I have been getting versions of this question a lot. It is very hard to answer with any precision, so, below are some very imprecise thoughts.
First, the shutdown would have to go on for quite a long-time (say at least a month) to affect the trajectory of aggregate macroeconomic statistics like gross domestic product (GDP) or employment growth. For one, the majority of what the federal government spends money on (including the health insurance coverage expansions contained in the ACA!) will not be affected by the shutdown. Transfers payments like Social Security, Medicare, Medicaid, Food Stamps, etc…will continue to flow, as will essential discretionary spending.
Given the relatively restricted scope of the shutdown in terms of government spending, it stands to reason that it would have to go on for a a month or so before there would be enough of a mechanical fiscal drag to start significantly affecting the path of macroeconomic aggregates. A very, very rough back-of-the-envelope estimate would be that the strictly mechanical impact of a month of the shutdown would subtract 0.1-0.2 percentage points off of GDP growth for (fiscal) 2014.* So, if the government shutdown lasts a month and the economy was set to grow 3 percent in 2014 without the shutdown, the mechanical drag from the shutdown would result in actual growth of 2.8-2.9 percent. Of course, if one focused on the effect of the shutdown only in the fourth quarter of (calendar) 2013, it will matter quite a bit more (multiply that 0.1-0.2 by 4, so, a one-month shutdown would reduce fourth quarter GDP growth by about 0.4-0.8 percent, which is not peanuts for a quarterly growth number).
People wrongly think the economy is like the weather, a natural force outside of our control. So thinking about problems like high unemployment and declining wages leave people feeling hopeless because they seem to result from large historic forces that we can’t affect like globalization.
The truth, however, is that the economy isn’t like the weather: It’s entirely man-made and the rules are set by politics, not God or nature. Globalization is real, but the terms of globalization—the rules for how the internationalization of trade and production operates and affects workers and companies—are set by politicians and the organizations they’ve created through international treaties. We can change those rules and shape globalization so it does less harm to working people in the United States and around the world.
One of those rules changes would prevent companies from manipulating their currencies to make their exports cheaper while simultaneously making goods imported from other countries more expensive. China, Japan, and other countries have done this for years, buying hundreds of billions of U.S. dollars to weaken their own currencies and making it cheaper and easier to export goods to the United States. This strategy has been very successful, and together, China, Singapore, Taiwan and several other countries, including Japan, export hundreds of billions of dollars more to the United States in manufactured goods than we send to them, leaving us with a huge trade deficit that costs jobs and undermines wages here. The Peterson Institute for International Economics estimates that foreign currency manipulation has cost the United States between one million and five million jobs.
The core argument of the hysterical Republican diatribe against Obamacare is that it will push Americans down a slippery slope into the nightmare of, gasp, SOCIALIZED MEDICINE!! The phrase regularly trips from the lips of GOP reactionaries. Here’s Texas Senator Ted Cruz in his recent 22-hour speech: “Socialized medicine is—and has been everywhere it has been implemented in the world—a disaster. Obamacare–its intended purpose is to lead us unavoidably down that path.” Congressman Marlin Stutzman (R-IND) tells us, “Obamacare is a perfect tool to crush free enterprise and force all Americans into a socialist health care system.”
These mantras are not really about health care. They are conversation-stoppers. They are designed to flood the mind with murky images of indifferent bureaucratic sloth, incompetent if not sadistic doctors and nurses, dingy overcrowded waiting rooms and other grim scenes from a dystopian medical horror movie. The purpose is to convince the public that as bad as our health care system is, real change would make it worse.
The National Parks–Yellowstone, Yosemite, Great Smokey Mountains and all the rest—are shutting down, along with much of the government, because what Politico called a “hard-line faction of House GOP lawmakers” can’t accept the results of the last election or the fact that Congress enacted the Affordable Care Act. They are carrying obstructionism to a disastrous new low.
This is a personal nuisance, since my wife and I planned a seven-night stay in Yellowstone that would have started Saturday night. Luckily, we checked ahead and learned that, as this Q and A from Bloomberg News recounts, everyone will be kicked out of the park, vacation be damned!
“Q. What about my trip to Yellowstone?
A. You’re out of luck. According to the Interior Department’s shutdown contingency plan: “All areas of the National Park and National Wildlife Refuge Systems would be closed and public access would be restricted.”
GOP Members of Congress Use Fiscal Showdown as Leverage to Damage Middle-Class Economic Security, One More Time
At the beginning of the year, Andrew Fieldhouse and I tried to document lots of the ways that the GOP House had managed to smother a full recovery from the Great Recession. The list was pretty impressive, but a key theme was that the GOP kept using the leverage of various fiscal decision points (reaching the debt ceiling, the expiration of tax cuts, the drawdown of the Recovery Act, etc…) to push for austerity on the spending side of government. And their tactic worked—the current economic recovery has seen historically slow growth in public spending, and by now the entire gap between today’s economy and a healthy one can be attributed to this austerity, full stop.
When we wrote our list, I had hoped any strategic gain to the GOP Congress stemming from throttling the recovery was over—the 2012 election had come and gone, and going forward from there it is not exactly obvious why slow economic growth is damaging to just one party or the other.
Obviously, I was wrong.
The new exploitation of external fiscal deadlines (the need for a “continuing resolution” to fund federal governmental operations after October 1 and reaching the debt ceiling in mid-October) concerns both a further ratcheting down of spending, but also the delay of the Affordable Care Act (ACA).
Paul Krugman and Mark Thoma have been discussing (see here and here) the views of the (increasingly influential) very rich on this fall’s fiscal debate. They hypothesize that rising inequality has led to exorbitantly large incomes for a select few, and that these select few don’t understand the value of social insurance because they reap little-to-no benefits from programs like Medicaid, and SNAP, for example. The top 1 percent, after all, rarely realize the benefits of social insurance, since the likelihood that they experience unexpected income losses to the extent that they fall below the middle class living standards is slim. More often, social insurance benefits those who may be in the middle and lower classes, and experience unexpected income losses (like a lay off). Complaining about insurance simply because you don’t think you will need it is a pretty pithy argument, but let’s ignore that for now.
Thoma and Krugman go further, noting that rising inequality seems to have confirmed the top one percent’s notion that they are the indispensable economic engine of the U.S. economy, who take risks and work the hardest and should justly reap the benefits. They push for lower taxes (even though their current tax rate is one of the lowest in history) because they don’t think anything should impede their productivity, and they demand respect for being the “job creators” in society. In the context of this fall’s showdowns over the federal budget and the debt ceiling, not only is this take wrong, but it is totally divorced from the reality the broad middle-class faces—a reality of high joblessness from an anemic recovery, and meager wage growth over the last 30 years.
EPI co-founder and board member Robert Reich has a new documentary, open in theaters nationwide today, called Inequality for All. Everyone should go see this important film.
The film explores the growth of economic inequality, and draws heavily on the work that EPI has done over the past 25 years.
In the decades following World War II, workers’ wages by-and-large rose alongside productivity. But since the 1970s, that relationship has broken down. While CEOs and financial executives have seen their pay skyrocket, wages have been flat for ordinary Americans (even those with a college degree) for the past decade. Add to that a minimum wage that has less purchasing power than it did in 1963 and it’s easy to see why Americans are concerned with economic inequality. It’s a challenge that came about thanks to policies set by those with the most economic power, and it’s something that can be fixed.
That’s why earlier this year, we launched inequality.is. The site walks you through how inequality affects you, how it affects the economy, how we created it, and what we can do to fix it. It even features a guest appearance from Robert Reich. (See also this blog post from Elise Gould for more about the site.)
Once you see Inequality for All, come back here for a more in-depth look at how this came about—and what we can do about it:
- A Decade of Flat Wages
- CEO Pay in 2012 Was Extraordinarily High Relative to Typical Workers and Other High Earners
- The Pay of Corporate Executives and Financial Professionals as Evidence of Rents in Top 1 Percent Incomes
- Rising Income Inequality and the Role of Shifting Market-Income Distribution, Tax Burdens, and Tax Rates
- Fix it and forget it: Index the minimum wage to growth in average wages
- Occupy Wall Streeters are right about skewed economic rewards in the United States
- Failure by Design
- Everybody wins, except for most of us
On Twitter, Atrios demanded more talk of the platinum coin as a solution to the looming showdown over the debt ceiling. For those who don’t remember what the platinum coin idea is all about, check this out—a very good explanation of the issue, as well as a link to a good Chris Hayes segment on it.
But the thirty-second version runs like this: currently, to fund governmental activities, the Treasury draws on an account at the Federal Reserve. The account is fed by both tax revenues and the proceeds from selling bonds (debt). But, because the United States has a statutorily imposed limit of how much outstanding debt is allowed, once this limit is reached on issuing new debt, Treasury can no longer sell bonds and deposit these proceeds, and hence the account at the Federal Reserve will dwindle. By October 17 (current guesstimate) it will be too small to finance that day’s governmental activities. A suggested way around this has been to have Treasury mint a coin (which has to be platinum for a reason too boring to note in depth) with a denomination of $1 trillion, deposit it at the Federal Reserve and, voila, governmental outlays can continue.
It’s true that the idea of minting a trillion dollar platinum coin as a solution to our nation’s problems sounds like something out of the Simpsons. But, the thing to realize is that while it is indeed a phony accounting solution, what it resolves is a phony accounting problem.
We Have a Deficit Problem: It is too small to fuel a robust economic recovery from the Great Recession
In a recent speech marking the five-year anniversary of the financial crisis, President Obama hailed the falling federal deficit by pointing out that, “our deficits are going down faster than any time since before I was born.” The reduction in the deficit between 2012 and 2013—from 6.8 percent of GDP to 3.8 percent—is the largest deficit reduction in the past 60 years. Contrary to how too many pundits and politicians think about the economy, that’s not a good thing. This rapid contraction in the budget deficit has sucked purchasing power out of the overall economy even while it remains severely demand-constrained following the Great Recession.
The figure below shows the federal deficit, which has been steadily falling relative to GDP since 2009, versus the trend in the output gap, an indicator of how close to full recovery the economy is. The output gap is the difference between what economic output would be if resources were fully employed (potential output) and actual output, expressed as a percent of potential output. The stagnation in the output gap—which is mirrored by stagnation in the share of working-age adults who are employed since the official recovery began—is caused in large part by the steep contraction in budget deficits.
Earlier this week I wrote a post with a graph showing just how austere public spending has been in the last 5 years relative to historical episodes of recession and recovery. Paul Krugman coincidentally posted a piece making the same point a couple hours later (which just might have given it a bit more reach).1
This was the graph I posted (which is also in a paper I co-authored with Hilary Wething):
Note that the difference between today’s level of public spending and what would have prevailed had just the normal historical experience following recessions held is absolutely enormous. Had we tracked this normal historical experience we would have about $800 billion more public spending and the economy would be essentially back to pre-recession health.*
Here’s what we read today. Share interesting articles in the comments!
- The Mismeasure of Poverty (New York Times)
- Cashier or Consultant? Entry Labor Market Conditions, Field of Study, and Career Success (Yale University, pdf)
- Washington Post Beats Up on Disabled Workers, Again (CEPR)
- 5 reasons Republicans should support Janet Yellen (CNN Money)
- How Bad Data Warped Everything We Thought We Knew About the Jobs Recovery (The Atlantic)
Last week, Brad DeLong posted what he called his “Seven Cardinal Virtues Of Equitable Growth.” I (pretty much) applaud them all: manage the macroeconomy; boost public and private investment; shift from value-subtracting industries (health care administration, prisons, finance, carbon energy) to value creating sectors; create a carbon tax; more immigration; obtain more equality of opportunity in 50 years by obtaining substantial equality of result right now; a well-functioning economy will need a larger government (addressing health-care finance, pensions, education finance, research and early-stage development) relative to the private economy than the twentieth century did. But, like many of my colleagues on the center-left, Brad overlooks what I see as the key economic challenge of our time—generating broad-based wage growth.
While Brad buries the goal of equitable wage growth in the grander category of “obtaining substantial equality of result right now,” I think economists and policymakers must explicitly focus on generating broad-based wage growth when discussing income inequality. This issue must be front and center, or we will never generate the policies needed to achieve the broadly shared prosperity we all want.
It is taken as a given that the annual fiscal policy dramas of the past few years (last year it was the “fiscal cliff,” the year before it was running up against the statutory debt ceiling, and this year it’s debt ceiling again plus the need to pass a “continuing resolution” to fund the federal government over the next year) are “bad for the economy.”
The general idea that these fiscal policy fights have hurt the economy’s recovery from the Great Recession is clearly right. However, far too many people get the story wrong about how these annual fiscal dramas have slowed recovery. In short, it’s not that they introduce damaging “uncertainty.” Rather, it’s that they have led to smaller budget deficits, which have sucked purchasing power out of an economy that remains severely demand-constrained.
This may sound doubly strange—the corrosive impact of “uncertainty” is now essentially an official talking point for the Beltway pundit class, and the most treasured cliché of economic commentary is that reducing the budget deficit is nearly always and everywhere a good thing.
The Congressional Budget Office released their long-term budget outlook last Tuesday. On the spending side, growth has slowed relative to their previous long-term projection largely because of reduced projected federal health spending on Medicare, Medicaid, CHIP, and the health insurance exchange subsidies. Given that the trajectory of federal spending in coming decades is almost entirely driven by health costs, this is a most welcome change.
On the revenue side, to no one’s surprise, things look considerably worse because of the tax cuts enacted by the American Taxpayer Relief Act (ATRA)—otherwise known as the “fiscal cliff deal”. The 2001 and 2003 tax cuts were made permanent for 99 percent of taxpayers and the alternative minimum tax parameters were indexed to inflation. As a result, CBO projects that by 2038 federal revenues will be about 3.7 percent of GDP lower than previously thought. As Nicole Woo of Center for Economic and Policy Research has pointed out, the latest CBO report suggests strongly that in containing projected long-run deficits, the U.S. has a tax problem, not a spending problem.
An under-appreciated part of this tax problem is the continued tax avoidance (and sometimes outright evasion) by many U.S. multinational corporations. CBO assumes that corporate tax revenues will average 2.2 percent between 2014 and 2023—basically falling from 2.5 percent of GDP in 2015 to 1.9 percent by 2023. After 2023, CBO assumes that corporate tax revenues will remain at 1.9 percent of GDP, which is about what the average was between 1973 and 2012.
But the importance of corporate income tax revenues has steadily fallen since 1946. In the 1950s, corporate income tax revenue was about 4.5 percent of GDP and the average between 1946 and 1986 was 3.2 percent of GDP. If corporate tax revenues are higher by one percent of GDP after 2014, then the deficit would be reduced by about one percent of GDP every year (actually a little more because net interest payments would be slightly lower). Because of the reduced deficits, the debt-to-GDP ratio would be about 5 percent lower in 2040 than CBO’s projection.
A good start toward increasing corporate tax revenues was introduced in the senate yesterday by Senators Levin, Whitehouse, Begich, and Shaheen. The Stop Tax Haven Abuse Act (S. 1533) would close some corporate loopholes and provide measures to combat the corporate use of tax havens to evade paying U.S. taxes.
The results of the 2012 American Community Survey (ACS), released by the U.S. Census Bureau, show the lingering effects of the Great Recession, and further evidence of a recovery that has been both too slow and too tentative. Both median household income levels and overall poverty rates were virtually unchanged in 2012.
Between 2011 and 2012, only a handful of states saw changes in inflation-adjusted median household income, consistent with a national median household income unchanged from 2011 (the increase of 0.1% nationally is not statistically significant). Our EPI colleagues explain clearly why we see this holding pattern in effect: “Given the tight relationship between the health of the labor market and incomes for most households, it is unsurprising that incomes for most households grew only slightly if at all in 2012 after deteriorating between 2007 and 2011.” Until we see significantly more robust job growth than that which has left us with a “jobs deficit” of over 8 million, improved income and poverty data (and improved well-being and economic security for American families in every state) will remain elusive.
Changes to median household income between 2011 and 2012 were statistically significant in only six states. In four of those states—Hawaii (4.8%), Illinois (1.4%), Massachusetts (1.6%), and Oregon (3.3%)—median household incomes grew modestly. In the other two—Mississippi (-1.6%) and Virginia (-2.2%)—incomes dropped slightly. In the remaining forty-four states (and the District of Columbia), median household incomes showed no significant change.1
The Census released its annual income and poverty report this week, which, among other highlights, calculates the number of people who are kept out of poverty by various government assistance programs. While many of the headline numbers stayed the same, the number of people kept out of poverty by the Supplemental Nutrition Assistance Program (SNAP) increased to an all-time high of 4 million people.1
The data arrived, coincidentally, as the House of Representatives announced it will be voting today to cut SNAP spending by 5 percent over the next 10 years, cutting 3.8 million people from the program by as early as next year. Understanding why SNAP has increased over the last five years helps us understand why it would be irresponsible–indeed cruel and stupid—to cut spending on the program now.
The hot debate over whether the new iPhones incorporate substantial improvements, or will spur even larger profits for Apple, misses a fundamental point. Whether or not the iPhones constitute a breakthrough for Apple’s business, their production process does not constitute a breakthrough for the workers making them. Despite an 18-month old highly-publicized commitment by Apple to dramatically reform working conditions in its supply chain, these conditions still include widespread abuses of labor laws and common decency, as well as widespread violations of Apple promises and its supplier code of conduct. Three of the latest undercover investigations by China Labor Watch and a recent review of Apple reform promises I conducted with Scott Nova of the Workers Rights Consortium support this conclusion.
The first of the China Labor Watch studies was an in-depth investigation of conditions for workers making the new iPhones at Apple’s second largest supplier, Pegatron. The study, released July 29, found Pegatron in violation of 17 specific commitments made in Apple’s supplier code of conduct, and 86 labor rights violations overall in areas such as hiring practices, wages, hours worked, and living conditions. As one illustration, Apple has touted its success in ensuring that workers in its supply chain work no more than 60 hours a week, a dubious accomplishment at best, since the limit under Chinese law is 49 hours a week. China Labor Watch found even this weak standard has not been achieved. At the three Pegatron factories examined, the average number of hours worked ranged from 66 to 69 hours per week, and in at least one factory these excessive hours were concealed because workers were forced to sign false time sheets.
This is a big week for those interested in the Federal Reserve—which should be everybody. The Fed has been the only economic policymaking institution with any real power that has been actively trying to lower unemployment and push the economy back to full recovery from the Great Recession over the past two years. If you’re looking for a job, more hours, or the confidence that you can ask your boss for a raise and might actually get it (because there aren’t three well-qualified but jobless people lined up outside to take your slot), you really should be interested in the Fed and what it’s doing.
The first bit of big Fed news is Larry Summers’ withdrawing from consideration to replace Ben Bernanke as the next Chair of the Federal Reserve. This seemingly clears the way for Janet Yellen—the current Vice-Chair of the Fed—to be offered the position. If Yellen is not offered the slot, it would be a bizarre and consequential mistake. She is eminently qualified for the job, and, most importantly right now, she has the correct diagnosis for what is keeping the U.S. economy from full recovery from the Great Recession (a continuing shortage of aggregate demand) and is committed to using the Fed’s power to hasten this recovery (by continuing its program to buy assets to keep interest rates low and inflation expectations from falling).
The U.S. Department of Labor issued final regulations today that extend minimum wage and overtime protections under the Fair Labor Standards Act to about two million previously excluded home care workers—personal care assistants for the frail elderly and the disabled, home health aides, and other direct support paraprofessionals working in the homes of patients and clients needing personal help with needs ranging from changing the dressings on wounds and administering non-injectable medications to personal hygiene and ambulation. The home care workforce is growing fast as the population ages and more people are cared for in their homes, rather than in costlier institutional settings. These jobs need to be decent jobs that pay a living wage.
Although domestic workers, like nannies, chauffeurs and housekeepers, were first covered by the FLSA in 1974, most home care aides have been excluded from minimum wage and overtime protections by the Act’s vague “companionship” exemption, which was never meant to cover people providing services for pay, while in the employ of a third party, rather than in a direct relationship with the patient or elderly client. An agency—and there are very large agencies, some employing tens of thousands of home care workers—could therefore ignore FLSA rules about paying for travel time when an aide moved between one client’s home and another’s, ignore the rules governing break time, and avoid paying time and a half for overtime when an aide worked more than 40 hours in a week. Some employers have even paid less than the miserably low federal minimum wage of $7.25 an hour.
Modest income growth in 2012 barely begins to offset lost decade driven by financial crisis and decade-long wage stagnation
This morning, the Census Bureau released its report on income, poverty, and health insurance coverage in 2012. It shows that from 2011 to 2012, median household income for non-elderly households (those with a head of household younger than 65 years old) increased 1.0 percent from $56,802 to $57,353. However, that modest growth barely begins to offset the losses incurred during the Great Recession. Between 2007 and 2011, median household income for non-elderly households dropped from $62,617 to $56,802, a decline of $5,815, or 9.3 percent. Furthermore, the disappointing trends of the Great Recession and its aftermath come on the heels of the weak labor market from 2000-2007, where the median income of non-elderly households fell significantly, from $64,843 to $62,617, the first time in the post-war period that incomes failed to grow over a business cycle. Altogether, from 2000 to 2012, median income for non-elderly households fell from $64,843 to $57,353, a decline of $7,490, or 11.6 percent.
Brad DeLong recently wrote an excellent piece contrasting the “Banking Versus Macroeconomics” camps in assessing how the U.S. responded to the financial crisis that peaked with the uncontrolled bankruptcy of Lehman five years ago. A quick summary:
“One camp, call it the Banking Camp, sees a central bank as a bank for bankers: its clients are the banks…and its functions are to support the banking sector and …to ensure that there is enough credit and liquidity in the economy that mere illiquidity rather than insolvency does not force banks into bankruptcy and liquidation.
Another camp, call it the Macroeconomic Camp, sees a central bank… as the steward of the economy as a whole, with its primary responsibility not to preserve the health of the businesses that make up the banking sector but rather to maintain the health of the economy as a whole.”
This is a useful dichotomy, and one that can help explain differing assessments of how policymakers responded to the Global Financial Crisis of 2007/08.
I don’t mean to pick on Joel Klein, the former New York City schools chancellor, but he has made himself such a caricature of self-styled school reformers who are undermining American public education that it would be a mistake not to respond to the claims on which he bases his efforts.
Last year, I addressed Mr. Klein’s conclusion that public education must be failing because he himself grew up in public housing as a “kid of the streets,” yet owed his success to great public schools; and if only children from public housing projects today had schools as good as his, they too would be successful.
The analysis, it turned out, was misleading. The New York City public housing in which the Klein family lived in the 1950s was segregated, constructed for white middle class two-parent households where the husband had a stable employment history and where market rents were charged with no public subsidy. Such housing projects no longer exist, and the conditions in which Joel Klein grew up bear no resemblance to those from which minority children in impoverished families come to school today.
Vincent Gray’s statement in support of his veto of the Local Retailer Accountability Act was a collection of non-sequiturs, half-truths, vague promises, and nonsense. He divides his critique of the LRAA into six sections.
- “The bill is not a living wage bill because it would raise the minimum wage only for a small fraction of the District’s workforce.” The Mayor says he wants, instead, “to raise the minimum wage for all District residents.” Of course, the District could do both: require a higher minimum wage for billion-dollar corporations and a lower one for other businesses, including mom and pop stores. But the fact is that Mayor Gray hasn’t put forward any minimum wage increase, and the level that Councilmember Tommy Wells has suggested is $10.25—far below a “true living wage.” Each member of a 2-parent family with two kids would need to earn nearly $20 an hour to have a true living wage in the District.
- “The bill is a job killer, because nearly every large retailer now considering opening a store in the District has indicated they will not come here or expand here if this bill becomes law.” The Mayor should identify the expansions Target, Home Depot, Wegmans, Lowe’s, Walgreens, Harris Teeter, AutoZone and Macy’s will make if the bill doesn’t pass. If they have such plans, why haven’t they announced them? And how credible is this threat? What billion-dollar retailer would invest here with a minimum wage of $10.25 an hour but not with a minimum wage of $12.50 that gives a credit for other benefits? The Mayor is either being dishonest, or gullible, or is simply unwilling to stand up to corporate bullies.Read more
Here’s what we read today. Did we miss anything good? Let us know in the comments.
- Why Janet Yellen, Not Larry Summers, Should Lead the Fed (New York Times)
- How High 401(k) Fees Can Doom Your Retirement Plans (Slate)
- Dying Not Under a Bridge, Nor Living in an E.R. (The Atlantic)
- Public Universities Funding Less Low-Income Students Nationwide (Color Lines)
- Carwash Workers and Capitol Hill: Immigration in Limbo (In These Times)
- At Grandmother’s House We Stay (Pew Research)
- Problem of unpaid internships in Ontario is ‘massive,’ says student group (Toronto Star)
- Wynne Godley’s Crucial Warnings About the Trade Deficit Still Ignored (AmericanEconomistAlert.org)
In a recent Health Affairs article, we, along with coauthor Dave Graham-Square, examine a potential pitfall in the design and implementation of the tax subsidies individuals and families may receive through the new health insurance marketplaces beginning in 2014. Next month, eligible Americans will be able to apply for subsidies to purchase health insurance in the new state and federally facilitated insurance exchanges. The amount of subsidy is determined by a person or family’s income over the past year. A problem may arise at the end of the year if income changes substantially and the family’s subsidy levels are not adjusted accordingly. Families may owe large sums at tax time if the subsidies aren’t recalculated as income rises.
Our article examines the extent to which eligible families in California experience income changes, which could have substantial effects on their subsidy levels. Using two-year panels of the Survey of Income and Program Participation (SIPP), matched to the California Simulation of Insurance Markets (CalSIM), we construct the projected demographic profile and participation of the state’s subsidized exchange population in 2018 to 2019.
Next Tuesday, the 2012 income numbers will be released by the Census Bureau and will reveal whether or not U.S. households have begun to dig out of the hole left by the Great Recession.
Between 2007 and 2011, median household income dropped by 8.1 percent (Excel file). Unfortunately, Tuesday’s numbers are unlikely to show much of a rebound for the median household in 2012.
Two things that will have pushed the income numbers in a positive direction are average weekly hours worked, which increased by 0.3 percent in 2012, and the share of the population that is employed, which grew by 0.3 percent when considering the entire 16+ population and 0.8 percent when considering just “prime-age” workers (workers age 25-54). However, those increases will be at least partially offset by the fact that due to the weak labor market, workers were earning less per hour in 2012 than they did in 2011. (Real hourly wages for the median worker dropped by 0.6 percent in 2012.) Putting these factors together, my back-of-the-envelope calculation is that, in 2012, median household income likely grew somewhere between zero percent and one-half of one percent.
The United States has experienced increasing economic inequality since the late 1970s. New data released this week confirm that the Great Recession was only a blip on the road toward growing income inequality. Emmanuel Saez and Thomas Piketty updated their now-famous data on cash, market-based income, allowing one to track trends in inequality in the United States between 1913 through 2012.
As illustrated in the graph below, the share of income going to the top 1 percent has surpassed its 2007 peak of 18.3 percent and is now 19.3 percent—the highest share since 1928.
At the same time, the Piketty and Saez data show that the Great Recession has battered incomes for the bottom 90 percent so badly that they are now back to the same levels that prevailed in 1966.
It was reported earlier this summer that congressional Republicans planned on demanding that the Obama administration choose from a “menu” of mandatory spending cuts in exchange for raising the country’s statutory debt limit. “Mandatory spending” (or the even less flattering “entitlements”) is a budget wonk’s way of referring to programs such as Social Security, Medicare and Unemployment Compensation as well as for important programs for low-income individuals and families such as Medicaid, the Supplemental Nutrition Assistance Program (SNAP, formerly known as food stamps), and Supplemental Security Income (SSI, a means-tested benefit for the low-income blind, disabled, and elderly).
Before looking ahead at some of the specific proposals for “entitlement reform,” it is instructive to look back at spending on these programs in recent decades to see which have been growing and which have not, and to examine the sources of this growth. The GOP narrative, after all, on why these popular programs must be cut is that they are allegedly spiraling out of control. This post examines whether or not there’s any evidence for this view.