You can’t measure tax progressivity while ignoring income trends

Mark Thoma does a terrific job explaining why the purported measure of tax progressivity favored by many conservatives doesn’t measure tax progressivity. Former George W. Bush Press Secretary Ari Fleischer, the inspiration behind Thoma’s post, insinuated that those lucky duckies at the bottom and middle of the earnings distribution should be paying more because their share of federal taxes paid has been falling while that of the top earnings quintile has risen substantially since 1979. As Thoma elucidates, Fleischer’s captious reading of the Congressional Budget Office’s series on average federal taxes by income group ignores the heavily skewed income trends of the last 30-plus years.

This State of Working America chart depicts just how lopsided those gains have been: The top 10 percent have captured 64 percent of economy wide income gains, while the bottom 60 percent of earners received only 11 percent of income gains.

Data compiled by economists Emmanuel Saez and Thomas Piketty show that this trend intensified during the Bush economic expansion, when the top 1 percent of households captured a stunning 65 percent of income gains, leaving just 13 percent for the bottom 90 percent of households. (The top 1 percent of households was simultaneously rewarded with 38 percent of the Bush-era tax cuts, when fully phased in.) These data don’t square with calls to shift the tax burden from capital to labor, and correspondingly from upper-income households to the middle class.

A progressive tax system embodies the principle that groups with more resources should pay a higher portion of their income in taxes than groups with fewer resources; taxes as a share of income—or effective tax rates—are intended to rise with income. Ignoring income necessitates disregarding this proper measure of tax progressivity. By Mr. Fleischer’s concept of tax fairness, Mitt Romney’s 15 percent preferential tax rate is a non-issue and there’s no need for a Buffett Rule. Similarly, ignoring effective tax rates is terribly convenient for conservatives attempting to shift the distribution of taxation down the income distribution, as proposed in many of the former and current GOP presidential candidates’ tax plans.

Without looking at taxes paid relative to income, one ignores ability to pay and progressivity, period. This may be politically expedient for those who want to abolish the Sixteenth Amendment and replace it with a regressive flat tax, but it’s intrinsically problematic when income inequality has returned to Gilded Age-levels. A greater degree of progressivity must be restored to the tax code, which must also raise more revenue for the realities of an aging population, spiraling health care costs, and a large structural budget deficit. Specious concepts of tax fairness cannot be condoned; they mask deep, growing inequities and provide cover for regressive tax plans that would further exacerbate income inequality.

Don’t blame the robots: It’s not productivity growth that’s holding job growth back

  • Josh Bivens
  • Josh Bivens

The Wall Street Journal ran an article a couple of days ago implicitly arguing that accelerating productivity growth is a prime reason why labor market recovery from the Great Recession has been so sluggish. Another reporter asked me about it yesterday, so I figured I’d write up a couple of thoughts on it.

First, we should be clear that the pace of labor market recovery since the Great Recession has not been uniquely bad; since the trough of the recession, private sector employment growth has actually been exactly in line with the (admittedly too-slow) recoveries from the recessions of the early 1990s and 2000s. Overall employment growth has actually outperformed the recovery from the early 2000s recession. Figure A below shows the trends for private sector employment. Note that the jobs lost during the latest recession dwarf those lost during other recessions – but since the official recovery began, job growth has been on-par with recent recoveries. Note that policymakers should not be graded on this generous curve – it’s a disaster that we haven’t had a better recovery from that perspective. But one doesn’t need to generate new theories to explain this allegedly atypically bad recovery – it just hasn’t been atypically bad.

Second, and in line with Dean Baker’s response to the article, productivity growth has not been particularly fast since the Great Recession. Figure B below shows the behavior of productivity averaged over all recessions between 1947 and 1981, the average of the early 1990s and early 2000s recoveries, and growth since the Great Recession. So, again, one cannot argue that fast productivity growth presents unique challenges in the current recovery since its performance just hasn’t been all that unique.

Lastly, and maybe wonkiest, fast productivity growth doesn’t change the validity of Keynesian diagnoses of what the economy needs at all. In fact, it would just strengthen them. The root of the Keynesian diagnosis is that there is a large gap between aggregate demand and potential supply in the economy – or, a large “output gap.” Figure C below shows the problem – the large output gap between actual and potential GDP is the reason why we have such high unemployment today. Productivity growth just pulls the potential GDP curve upwards, which means, all else equal, that the output gap will rise (on the chart I illustrated this with the “actual, if productivity growth accelerated” line).

But, the obvious solution to this problem is simply to push up demand to make actual GDP equal potential GDP again. Basically, accelerating productivity growth would just make measures to boost demand more necessary, and would insure that no adverse supply-side response (say accelerating inflation or rising interest rates) would kick-in.

The root cause of today’s underperforming economy remains insufficient spending by households, businesses and governments to fully employ all those who want a job. And the cure for this is simply policy measures to boost spending. Yes, I’m sure this has gotten boring for many economy watchers who want newer and more exciting diagnoses and cures, but sometimes what’s true is pretty boring.

One quick thought on why explanations based on productivity growth can sound convincing: At any point over the past century you could have walked into a factory and been told about the big technological improvements that had been made over the past four years. If you’re a business writer who walks into a factory today looking for a root cause of the labor market’s doldrums, guess what? You’ll be told about the big technological improvements made over the past four years, and then you might think, “hey, that’s why the jobs aren’t here!” But, if you had walked into a factory in 2000 – when the unemployment rate reached 3.8 percent – You also would’ve been told about an amazing four-year run of technological advance. In the end, high rates of unemployment are about demand falling short of supply, period.

Romney may not like government, but he loves its tax subsidies

Former Massachusetts Gov. Mitt Romney has at long last revealed his tax rate, which he says is “probably closer to 15 percent than anything,” largely because his income “comes overwhelmingly from some investments made in the past, rather than ordinary income or earned annual income.”

Two points. One, generally speaking this isn’t a product of the ingenuity of Romney’s expensive tax accountants. Over the past 30 years, Congress has gradually lowered the top tax rate on capital gains from 40 percent in 1977 to the preferential rate of 15 percent today. In fact, the only significant increase in the capital gains tax rate in the last few decades was when it was paired with an even larger tax cut for high-income earners, a reduction in the top rate for ordinary income from 50 percent to 28 percent. (It should be noted, however, that Romney does benefit from the carried interest loophole, a defect in the tax code that allows private equity and hedge fund partners to reclassify their compensation as capital gains and thereby enjoy the 15 percent rate on all of their income, not just their capital income. But this loophole only exists because capital income enjoys a preferential tax rate in the first place.)

Second, this is a tax rate that most Americans would love to pay. According to the Tax Policy Center, an average family of four pays about 20 percent of its income in federal taxes (taking into account the employer-side payroll tax). This family’s tax rate will likely rise further if, as Romney’s tax plan calls for, the recent expansions of the EITC, the Child Tax Credit, and the Hope Credit (renamed the American Opportunity Tax Credit) are allowed to expire. Speaking of the Romney tax plan, 80 percent of its benefits would go to taxpayers like himself with income over $200,000—the same people that already disproportionately benefit from the preferential tax rate on capital income.

This gets to a more fundamental question: Why is the government favoring Romney’s income over that of most Americans? After all, it’s not like he’s been working recently—he’s been running for president for the better part of five years. And even if he did have the time to actively manage his investments, he’s not able to because they’re in a blind trust. As for the risk factor, sure he’s risking his capital, but he’s not bearing any more risk that most households in this economy face. So tell me again, why is it so important for the government to subsidize rich people like Romney at the expense of average American households?

The Gingrich nonsense

Newt Gingrich has been using the fast exchanges of the Republican presidential debates to ignore facts, misdiagnose economic problems and then present wrongheaded solutions. The key fact that he is ignoring is the Great Recession—the greatest economic downturn the country has seen since the depression of the 1930s. It is amazing that anyone could miss this fact, but, apparently, Gingrich has.

Once we acknowledge the existence of the Great Recession, Gingrich’s ideas stop making sense. His statement that “more people have been put on food stamps by Barack Obama than any president in American history” is ludicrous. The recession began in Dec. 2007; President Obama took office in Jan. 2009, more than a year later. The Supplemental Nutrition Assistance Program (SNAP, formerly known as food stamps) exists to reduce hunger in America. During this period of extreme economic hardship when the rate of hunger in America is high, our leaders should want the needy to turn to SNAP. Would a President Gingrich eliminate SNAP or prevent the number of SNAP recipients from rising during a recession?

Gingrich’s latest idea is to fire janitors in schools and “hire 30-some kids to work in the school for the price of one janitor, and those 30 kids would be a lot less likely to drop out.” It is true that teen (i.e., 16-to-19 years old) employment is correlated with positive student outcomes including high school graduation. But this is a horrible idea.

Think of a family where one parent is a janitor and one child is in high school. Gingrich is proposing to layoff the parent and replace the parent’s income with one-thirtieth the salary brought in by the child. Who knows how many hundreds of thousands of families would be plunged into poverty if this idea is ever implemented. We know that poorer children do worse in school, so any possible benefit from the increase in teen employment would likely be undone by the increase in poverty. One important reason that the teen unemployment rate is so high today is because of the Great Recession, the recession that began in the final year of the George W. Bush administration.

From Flickr Creative Commons by Gage Skidmore

It is great that Gingrich wants “to find ways to help poor people learn how to get a job, learn how to get a better job, and learn someday to own the job.” All Americans support these goals. But the real issue is this: What policies should we pursue right now to speed a full recovery from the Great Recession?

Gingrich wants to slash taxes. But we know that this is not the path to prosperity that Gingrich thinks it is. Mark Zandi, chief economist of Moody’s Analytics, tells us that tax cuts are among the weakest things we could do to stimulate the economy and that increased SNAP spending is among the best. The reason is simple. People on SNAP are experiencing economic hardship. They spend their benefits, circulating those dollars in the economy. Much of the added income produced by tax cuts to people who are well-off is saved and not spent.

We also know to be skeptical of the tax-cut strategy because we tried it during the George W. Bush administration and it failed. President Bush cut taxes and “the U.S. economy experienced the worst economic expansion of the post-war era.”

Further, after examining the Gingrich Jobs plan, Howard Gleckman of the Tax Policy Center reports that “Newt Gingrich is proposing a massive tax cut aimed at the highest earning American households. Gingrich’s plan would add about $1 trillion to the federal deficit in a single year.” It is hard to imagine worse economic policy than Gingrich’s economic ideas.

Once we begin the discussion with acknowledgement that the Great Recession, which began more than a year before President Obama took office, is the root cause of the massive loss of jobs we’ve seen since 2007, we can see that Gingrich’s economic proposals are disastrous for the U.S. economy. Apparently, he wants hungry Americans to stay hungry. He wants to lay off workers and replace them with children making a tiny fraction of the prior wage. During this period of high unemployment, this policy guarantees an increase in poverty. And, while he has increased hardship and misery for the poorest Americans, he wants to make sure that the richest Americans get even richer with massive tax cuts. Gingrich’s vision for America is an American nightmare.

Krueger links progressive taxation, income inequality, and economic mobility

At a Center for American Progress (CAP) event yesterday, Alan Krueger, chair of the president’s Council of Economic Advisers,  gave a presentation on the rise and consequences of inequality. As mentioned in a post by Ross Eisenbrey, Krueger dove into a lot of interesting statistics, many of which were compiled into a PowerPoint presentation, and many of which are also documented on our website.

One point in particular that merits highlighting is that the U.S. tax code isn’t terribly progressive compared to other OECD countries. This chart (Figure 10 in Krueger’s slideshow) shows the Gini coefficient – a measure of inequality – for OECD countries both before and after taxes and transfers. Contrary to conservative fears of the consequences of policies that promote any sort of redistribution, the U.S. tax code is actually uniquely modest in its attempt to reduce income inequality. As shown below, each of the tax codes of every OECD country save Turkey, Mexico, and Chile do a better job of promoting broadly shared prosperity than the U.S.

Krueger links this to the issue of income mobility—that is, the ability of people to move between income classes—which has been eroding over time. The graph he presents (below) shows the strong link between these two issues, showing that higher income inequality is associated with lower intergenerational mobility.

One of the fundamental tenets of the American Dream is opportunity and economic mobility, which have been moving in the wrong direction. As Krueger points out, one way to arrest this disturbing trend is by making the tax code more progressive. And as the first graph shows, we have a lot of room to improve.

Income inequality is a policy choice

In a speech today at the Center for American Progress, the Chairman of the Council of Economic Advisors, Alan Krueger, laid out a compelling argument that rising inequality is a danger not just to the middle class, but to the recovery from the Great Recession and to the long-term growth of the U.S. economy.  Krueger showed, with the help of some excellent charts, that the polarization in income in the U.S. has already shrunk the middle class dramatically and that the median household’s income is lower today than it was 10 years ago. Data from around the world support a connection between increased equality and increased economic growth and between income equality and economic mobility.

EPI has been sounding the alarm about the rise in inequality for many years, and a useful tool on our website shows the history of how national income has been shared between the bottom 90 percent and the top 10 percent, going back to 1917. As Krueger pointed out, the problem began in the late 1970s. From 1979 to 2008, income in the U.S. grew steadily – by an average of $10,401 per capita. But all of that income growth went to the top 10 percent, and the top 1 percent increased its annual income by more than $1.1 trillion. The nation grew substantially wealthier, yet the bottom 90 percent did not share in that increase at all – in fact, its income declined.

Krueger pointed to a number of contributing causes for this rising inequality, including globalization, which pits U.S. workers against a huge and more poorly paid labor force in the developing world, tax policy, the failure to increase the minimum wage, and a decline in unionization. We have no choice about whether our economy will be closely linked to the rest of the world, although we could manage the relationship better. But the other matters – tax policy, the minimum wage and unionization – are entirely within our control.

Tax policy should not advantage the rich, who have already taken a much bigger share of the national economic pie than they did when our economy was at its strongest and fairest. Krueger announced his adherence to the Buffet Rule, which holds that people making more than $1 million a year should not pay a lower share of their income in taxes than middle-class families.  He recommended repealing unnecessary tax cuts for the wealthy and returning the estate tax to its 2009 levels.

Mitt Romney and President Obama both agree that the minimum wage should be raised, but they surely disagree about how to reverse the decline in unionization – or even whether it’s a bad thing. Krueger cited evidence that the primary effect of unions on the wage structure is to lift lower class families into the middle class. That is clearly a positive outcome, and efforts to weaken unions, through “right-to-work” laws like one being debated in Indiana, or federal legislation to make it harder to organize new unions, will worsen income inequality and should be opposed.

Inequality in America is worse than in all but a handful of developed countries; and it is getting worse fast. Krueger and the Obama administration are absolutely right to focus public attention on it.

Asking the wrong question about presidents and jobs

Ezra Klein asks a number of former chairs of the White House Council of Economic Advisors if presidents can create jobs. Since this allows me to channel one of the greatest Saturday Night Live skits ever, let me point out that the question is moot.

The right question is: Are the policies pushed by presidents or candidates appropriate to the economic problems and challenges actually facing the country?

So, was the Obama administration right to advocate for substantial fiscal support as soon as they entered office? Absolutely – the economy was losing around 750,000 jobs a month by the time they took the reins of policymaking, even as the Federal Reserve’s conventional recession-fighting tools were exhausted. Were they right in advocating for further substantial fiscal support this fall? Again, absolutely yes – the Fed’s recession-fighting tools remain ineffective even while unemployment hovered over 9 percent. The proper criticism of their actions is, of course, that they have not been aggressive enough in their advocacy for more fiscal support.

What does this mean for Mitt Romney’s job prescription to cut (spending and taxes) and deregulate? That it’s a fundamental misdiagnosis of what actually ails the U.S. economy. The mammoth job loss we experienced during the Great Recession didn’t occur because taxes went up or regulations proliferated in Dec. 2007 – the job-losses happened because spending by households and businesses collapsed in the face of the bursting housing bubble.

From Flickr Creative Commons by Secretary of Defense

Klein is right that many things besides presidential policy preferences and even policy actions determine job growth in the economy. But, this does not mean that they’re irrelevant to economic performance, and I fear far too many of Klein’s readers will come away from this column with the impression that they are; or even worse, that there’s little information available to voters to assess who would be the better economic manager. That’s not right – the president sets the agenda and it’s hugely important to know what this agenda is and whether or not it’s appropriate for the economic challenges facing us.

Klein’s also right that it would be nice if there was an easily-tracked single benchmark that reliably graded presidential performance, but that such a benchmark doesn’t exist. That said, answering the right question – are candidates proposing solutions consistent with the problems – isn’t really so hard.

Trade and jobs – why make it so hard?

Sometimes it seems like policymakers think that points are given for degree of difficulty. The Washington Post reports a number of policies are being considered by the Obama administration to “reward companies that choose to bring jobs home” and eliminate tax breaks “for companies that are moving jobs overseas.”

The impulse behind these ideas seems fine to me – the U.S. economy continues to “leak” too much demand to the rest of the world in the form of chronic trade deficits.

But, as the article notes, designing tax-based solutions to this problem will be quite complex and would take huge amounts of money to actually move the dial on this problem.*

If only there was a policy solution that was simple, could happen even without a gridlocked Congress, and would actually move the dial on the problem of large trade deficits dragging on growth.

But there is! Allow the dollar to fall in value sufficiently to move the trade deficit much closer to balance. Currently the biggest impediment to this happening is the policy of major U.S. trading partners (China is the linchpin) of managing the value of their currency to keep it from rising against the dollar – this results in Chinese exports gaining cost-advantages in both the U.S. and third-country markets where Chinese-produced goods compete against U.S.-produced ones.

Presumably this issue came up in Treasury Secretary Tim Geithner’s meeting with Chinese leaders yesterday, but this issue has “come up” between the U.S. and China for a decade with no movement. As Joe Gagnon and Gary Hufbauer have pointed out, however, there is no need to wait for China on this one – the U.S. could solve this currency management unilaterally.

Engineering a decline in the dollar’s value costs taxpayers nothing, can be done without moving through a gridlocked Congress, would actually provide significant help to the job market in coming years, and requires no Byzantine redesign of the tax code.

So, yes, one probably shouldn’t bet on it happening.

*Yes, there are ways that features of the U.S. tax code provide some incentive for production abroad rather than at home – and these should be removed. But this is surely a second- or even third-order driver of trade flows, at best.

False signals on the need for college graduates

Catherine Rampell of the New York Times recently looked at job growth by education and interprets the data as suggestive of the “polarization” of employment where employer demand is growing at the most and least-educated categories but falling for those in the middle. Rampell uses this analysis to argue that “college is worth it.” My analysis of the employment trends in recent years, elaborated below, runs directly counter to a common interpretation of the “polarization” hypothesis, which is that we have a growing unmet need for college graduates. I’m all for giving everyone the opportunity to get the most training and education they want. And, I’m sure that there are plenty of economic and non-economic (i.e., health, citizenry) ways we’d be better off with more college graduates. I’m just not persuaded that economic data are screaming out that we need to greatly accelerate the supply of college graduates.

I’m not much of a fan of the hypothesis that recent technological change is leading to a “polarization” of wages. I’m especially suspicious when analysts lump all college graduates together in their analysis, combining those with four-year college degrees (22 percent of employment) and those with advanced or professional degrees (11 percent of employment). This is because college graduates (those with bachelor’s degrees only) have not fared well in the labor market for at least 10 years—real wages are no higher than 10 years ago—while those with advanced degrees have seen their wages grow strongly. I have covered this ground in Education is Not the Cure for High Unemployment or for Income Inequality. In fact, those economists who argue that employment and wages are polarizing, such as Larry Katz of Harvard or David Autor of MIT, are pretty clear that employment outcomes for about half of college grads are part of the “middle” that’s faring poorly. That’s why it is misleading to use those analyses to argue that having more people go to college is the answer to growing wage inequality or middle-class wage stagnation; getting onto the better wage track requires either getting an advanced or professional degree (not just a college degree) or joining a clear subset of college graduates. That being the case, the arguments of those seeing “polarization” in the data lay out a very narrow track to good earnings and, in my view, further raise the issue of the need to make sure that those without college degrees, and many with college degrees, have good quality jobs.

More extensive elaboration of these issues will have to wait for another time to explore. Now, it is worth digging into Rampell’s analysis, especially since it reaches conclusions contrary to two blog posts (read here and here) where I presented data showing that the falling unemployment among college graduates (unfortunately, because of data availability, using all college graduates, bachelor’s or higher) over the last two years was primarily due to labor force shrinkage rather than strong employment growth. For context, it should be noted that in earlier work I documented that the unemployment rate doubled for every educational group during the period of rising unemployment, including those with a college degree or further education.

Rampell presents the absolute employment growth over the last 12 months (December over December), noting college graduate employment was up over a million, high school graduate employment down about 550,000 and employment up by roughly 125,000 for high school “dropouts.” I take this a step further in Table 1 and look at changes over the last two years (from when unemployment peaked) and improve the analysis by using quarterly data (less volatile) and calculating percent growth in employment (necessary since the education groups are different sizes, “dropouts” being less than one-fourth the size of college graduates).

Table 1: Employment growth by education, ages 25+

Less than high school High school Some college College or more
2009-10 -2.5% 1.0% 0.9% 0.5%
2010-11 1.9% -1.0% 0.3% 2.3%
2009-11 -0.6% -0.1% 1.2% 2.8%

Both years have a different pattern. Over the last four quarters there was weak employment growth for the middle two education groups and stronger growth at the top and bottom ends. The year before, however, saw weaker employment growth among college graduates (up 0.5 percent) than for those with high school (up 1.0 percent) or “some college” (up 0.9 percent). Looking over the last two years as a whole one finds employment growth better the higher the education level. This is not strong evidence of “polarization,” or even the bastardized version of the hypothesis (the one where all college graduates are presumed “winners”).

The best way to analyze these trends is to examine the employment rates (employment divided by population) of each group, as done in Table 2. This scales the changes to the size of the population involved. Overall, the employment rate has not changed over the last two years, rising just 0.1 percent. Unemployment fell by 1.2 percentage points, from 9.9 percent in 2009:4 to 8.7 percent in 2011:4, but that is entirely explained by a shrinkage of the labor force. Interestingly, the employment rate has declined for all but the “dropouts” and has declined the most for those with a college degree (or more) and those with “some college.” As observed at the start, these results run directly counter to a common interpretation of the “polarization” hypothesis, that we have a growing unmet need for college graduates and that one of our key challenges is to greatly accelerate the supply of college graduates.

Table 2: Changes in employment-to-population ratio, 2009-11


Quarter 4


2009 2010 2011 09-10 10-11 09-11
All 58.4 58.3 58.5 -0.1 0.2 0.1
Education, 25 years and older
Less than high school 39.2 39.3 40.6 0.1 1.3 1.4
High school 55.1 54.9 54.7 -0.2 -0.2 -0.4
Some college 64.4 64.2 63.5 -0.2 -0.7 -0.9
College degree or more 73.6 72.9 72.7 -0.7 -0.2 -0.9

The NLRB protects the right of non-union employees to fair pay

The National Labor Relations Board’s recent decision on D. R. Horton, Inc. and Michael Cuda is a great reminder that the NLRB protects much more than the right to organize a union – as important as that is. The National Labor Relations Act, which the NLRB enforces, gives employees the right to engage not just in collective bargaining through a union, but also in what it calls “concerted activity for mutual aid or protection” — actions taken by one or more employees in pursuit of a collective goal to address wages or working conditions.

In the Horton case, non-union employees wanted to enforce their right to overtime pay under the Fair Labor Standards Act, through a collective or “class” action. But the employer had required the employees to give up the right to bring any claims on a collective basis in order to keep their jobs. The NLRB found the employer guilty of an unfair labor practice by requiring employees to waive “their right to collectively pursue employment-related claims in all forums, arbitral and judicial.”

The NLRB protects the right of employees to join together and enforce their right to overtime pay, and employers can’t take that right away. The same is true for the right to receive the statutory minimum wage or to receive tips that employees have earned.

Similarly, employers violate the National Labor Relations Act if they punish employees who join together to complain about unsafe working conditions, or discrimination in the workplace, or being forced to commit illegal acts. The employees don’t have to join or form a union, they simply have to act together for mutual aid or protection regarding the terms and conditions of their employment.

President Obama’s bold and controversial recess appointment of three new members of the NLRB ensures that this vital agency will continue to function and protect the rights of employees, union and non-union alike. Congressional Republicans had tried to prevent these appointments, knowing that, with only two members, the NLRB would not have a quorum to decide cases. To his credit, Obama decided that the rights of working Americans are too important to sacrifice to congressional gridlock.

Shouldn’t everyone be listening to Nouriel Roubini?

Economists were very well represented in Foreign Policy‘s annual roundup of 100 top global thinkers (accounting for 21 percent of the honorees). Among the dismal scientists recognized, economic consultant and New York University professor Nouriel Roubini was given due credit for his consistently bearish but prescient economic warnings over the past four years. Considering his prognostications regarding the housing market implosion, financial sector meltdown, prolonged high unemployment, and sickly economic recoveries in the advanced economies, among other fronts, Roubini’s economic insight clearly commands gravitas. As such, it’s worth highlighting Dr. Doom’s choices for the best and worst economic policy ideas:

Best idea: “Let’s start taxing the rich more—the Buffett Rule—as inequality is now at 1929 levels and increasing further.”

Worst idea: “A front-loaded fiscal austerity that will sink us in a severe recession.”

Hear, hear. There may be a visceral backlash against (or tone-deaf indifference to) these very same sentiments when espoused by progressive economic think-tanks, but shouldn’t everyone be listening to Nouriel Roubini?

From Flickr Creative Commons by presidential office

It’s worth noting that Roubini recently articulated other pertinent policy prescriptions in a report The Way Forward, coauthored with Westwood Capital Managing Partner Daniel Alpert and Cornell University Law Professor Robert Hockett. Their three-pronged plan for economic recovery proposed:

  • A $1.2 trillion, five-to-seven year program of heavy public investment, thereby putting Americans back to work building a more competitive economy (at relatively little cost).
  • Comprehensive debt-restructuring to detoxify the real estate market and financial intermediation.
  • Global reforms to re-balance the world economy, particularly reversing fiscal austerity programs in surplus nations (e.g., Germany) and increasing domestic  Chinese demand (through a combination of currency appreciation, improved labor market standards, and budget reforms).

Yup, the global economy would be in far better shape if Dr. Doom was steering economic policymaking. It’s a pity the United States is heading further and further down the austerity path instead of learning from the dismal European experience.

Capping federal spending at 18% of GDP is still infeasible

In his Iowa caucus speech Tuesday evening, former senator Rick Santorum (R-Pa.) pushed for deep tax cuts for the wealthy, $5 trillion in budget cuts over five years, a cap on government expenditure at 18 percent of the economy, and a balanced budget amendment “as a guarantee of freedom for this country.”

This isn’t just radically conservative—it’s a farcical proposal bordering on Ron Paul-levels of delusion. (No, we’re not all Austrians now.) To reiterate: arbitrarily capping government expenditure at 18 percent of GDP isn’t just undesirable, it’s infeasible and absolutely crazy. Federal spending has exceeded 18 percent of GDP since 1966 (roughly the inception of Medicare and Medicaid). As the population ages and health care costs continue to spiral, federal spending will have to rise, not fall, if voters want government to continue providing health care to seniors, impoverished children, and the disabled (polling strongly suggests they do). The House Republican 2012 budget—which proposed ending Medicare and eviscerating Medicaid—wouldn’t even reduce federal spending below 18 percent of GDP by 2040. Under a current policy baseline, spending is projected to be about 22.5 percent of GDP over fiscal years 2012-21. Wrenching expenditure down to 18 percent of GDP would therefore slash nearly 5 percent of GDP, or $8.7 trillion, from the budget over the next decade (cutting $1 in $5 dollars of expenditure). But even deeper budget cuts would be needed to achieve $5 trillion in cuts over five years anytime soon (in the first five years, the cap would only cut $3.7 trillion, relative to current policy).

From Flickr Creative Commons by Gage Skidmore

But it gets worse! Santorum’s spending cap is also tied to a balanced budget amendment, and his tax plan wouldn’t raise anywhere close to 18 percent of GDP in revenue. An extension of current tax policies—the starting point for Santorum’s sweeping tax cuts—is projected to raise revenues of only 17.6 percent of GDP over the next decade. From there, the alternative minimum tax would be repealed; the top tax rate would be reduced to 28 percent (while retaining major tax preferences and expanding exemptions); capital gains and dividends taxes would be further reduced to 12 percent; the estate tax would be repealed; the corporate tax rate would be halved to 17.5 percent and fully eliminated for manufacturers; and businesses would get even bigger tax breaks on foreign profits, research, and investment. Not a cheap wish list. While we haven’t scored it yet, it wouldn’t be surprising if Santorum’s tax plan fails to raise even 16 percent of GDP, forcing much deeper budget cuts. (Kevin Hassett of the American Enterprise Institute ballparks the annual static revenue loss between $550 billion and $700 billion, or between 3.4 and 4.3 percent of GDP.)

This could easily sink the U.S. economy. As Europe is discovering, the notion that spending cuts increase growth (i.e., expansionary austerity) is totally bunk in today’s context of high unemployment, low interest rates, and large output gaps. Spending caps and balanced budget amendments are terrible fiscal policies because they obstruct counter-cyclical fiscal stabilization and instead force pro-cyclical spending cuts. According to the private forecasting firm Macroeconomic Advisers, “If actually enforced in fiscal year (FY) 2012, a [balanced budget amendment] would quickly destroy millions of jobs while creating enormous economic and social upheaval.”

Senator Santorum’s plan wouldn’t just exacerbate future recessions—it would preclude a return to full employment and likely trigger another deep recession. What part of prolonged mass underemployment, widespread economic insecurity, and trillions of dollars in forgone national income represent a guarantee of freedom?

Consumers need a strong Financial Protection Bureau

It is shocking that in the wake of a deep economic crisis brought on by irresponsible financial practices, Congress would stymie the Consumer Financial Protection Bureau by not approving a director. President Obama was right to insist that the American public be protected by making a recess appointment of Richard Cordray. Cordray has excellent credentials.

An unchecked financial industry played a key role in bringing on the Great Recession—the worst economic downturn the country has seen since the depression of the 1930s. This American Life documented the anything-goes attitude in the financial industry prior to the recession. The show reported that “to make a mortgage-backed security, you needed mortgages. Lots of them.” People making securities “needed to buy up as many mortgages as possible.” They threw all standards and requirements out of the window. Mortgage loans were made to anyone, even 23 dead people in Ohio.

This American Life cited the experience of Mike Garner, a bartender who was made into a banker overnight to feed mortgages to Wall Street:

Mike Garner’s bank did not care all that much how risky these mortgages were. This was a new era. Banks did not have to hold on to these mortgages for 30 years like they used to. They didn’t have to wait and see if they’d be paid back. Banks like Garner’s would just own the mortgages for a month or two. And then they sold them on to Wall Street. And then Wall Street would sell them on to the global pool of money.

“The actual guys cruising strip malls all across Nevada buying mortgages from brokers– their commission depended on selling more loans,” so they too encouraged the recklessness. At every step in the process of producing mortgage-backed securities people were making a lot of money . . . until the bubble burst.

And then, millions of homeowners were stuck with loans they could not afford, loans that would lead them to foreclosure.

Although it has been going on for years, the foreclosure crisis is probably less than half over according to a recent analysis by the Center for Responsible Lending. CRL finds that of mortgage loans made from 2004 to 2008, 2.7 million have ended in foreclosure. But another 3.6 million homes remain at risk of foreclosure. These foreclosures hurt not only the person owning the loan but the entire community. The neighboring homeowners experience declining property values. The cities obtain less in tax revenue to provide city services.

Most foreclosed homes were owned by whites—1.5 million in CRL’s analysis—but the research also suggests that Latinos and African Americans were targeted when brokers and banks began their desperate search for more and more mortgages. Latinos and African Americans were more likely to end up with mortgage loans that were very profitable to the financial services industry but more expensive and risky for the consumer.

Among borrowers with good credit scores (FICO scores of 660 or higher), Latinos and blacks were more than three times as likely as whites to be given a higher-rate subprime loan. They were two to three times as likely as whites to be saddled with a prepayment penalty. Latinos were nearly twice as likely as whites to be given an adjustable rate mortgage. Thus, even Latinos and blacks with good credit ratings found themselves in bad loans.

These bad loans that were disproportionately sold to Latinos and blacks may help explain why we have seen such a dramatic loss of wealth among these groups since the start of the recession. For most Americans, their home is their main source of wealth. Latinos and blacks were more likely to be given loans that would end in foreclosures, loans that would dramatically reduce their level of wealth.

The figure shows that 5.1 percent of loans made to whites from 2004 to 2008 ended in foreclosure. For African Americans, the rate of foreclosure is 9.8 percent. For Latinos, it is 11.9 percent, more than double the white rate. Further, an additional 13.7 percent of loans to Latinos are seriously delinquent—delinquent for more than 60 days or in the foreclosure process. Among African Americans, 14.2 percent of loans are in this situation, as opposed to 6.8 percent of loans to whites.

Mortgages are only one type of financial product. There are many other products and services where there have been reports of abuses. The Consumer Financial Protection Bureau was created to protect consumers from these dangers. We are currently struggling to recover from the ravages of a financial meltdown fueled by abusive lending.  In appointing Cordray, the president did the right thing.

Romney’s tax plan for the 1%

On the heels of Mitt Romney’s narrow eight-vote victory in the Iowa caucuses Tuesday, the Tax Policy Center has put out a timely distributional analysis of the tax components of his economic plan. Over the course of his campaign, TPC notes, Romney has proposed “permanently extending the 2001-03 tax cuts, eliminating taxation of investment income of most individual taxpayers, reducing the corporate income tax, eliminating the estate tax, and repealing the taxes enacted in 2010’s health reform legislation.”

According to TPC, Romney’s tax plan would result in a significant increase in the deficit. Against a scenario in which the Bush tax cuts (and other provisions) are allowed to expire, the Romney plan would lower revenue by $600 billion in calendar year 2015, about a 16 percent cut. Assuming all expiring tax provisions are extended, his plan would reduce revenues by $180 billion in the same year.

How would people fare under the Romney plan? Distributional tables show the majority of the benefits from the proposed tax changes would go to those at the top of the income scale. Using a current policy baseline scenario, almost 60 percent of the share of total federal tax changes would go to those in the top 1 percent, and one-third of changes would go to those in the top 0.1 percent. (The figure below shows distributional effects under both a current law and current policy scenario.) Tax units making over $200,000 would see over 80 percent of the benefits. It is important to bear in mind that the top 1 percent of households received 65 percent of all income gains over 2002-07; these are generally not households struggling to make ends meet.

In contrast, many lower-income taxpayers would actually see their taxes increase because the Romney plan would allow the American Opportunity tax credit and portions of the earned income tax credit and the child tax credit to expire. In fact, according to the TPC analysis, over half of the taxpayers facing a tax increase under Romney’s plan actually make less than $30,000 a year.

It’s not like we haven’t trod this path before. The Bush-era tax cuts blew a hole in the budget and failed to generate even mediocre economic results for middle-class households. Yet Romney’s tax plan, like many others being put forth in this election, doubles down on dangerous tax cuts, while heavily weighting the benefits toward the wealthy.

Mobility remains low as inequality increases

Inequality means that some income earners claim a larger slice of the pie than others. Some people might argue that this is not such a big problem if everyone has an equal shot at winding up at the top. Some even claim that this is the essence of the American Dream; that regardless of where you begin, if you work hard, you can have all the opportunities to succeed.

Unfortunately, income mobility—movement between income classes—is less common than purveyors of the American Dream would have you believe. An article by Jason DeParle in today’s New York Times discusses important findings from five large studies, including research by Markus Jantti and coauthors and Miles Corak, which both show mobility in the U.S. lags behind its peers. Significant other research has demonstrated a similar lack of mobility in the U.S.

In a world of perfect mobility, people will be able to move up in the income distribution with hard work and dedication, regardless of where in the distribution they started out. One way of thinking about this is by looking at college completion rates by income status and eighth grade test scores. If all it took were high test scores to get ahead, no matter what your income, you would have an equal opportunity to graduate from college. These data tell another story: High-income students who have low test scores are more likely to graduate from college than low-income students with high test scores.

Other research demonstrates that mobility is more restricted for some groups than others. African Americans who start out in the bottom 25 percent of the income distribution are nearly twice as likely to remain there than whites.  In addition, white Americans who start out in the bottom 25 percent are about four times more likely to make it to the top 25 percent of the income distribution than blacks.

As DeParle notes in his article, the notion of the American Dream is actually less common in the U.S. than in many peer nations. Look at the relationship between a son’s earnings and his father’s earnings. The likelihood of a son staying in the bottom 40 percent of the wage distribution if his father was in the bottom 20 percent is higher for those in the U.S. than in peer countries (Denmark, Finland, Norway, Sweden and the United Kingdom). The U.S. also boasts lower rates of upward mobility because a lower share of sons with low-income fathers end up in the top 40 percent of the wage distribution than in similar countries.

A new paper by Katharine Bradbury released last fall looks at changes in mobility across time. The figure below shows the percent of those in the poorest and richest quintiles that move up or down and those that move far over the subsequent 10 years.

While it is not clear that mobility has fallen, it is evident that mobility has not increased. Although many argue that income inequality is acceptable in the U.S. if mobility is also greater, this clearly shows that mobility has not increased enough to offset the drastic rise in inequality over the last 30 years.

Unpaid internships hurt mobility

In his excellent piece in today’s New York Times on the declining economic mobility of Americans, Jason DeParle mentions a commentary by Reihan Salam for the National Review Online, “Should we care about relative mobility?

Salam disputes that there’s anything wrong in the natural tendency of economically successful families to give their children special advantages in the competition for jobs, education and other resources. He admits, however, that affluent white families may have social networks that blacks cannot access and that protect whites, but not blacks, from downward mobility. Salam writes:

“To be sure, there might be an incumbent-protection story here, as Scott [Winship] has suggested. That is, it is possible that non-black families in the top three-[fifths] of the income distribution are giving their children advantages that protect them from scrappy upstarts in ways that might damage our growth prospects. That really is a legitimate concern.”

The particular mechanism Salam identifies – internships — is one that EPI has identified as a serious problem for the economic mobility of minorities and for the labor market in general.  Salam recognizes that internships are sometimes reserved for the affluent: “Moreover, parents who have achieved some success tend to be part of social networks that can give their children access to valuable economic opportunities. Even the most committed egalitarian won’t deny her daughter the opportunity to take an internship with a beloved friend and colleague just because other children won’t get the same leg up.”

Unpaid internships, in particular, exclude students from poorer families who can’t afford to work for nothing for a summer or a semester, especially after they graduate from college with tens of thousands of dollars of student loan debt. The children of affluent families, on the other hand, can afford to live in the most expensive cities in the U.S., such as New York and Washington, making contacts, building their resumes, and sometimes even learning skills, while their parents pay for their room and board, travel and entertainment. Before even taking into account the family connections that reserve some of the best opportunities for the sons and daughters of the affluent, the $4,000-$5,000 cost of, for example, moving to Washington and living for 10 weeks prevents almost any working class kid from taking an unpaid internship.

As Ross Perlin points out in his meticulously researched book, Intern Nation, the number of unpaid internships is growing exponentially, fueled by the failure of the U.S. Department of Labor to enforce the minimum wage, a new industry of internship coordinators and consultants, and the recession. It’s hard to quantify the impact of this phenomenon on the decline in economic mobility, but I suspect it has been substantial and will continue to grow until the  Department of Labor cracks down on what is, in many cases, illegal exploitation.

A happy (economic) 2012 is far from guaranteed

A couple of commentators have put forward reasons why 2012 might be a better-than-expected year for the economy. Matt Yglesias’ entry into the “happy days are here again” sweepstakes is a bit older, but it’s smarter than most and invokes an obscure, but important, economist of olde to make the point. Thus, it’s a good peg to use to remind people about the case for pessimism.

Yglesias’ post basically sums up multiplier-accelerator models of recovery – the idea that when recoveries begin, they will be self-sustaining and initial improvements in one sector of the economy will generate further increases in activity in other sectors (this reasoning also explains the dynamic of contractions, not just recoveries).

As Yglesias puts it:

“But every downward tick in the unemployment rate is another twentysomething moving out of his parents’ basement, stimulating a return to a more normal level of construction. Multifamily housing starts are already up 80 percent over the past year to accommodate the likely coming flood of renters, and there’ll be more to come once people have more cash in their pockets.

This increase in economic activity will boost state and local tax revenue and end the already slowing cycle of public sector layoffs. Re-employment in the construction, durable goods, and related transportation and warehousing functions will bolster income and push up spending on nondurables, restaurants, leisure and hospitality, and all the rest. Happy days, in other words, will be here again.”

This is indeed what recovery will look like when it comes. But there’s very little evidence that the process has started.

For one, “every downward tick in the unemployment rate” that we’ve seen over the past two years (i.e., since the unemployment rate peaked at 10.1 percent in Oct. 2009) has not represented somebody getting a job (and hence able to move towards independence and spending). Rather, it’s represented somebody dropping out (or choosing not to enter) the labor force. And even over the past year (since Nov. 2010), fully two-thirds of the decline in the unemployment rate was driven by a shrinking labor force and not by employment growth.

The best chart to show that a robust multiplier-accelerator process has yet to begin remains the difference between actual and potential GDP. The size of this gap is the progress that is being made (or not) towards recovery. The free-fall of this ratio that was the Great Recession has stopped, but so has the upward progress of the early part of the recovery (when, by the way, there was an actual boost to the recovery being provided by fiscal support, instead of the drag that will constitute the next year). Until one sees a rapid upward movement in the gap between actual and potential GDP (and, actually, until one sees this movement driven by improvements in actual rather than a deterioration in potential GDP), it seems awfully premature to think that a positive, self-reinforcing cumulative causation has set in or can be banked on for the coming year.

Happy Holidays from EPI

As you’ve probably noticed, Working Economics is on vacation. Unless there’s some breaking news or other pressing circumstances, we’ll resume blogging on Tuesday, Jan. 3. Until then, please take time to enjoy your families and the holiday season!

And if you find the wait for our return too unbearable, you can revisit some of our most popular posts since our launch last fall:

Worst economic idea of the year?

As my colleague Monique Morrissey highlights, Jeff Madrick has a terrific (albeit somewhat depressing) list of the 10 worst economic ideas of 2011. Doubling down on the failed supply-side experiment and making taxes more regressive is honored as the fallacious economic policy coup de grâce of the year:

“At the top of the list for sheer scandalous insensitivity are Herman Cain’s and Newt Gingrich’s tax plans for America… Gingrich’s plan wins the gold medal: his plan is both regressive and a gigantic revenue loser.”

Spot on. Cain’s plan is wildly regressive. Gingrich’s plan is grossly unaffordable and irresponsible. Cain’s “9-9-9″ plan would swing the average tax rate for households in the lowest income quintile (those earning under $18,000 annually) by 18.3 percentage points, from 1.8 percent to 20.2 percent. The swing at the top end of the earnings distribution is almost as wild, with rates plunging 17.2 percentage points to 17.9 percent for the top 0.1 percent of earners (those making roughly $2.7 million or more), an average tax cut valued above $1.3 million. (See this Tax Policy Center current policy baseline table.)

As for Gingrich, Madrick notes his optional flat tax would blow a gaping hole in the federal budget: $850 billion relative to current policy and $1.28 trillion relative to current policy in 2015 alone. The price tag has (extremely misguided) purpose: The highest income 0.1 percent would see their average tax rate cut by two-thirds and fall to only 10.8 percent, a giveaway averaging $1.9 million per household.

But this is more than a two-pronged onslaught of voodoo economic practitioners. Remember Rick Perry’s tax plan? Eerily similar nostrum: Gut the central tenant of a progressive tax code that effective tax rates are supposed to rise with income, give the highest income 0.1 percent a tax cut of $1.5 million, and drain the Treasury of $995 billion relative to current law ($570 billion relative to current policy) in 2015 alone. The presidential campaign trail has been inundated with plans to slash corporate tax rates, cut capital gains and dividends taxes, and eliminate the estate tax. (See this great comparison table detailing and contrasting all the GOP presidential candidates’ tax plans, produced by the good folks at TPC.)

It’s also worth noting that House Budget Committee Chairman Paul Ryan was paving this path in 2010 when he released his Roadmap for America’s Future, which proposed shifting the distribution of taxes from upper-income households to the middle class by replacing the corporate income tax with a regressive subtraction-method value added tax that forces up middle-class tax rates. (Ryan would end all taxation of corporate profits by also eliminating taxes on capital gains and dividends.)

This is the bedrock of conservative economic policy. It’s even politically enshrined in Grover Norquist’s Taxpayer Protection Pledge. Never mind that it hasn’t improved economic performance, it has and continues to defund government, and it would continue to exacerbate income inequality. Unfortunately, with the election looming, it’s a safe bet that sweeping regressive tax cuts will be a top contender for 2012’s worst economic policy ideas.

The whole list is worth a read. Other highlights include the fallacy of expansionary austerity and arbitrarily capping federal expenditures as a share of the economy (somewhere between 16.6 percent to 21 percent, none of which would be tenable levels).

Thanks, grandma!

Jeff Madrick rightly dubbed cutting Social Security and raising the Medicare eligibility age two of the 10 worst economic ideas of 2011. Nevertheless, the idea that we need to work into our late 60s or even 70s has become an obsession of many inside the Beltway, who prefer to close Social Security’s modest projected shortfall on the cost side rather than the revenue side. Likewise, self-styled budget hawks are more concerned with reducing government spending on health care than addressing inefficiencies in the overall system, which are worse in the private sector.

Among other problems, an obsession with working longer ignores the fact that women, at least, are working more at younger ages. Not only does this help Social Security’s finances, but it turns out that forcing seniors to keep working into old age might actually reduce the number of younger women who are able to work (this assumes there are jobs for everyone). A new working paper by economists Janice Compton and Robert A. Pollak finds that proximity to grandmothers increases mothers’ employment, presumably because grandparents are able to help with childcare. (Though the study only directly measures the impact on women who live near their mothers and mothers-in-law, it also indirectly captures some of the effect of doting grandfathers and other relatives.) Though the study doesn’t take into account whether the grandmothers are working or retired, retirees have more time to spend on care-giving, which can oftentimes allow their children the flexibility to return to, or remain in, the workplace.

This study resonated with me because, like a lot of new parents, my ability to return to work this year depended not only on a paid caregiver, but also on grandparents. My husband and I were lucky to have both a friend looking for a flexible job and parents living nearby who offered to pitch in one day a week and as needed. Not only is my daughter blossoming under her grandparents’ and my friend’s care, but my parents’ help indirectly boosted the economy by allowing both my friend and me to return to work. (Admittedly, in some cases grandparent care may reduce the paid workforce, and GDP, to the extent that it simply replaces paid care-giving with unpaid care-giving, but as feminist economists like to point out, GDP is not a good measure of social welfare.)

A minimum wage milestone

On Jan. 1, 2012, Washington will become the first state in the nation to have a minimum wage above $9 per hour ($9.04/hour to be precise). Washington is one of 10 states with some form of minimum wage indexing, requiring that the state minimum wage grow at the same rate as inflation, thereby ensuring that the real value of the lowest-paid workers’ wages does not shrink as normal costs of living go up. Eight of these states will have automatic increases take effect on New Year’s Day: Arizona, Colorado, Florida, Montana, Ohio, Oregon, Vermont, and Washington.

You may be thinking that $9 per hour seems like a lot, especially for the neighbor’s teenage son who works part-time down at the local fast food chain, right? Well this may be the perception that some have of minimum-wage workers, but it is wrong on a number of levels. First, the typical minimum-wage worker is not a teenager, nor is she a man. According to data from the Current Population Survey, 80 percent of minimum-wage workers are over the age of 20. This is true not just in the eight states seeing an increase on Jan. 1, but nationwide as well. At the same time, roughly 60 percent of minimum-wage workers are female, despite the fact that women make up only 48 percent of the national workforce. See the table below for more details.

Second, over three-quarters of minimum-wage workers work more than 20 hours per week, and just over half are full-time employees. In fact, my colleague Heidi Shierholz has calculated that families with a minimum-wage worker rely on those minimum-wage earnings for nearly half (45.9 percent) of their income.

Third, make no mistake, $9 per hour is not a lot of money. Assuming they work 40 hours per week, 52 weeks a year, a minimum wage worker earns $18,720 a year. For comparison, the 2011 federal poverty line for a family of three—such as a single mother with two children—is $18,530 a year. (Note: If you were only making the federal minimum wage of $7.25 per hour, your annual income would be $15,080 – not enough to be above the poverty line for a family of three, and just barely over  the poverty line for a family of two.)

Finally, in a historical context, the minimum wage has been considerably higher. In inflation-adjusted terms, the federal minimum wage was highest in 1968, at a value of roughly $9.85 per hour in 2011 dollars. So even at $9 per hour, the Washington minimum is well below historical highs, not to say anything of the federal minimum wage, which at $7.25 has declined in value by more than 26 percent since 1968. With inequality at record levels, and still on the rise, indexing the federal minimum wage would be one very basic protection of workers at the very bottom of the income distribution. The question we should be asking then is not whether Washington’s minimum wage is too high, but why isn’t the federal minimum wage just as high or even higher?

At least for the approximately 194,000 workers in Washington state, and the 1 million across all eight states, who will be directly affected by these increases, the value of their paychecks will hold steady for one more year. Roughly another 400,000 workers across the eight states, whose wages are just above the minimum, will also see a small pay increase as employers adjust their overall pay scales to reflect the new minimum. (These are the “indirectly affected” workers in the table below.) It’s a shame that low-wage workers nationwide will not see this same minimal protection of their wages, but at least for this New Year, we can toast the Evergreen State.

Click to view in full-size:

Some ugly views about the unemployed among congressional Republicans

Robert Pear’s story in the New York Times yesterday about the impasse in Congress over renewing the federal emergency unemployment benefits program was a mixed bag. It did a good job of demonstrating how differently Republicans and Democrats view the unemployed, making clear that some Republican politicians have decided to scapegoat the unemployed and blame the victims rather than those truly responsible for our economic woes. But Pear also inadvertently contributed to misunderstandings and misinformation about the unemployment insurance (UI) program and failed to point out essential facts about its operations and justification.

Pear reports that 3 million people could lose their unemployment benefits in the near future if Congress fails to renew federal assistance. That’s true, and it would not only be painful to disastrous to these individuals and their families, it would be bad for the economy, as everyone from Goldman Sachs to EPI recognizes.

Well almost everyone. As Pear reports, House and Senate Republicans think a lot of people ought to lose their benefits because they’ve received them too long and are essentially just taking a long vacation. He quotes Michigan Republican Dave Camp, who heads the tax-writing committee that’s in charge of UI, and who wants to chop 40 weeks off the maximum benefit duration: “This reflects a more normal level of benefits typically available after recessions.” Rep. Camp somehow has forgotten that there’s little normal about the current economy, which with an 8.6 percent unemployment rate is still struggling to recover from the Great Recession, the worst economic downturn in 80 years.

But Sen. Orrin Hatch (R-Utah) expresses what may be on the minds of many of the Republicans who want to kill or reduce the emergency UI benefits: “I don’t see why you have to go more than 59 weeks. In fact, we need some incentives for people to get back to work. A lot of these people don’t want to work unless they get really high-paying jobs, and they’re not going to get them ever. So they just stay home and watch television. I don’t mean to malign people, but far too many are doing that.”

Republican Congressmen Orrin Hatch, left, and Dave Camp are outspoken critics of extended unemployment insurance benefits. (From Flickr Creative Commons by Michael.Jolley)

Pear could do his readers and Sen. Hatch a service by letting them know that workers receiving the last 20 weeks of benefits possible – Extended Benefits – have no choice about what job they’ll take.  The law says their benefits are cut off if they refuse even a minimum wage job, so they aren’t holding out for “really high-paying jobs.”

This would also have been a good moment for the article to have mentioned that there are more than four unemployed workers for every available job. The experience of most unemployed workers is that they call and write and email employers and never hear a word back. Indeed, the evidence suggests that workers who receive UI do more job search than those who never receive benefits. They have every incentive to look hard because: a) their benefits are cut off if they don’t look, b) the benefits are so low (averaging less than $300) they barely amount to the minimum wage for a 40-hour work week, and c) most people are embarrassed or even ashamed to be jobless, even though the fault lies with the economy and not them.

More damaging, Pear leaves an impression that there are no job search requirements for UI at all. He describes the Republican position as imposing job search requirements for the first time: “House Republicans said they wanted a full-year extension, with additional requirements to prevent abuse of the program. They would require most recipients of jobless benefits to search for work…” Job search is not “an additional requirement.” Every UI recipient already is required to look for and accept suitable employment, until they begin receiving Extended Benefits, at which point they are required to accept even minimum wage work for which they are totally overqualified.

The Republicans want to set new and punitive barriers to benefits in front of the unemployed, including drug tests and high school GED requirements, perhaps to paint a picture of them as undeserving. There’s no good reason to subject people to humiliation who have worked hard and earned insurance benefits. They are not the reason employers are sitting on record profits and refusing to hire. They did not engineer the $8 trillion housing bubble that crashed the economy.

They want to work. There are no jobs. They have been punished enough.

WSJ swings and misses on tax policy

In a scathing critique of the House Republicans’ strategy regarding the payroll tax cut, the Wall Street Journal’s editorial board really botched the underlying economics:

“House Republicans yesterday voted down the Senate’s two-month extension of the two-percentage-point payroll tax holiday to 4.2% from 6.2%. They say the short extension makes no economic sense, but then neither does a one-year extension. No employer is going to hire a worker based on such a small and temporary decrease in employment costs, as this year’s tax holiday has demonstrated. The entire exercise is political, but Republicans have thoroughly botched the politics.” (Bold added.)

The Journal‘s editorial page inverts the economics of the payroll tax cut by confusing the enacted employee-side tax cut (being considered for extension) with an employer-side tax cut. The objective behind the employee-side payroll tax cut extension is to put $120 billion worth of disposable income into the hands of consumers, creating and sustaining demand for goods and services, rather than altering marginal hiring costs.

The two-month extension that passed the Senate with overwhelming bipartisan support would increase disposable income by $20 billion via the payroll tax cut and pump another $8 billion into the economy through emergency unemployment benefits. Short of assigning a zero (or negative) fiscal multiplier to these programs, it can’t be argued that this will have no impact on an economy running $918 billion (5.7 percent) below potential output. And recent research by Berkeley professors Alan Auerbach and Yuriy Gorodnichenko, among others, finds that large output gaps imply large multipliers; a zero fiscal multiplier for government spending in a depressed economy is entirely unsubstantiated. (A legitimate critique would be that serious infrastructure investment or public works employment would be a better way to generate demand than the payroll tax cut, some of which will undoubtedly be saved.)

With regard to the duration of extension, Howard Gleckman aptly notes that setting tax policy in two-month increments makes little sense, but I think the Journal’s editorial board would agree with Gleckman that House Republicans only have themselves to blame for that situation.

House vote will hurt millions of unemployed workers

Turning their backs on millions of unemployed workers who can’t make ends meet without the help of their unemployment insurance (UI) benefits, 229 Republican House members voted not to renew federal emergency benefits for the long-term unemployed. In a bipartisan vote, the Senate had agreed to continue the emergency benefits until the end of February, along with an extension of the payroll tax cut that expires at the end of December. But the House refused to consider that bill yesterday, killing hopes for the unemployed as winter begins.

What does the House vote mean for the unemployed?

Regular state UI benefits generally last no more than 26 weeks. The average benefit is less than $300 a week, but an individual’s benefit varies depending on previous earnings and state law. The maximum state-provided benefit currently ranges from $235 in Mississippi to $629 ($943 with dependents) in Massachusetts.

The federal legislation the House was voting on provides up to 73 weeks of additional benefits; workers in any state who exhaust their regular UI benefits before they can find a job can receive up to 34 additional weeks of benefits through the temporary federal Emergency Unemployment Compensation (EUC) program enacted in 2008. That number rises to 53 weeks in states with especially high unemployment rates. Workers who exhaust both their regular UI and EUC benefits can receive up to 20 additional weeks of benefits through the Extended Benefits (EB) program.

The House vote will terminate all of the additional federal weekly unemployment insurance benefits, as of Jan. 3, 2012. For more than 400,000 workers who will exhaust all of their regular state benefits in January, there will be no more federal help; their benefits will be cut off. More workers will exhaust benefits in February and each succeeding month, and all of them – millions of workers — will be denied any federal benefits.

Nearly 600,000 very long-term unemployed workers who are currently receiving Extended Benefits will lose those benefits in January 2012 because their states will end their EB program when full federal funding expires.

More than 3 million workers are currently receiving EUC. Most of them will lose those benefits prematurely if the legislation is not renewed. EUC provides benefits in “tiers” of weeks; people receiving EUC as of Jan. 3, 2012 will be allowed to complete their current tier but not move on to the next tier. The National Employment Law Project estimates that over 700,000 workers will reach the end of their current tier and thus receive no further federal benefits in January. Many more will lose EUC benefits prematurely in the months to follow.

Altogether, the Department of Labor estimates that about 2.5 million workers will lose benefits by March 3, 2012, and 5 million by year’s end, if federal benefits are not renewed.

Although the economy has improved since the depths of the recession, by any measure, the labor market is very poor, and jobless workers face terrible challenges. A recent report by the Council of Economic Advisers makes clear that the jobless are not to blame for their situation; the fault lies with the economy:

As of November 2011, the unemployment rate stood at 8.6 percent and 5.7 million workers had been out of work for more than 26 weeks; the average duration of unemployment was 40.9 weeks. In October, the latest month for which job vacancy data are available, there were more than four job seekers per job opening (versus 1.5 pre-recession). Estimates based on flow data from the Bureau of Labor Statistics monthly Current Population Survey (CPS) show that the probability that an unemployed worker finds a job in any given month is roughly 17 percent. For those who have been unemployed for more than 26 weeks, the monthly job-finding rate is closer to 10 percent.

Top 10 lies about Social Security (from those who just want to dismantle government)

Since the season of top 10 lists is upon us, here’s the Social Security Scrooge version:

  1. Social Security costs are escalating out of control. No. Costs are projected to rise from roughly five to six percent of GDP before leveling off.
  2. Americans want benefits but aren’t willing to pay for them. Wrong again. Americans across political and demographic lines support paying Social Security taxes. They also strongly prefer raising taxes over cutting benefits as a way to close the projected shortfall. The most popular option is raising taxes on high earners, since earnings above $106,800 aren’t taxed. But Americans prefer to close the gap on the revenue side even if asked to pay more themselves.
  3. Our children and grandchildren will drown in debt if we don’t cut the social safety net. No, future generations will drown in debt—their own or the federal government’s—if we don’t address health care cost inflation. Cutting Medicare or Medicaid benefits just pushes costs onto the private sector. And there’s no reason to lump Social Security in with other programs since it’s funded through dedicated taxes and prohibited by law from borrowing.
  4. The Baby Boomers will sink us. No, we saw them coming. Social Security began building up a trust fund in the early 1980s in anticipation of the Boomer retirement. The trust fund will keep growing for another decade to around $3.7 trillion, enough to last through the peak Boomer retirement years.
  5. We’re living longer, so we need to work longer. No—only some of us are living longer, and most of us are already working longer. Gains in life expectancy have been concentrated among people with higher incomes and more education, especially men. Meanwhile, the labor force participation of older workers is close to the postwar peak.
  6. We just need to save more for retirement. That’s a reason to expand Social Security, not shrink it. The average household has a retirement income deficit of $90,000, a conservative measure of how far behind they are in saving and accumulating benefits for retirement—and that’s without further cuts to Social Security. Retirement insecurity is increasing due to earlier Social Security cuts and the shift from secure pensions to do-it-yourself retirement accounts. (If anything, budget hawks should look to trim 401(k) tax breaks, two-thirds of which go to taxpayers in the top fifth of the income distribution and have little impact on saving.)
  7. Seniors are greedy. No, they’re struggling to make ends meet. By any reasonable measure, seniors and other beneficiaries are worse off than working adults, so it makes sense to increase contributions rather than cut benefits. Older households have incomes roughly half those of working-age households. The “greedy geezer” myth rests on the fact that seniors have lower official poverty rates than children and working-age adults, though an improved measure that takes into account higher medical expenses for seniors shows that the three groups have similarly high poverty rates. In any case, cutting Social Security would increase poverty for all. Also, while older households typically have accumulated more savings than younger households, these savings are not enough to maintain their pre-retirement standard of living through retirement.
  8. Benefits are generous. No, they’re modest and shrinking. The average retirement benefit is $14,000 a year—less than a full-time minimum wage worker earns—and benefits constitute two-thirds of income for the average older beneficiary. For a medium earner retiring at 65, benefits replace 41 percent of pre-retirement earnings, down from 52 percent in 1981. This replacement rate is scheduled to drop in the next 15 years to a meager 36 percent.
  9. We’ll just cut benefits for people who don’t need them. No, proposed cuts would hurt the middle class now and the poor later. Because benefits for high earners are modest and wealthy retirees few, supposedly “progressive” plans actually go after middle-class benefits in order to yield significant cost savings. Social Security’s enduring popularity rests on the fact that people earn the right to participate by working and contributing, in keeping with core American values. Moving from a universal social insurance program toward a need-based one would doom Social Security to the same fate as targeted programs like Medicaid, which are being squeezed even as demand for them grows. An even worse idea is cutting cost-of-living adjustments, which would have an impact on all beneficiaries, but especially the oldest old, who are also the poorest old.
  10. Social Security won’t be there for us. Only if we fall for these arguments. Social Security can pay full promised benefits for another quarter-century. Even if nothing is done to shore up the system, Social Security can continue to pay three-fourths of promised benefits after the trust fund runs out. Though this would be far from ideal, it’s certainly no reason to preemptively cut benefits. Instead, we should devote a small portion of the economic growth projected over Social Security’s next 75 years to continuing to build economic security on the cornerstone laid by President Franklin D. Roosevelt.

Continuing extended UI benefits will make the labor market stronger

As the debate over continuing extended unemployment insurance (UI) benefits rages in Washington, there has been an endless barrage of claims that UI is bad for the labor market because, among other things, these benefits make people lazy and keep them from looking for work or accepting jobs (see e.g., the last few paragraphs from this The Hill blog post).

THIS IS NOT TRUE. The macroeconomic benefits of UI (keeping spending power in the economy from falling as far as it otherwise would) are large and completely unambiguous, while the microeconomic impacts (for example, the incentive it may provide people to search either more or less hard for work while collecting benefits) are small and can actually cut in very useful directions for the economy.

Let’s look at the evidence. Jesse Rothstein has written the most careful study available on the microeconomic effects of UI extensions in the Great Recession. Note that an unemployed worker can leave unemployment in one of two ways – by either getting a job, or by giving up looking for work (and thereby dropping out of the labor force and no longer being counted as unemployed). Rothstein finds that in the fourth quarter of 2010, the average monthly rate of leaving unemployment for a displaced worker was 22.4 percent. He finds that it would have been around – wait for it – 24.0 percent if UI benefits hadn’t been extended. Furthermore, he finds that about two-thirds of the decline in the rate of leaving unemployment that can be attributed to UI comes from reduced labor force exit, rather than reduced reemployment. In other words, about two-thirds of the very small reduction in the rate of leaving unemployment is due to people not giving up looking for work! Let me say that again – most of the increase in unemployment duration that can be attributed to the UI extensions comes from increased job search, since UI gives people a reason to continue looking for work even though job prospects are so bleak (which will likely increase the share of displaced workers who ultimately find work).

Of course, only reduced reemployment – i.e., a slower rate of displaced workers actually finding a new job – is what policy makers are worried about. What does Rothstein find there? In the fourth quarter of 2010, the monthly rate of reemployment for a displaced worker was 13.4 percent. He finds that it would have been around 13.9 percent if UI benefits hadn’t been extended, an extremely small effect. Furthermore, other research shows that most of the increase in time-to-reemployment that can be attributed to UI is not a harmful work disincentive effect, but rather a beneficial “liquidity” effect. In particular, it is actually efficiency enhancing to give liquidity-constrained displaced workers the needed space to find a job that matches their skills and experience and meets their family’s needs. This is of course more important now than ever, when job openings are so scarce.

Finally, as mentioned above, UI has large, positive macroeconomic effects. Spending on extended UI benefits is a very effective way to inject money into the economy, since that money gets immediately spent by cash-strapped, long-term unemployed workers. This spending creates demand for goods and services, which take workers to provide, so it generates new jobs. The spending of extended benefit checks will create over a half-million jobs in 2012. If the extended benefits aren’t continued, those jobs will be lost, and, all else equal, the loss of those jobs would increase the unemployment rate by around 0.3 percentage points.

Claims that continuing the UI extensions will further weaken the labor market are simply not supported by the evidence.  Continuing extended UI benefits will create jobs, incentivize people to keep looking for work who otherwise would have given up, and provide a lifeline to the families of workers who lost their job during the worst, and ongoing, labor market downturn in seven decades.

Cleaner, safer air (and some jobs) coming soon: Final “air-toxics rule” still likely to be life-saver, not job-killer

On Friday, the Environmental Protection Agency finalized the “air toxics rule” – a regulation mandating the reduction of toxic emissions (including mercury and arsenic) from the nation’s power plants, with some details concerning this rule made available to Washington Post. The EPA is expected to provide full information on the rule later this week.

The cost and other data on the final rule that have been released differ little from information available about the proposed rule.  It is thus very unlikely that the final Regulatory Impact Analysis (RIA) describing the expected impacts of the final rule will differ significantly from the proposed Regulatory Impact Analysis and other information released with the proposed rule in March of this year. This information makes clear that with benefits exceeding costs by at least 5-to-1, the rule is well worth doing – with up to 17,000 lives saved per year after its implementation and 850,000 additional days of work added to the economy because workers are healthier and would require fewer sick days.

Opponents of the act predictably characterized the air toxics rule as a “job-killer.” Even normall,y this is pretty bad economics – no serious economist thinks that regulatory changes on the scale of the air toxics rule have non-trivial impacts on national job growth. And during times like now – with the economy mired in a “liquidity trap” (very large amounts of productive slack persist even as short-term interest rates are stuck at zero) – this is completely upside-down economics. In today’s circumstances (with very high rates of unemployment) the jobs directly created by the need to install pollution abatement and control technologies will almost surely not be offset by rising interest rates or prices, as could happen if these regulations took effect in an economy with no productive slack.

Our own earlier research, based on the information provided with the proposed rule, indicated that it would lead to roughly 92,000 net new jobs by 2015. The nature of this estimate is likely to apply to the final rule as well. To be clear, this rule isn’t a significant jobs policy that would put a large dent in the current unemployment crisis. But, it is a very valuable rule that would only push in the correct direction in the labor market.

We will re-examine the job impacts of the final rule when full information is available.

Reducing the black-white achievement gap by reducing black unemployment

Class matters in educational performance. Helen F. Ladd and Edward B. Fiske have recently persuasively argued this point in the New York Times and at a recent conference. One analysis Ladd conducted in the conference paper included academically high-performing countries like South Korea and Finland. As Ladd illustrates, in these two countries (as well as in lower-performing countries) the most privileged students do best academically and the least privileged do worst.

This gradient of academic achievement exists despite the fact that South Korean and Finnish students have among the highest median test scores in the world. The students cannot be accused of coming from cultures that do not value education. Both countries are also racially and ethnically homogenous. Thus, neither culture nor race can be used to explain why poorer Korean and Finnish children do worse in school than their richer peers. Class matters.

Class matters in the United States also. Ladd and Fiske report that “data from the National Assessment of Educational Progress [in the United States] show that more than 40 percent of the variation in average reading scores and 46 percent of the variation in average math scores across states is associated with variation in child poverty rates.”

This information helps us to understand the black-white achievement gap and its persistence. The child poverty rate for African Americans is regularly more than three times the rate for whites. Since class matters for educational achievement, it is not realistic to expect to close the black-white achievement gap while the economic gaps between blacks and whites are so large.

This is why I argue in A jobs-centered approach to African American community development that a jobs program for black communities is an important part of improving educational outcomes for black children. As the figure shows, there is a fairly strong relationship between the black child poverty rate and the black unemployment rate. In the early 1980s, the increase in black unemployment corresponds with an increase in black child poverty. In the late 1990s, the decrease in black unemployment matches a downward trend in black child poverty. The uptick in black unemployment in recent years is reflected in a recent rise in black child poverty.

If we reduce black unemployment, we reduce black child poverty. Fewer black children in poverty set the stage for higher black student achievement.

Some people believe that education is the key to lift blacks out of poverty, but it is important to realize the role that poverty and other forms of economic disadvantage play in black educational outcomes. Economic inequality plays an important role in unequal educational outcomes.

The financial crisis didn’t, and won’t, fix inequality

The incomes of the top 1 percent have fallen in the last two recessions because their incomes were disproportionately affected (through capital gains and stock options, among other things) by the steep decline in the stock market that occurred in the early 2000s and in the recent financial crisis. This decline in the stock market and incomes linked to it are disproportionately claimed by the rich, so this led to a temporary reduction in income inequality. After the early 2000s episode, high incomes and inequality rose quickly during the upturn as the stock market recovered. There is little reason to expect this not to be replicated in coming years after the sharp 2009 fall.

People would be well-advised to keep this in mind – too many observers, such as Megan McArdle, have highlighted this drop in top incomes by 2009 and suggested that maybe income inequality has stopped growing, saying “We don’t want to spend years focused on income inequality, only to learn that the financial crisis fixed it for us.” A New York Times article echoed this perspective. EPI countered in a post yesterday with new data showing that wages for top earners have restarted their upward march after hitting a post-recession low in 2009 – meaning that income inequality (or at least inequality of wages) is, not surprisingly, already rising again.

The fall in incomes at the top between 2007 and 2009 had much to do with the fall in realized capital gains and EPI pointed out that capital gains actually fell far more than the stock market decline. That makes sense since households would not want to sell off their stock when prices are low. The graph below plots average capital gains income for the top 1 percent of income earners along with the S&P 500 index (both indexed to 1989) and shows that this “overreaction” of realized capital gains relative to stock market movements is far from unusual.

This dynamic was very much at play in the 1990s and 2000s. Capital gains income for top earners skyrocketed faster in the 1990s than the growth of the stock market and then fell faster after the technology bubble crash. This was followed by capital gains growth faster than the stock market in the recovery period from 2003 to 2007. Unfortunately, the data from Emmanuel Saez and Thomas Piketty on incomes used in this graph only extend to 2008, but it isn’t difficult to see what is happening here. The behavior of the S&P 500 since 2008 is shown, with the recovery from the 2009 bottom clearly visible. As reported in our blog post yesterday, we know that capital gains fell further in 2009, which surely helps to explain the dip in the top 1 percent of incomes that McCardle highlights.

But we also can see the stock market increase in 2010 and 2011, which is surely driving capital gains income for the top 1 percent higher. The important part of the inequality debate is not to cherry-pick individual years where the rich suffer, or do exceptionally well, but to show the unmistakable trend over time. Temporary reductions in the relative income of the very rich are a common feature during recessions – but so far, the long-run trend of growing income concentration has re-established itself quickly after these cyclical downturns. Given this, it is most unlikely that the financial crisis has fixed income inequality.

(Wonky note: The spike in capital gains income in 1986 was due to a change in tax law in 1986: The Tax Reform Act of 1986. The law raised the rate on capital gains income, effective January 1 1987, from 20 percent to 28 percent.  Long-term capital gains on corporate stock were seven times their December 1985 levels in December 1986. For more, see “The Labyrinth of Capital Gains Tax Policy: A guide for the perplexed” by Leonard Burman, Brookings Institution Press, 1999.)

Snapshot: Unemployment insurance benefits increase job-search activities

Yesterday, the House of Representatives passed legislation authored by Rep. Dave Camp (R-Mich.) that would reduce the maximum number of weeks of unemployment insurance benefits that the federal government provides to jobless workers from 73 weeks to 33 weeks.

Claims that unemployment insurance benefits dissuade the jobless from looking for work are untrue, as the accompanying chart shows. Research by Carl Van Horn and the Heldrich Center at Rutgers University shows that unemployed workers who receive unemployment compensation do more to find a job than those who never receive benefits. They do more online job searching, are more likely to look at newspaper classified ads, and are more likely to send email inquiries and applications to prospective employers.

The reason unemployed Americans can’t find jobs isn’t a failure to look. As EPI economist Heidi Shierholz points out, they can’t find jobs because there are 10.6 million more unemployed workers than there are available jobs.

—with research assistance from Hilary Wething