CAP’s rethinking of the grand bargain path is good. Now CAP should rethink their role in putting us on that path.
The Center for American Progress (CAP) has issued an important new report saying that “new realities” dictate that we “reset button on the entire fiscal debate,” end the pursuit of a fiscal “grand bargain” with Republicans in Congress on deficit reduction, and replace the sequester (through 2016). One can only hope this signals a change in direction for the administration and others on the center-left who embarked on the grand bargain deficit reduction journey in late 2009 and early 2010 when their focus should have remained on job creation. That turn of events was one of the most consequential economic policymaking decisions in decades, because it derailed job creation (i.e., further stimulus) efforts thus ensuring that recovery from the Great Recession would be agonizingly slow. That, of course, has had a hugely adverse impact on the wages, benefits and employment of the vast majority of Americans, but has also had tremendous political fallout (i.e. 2010) and weakened the public’s faith in government’s ability to spur job growth. It was a clear unforced error by CAP and the administration to suggest the need for a grand bargain on deficit reduction, embodied in the appointment of the Simpson-Bowles commission. For these reasons it’s worth examining the argument CAP has made and compare it to the situation in late 2009 and early 2010 when CAP pushed for a grand bargain, praised the Simpson-Bowles effort and recommended a deficit plan that, if adopted, would have started to cut spending in October 2010 (when, it turns out, unemployment was still 9.5 percent). This is not an across-the-board indictment of CAP—they do lots of excellent work, including Michael Linden’s budget analyses. But it is important to highlight that there were two paths available to liberal and center-left policymakers over the course of this crisis, and many of today’s difficulties are with us because the wrong path was chosen. EPI, I am proud to say, was and remains resolutely focused on the ongoing jobs crisis.
In the May issue of Educational Leadership, I attempt to show how our misunderstanding of the origins of racial segregation stands in the way of efforts to narrow the black-white academic achievement gap.
Socially and economically disadvantaged children perform, on average, at lower levels of achievement than advantaged children. The achievement gap primarily results from disadvantaged children coming to school unprepared to take advantage of what schools have to offer, not primarily from inadequate teachers or schools. Children who come to school from households with poor literacy levels, who are in poor health, whose housing is unstable, whose parents are suffering the stress of unemployment, and who are themselves stressed as well in neighborhoods with high levels of crime and violence, cannot be expected to achieve, on average, as well as middle class children, even if all have high quality instruction.
Disadvantaged children’s obstacles to achievement are exacerbated when these children are concentrated in racially and economically homogeneous and isolated schools. Meaningful narrowing of the achievement gap will not be possible without breaking down these barriers and integrating black children into middle-class schools.
On May 1st, I wrote a blog post pointing out that at a rate of 175,000 jobs per month we won’t get back to the December 2007 unemployment rate until 2020. Apparently, I was looking into a depressing but very accurate crystal ball, since 175,000 jobs is exactly how many jobs we ended up getting in May.
It’s still true that at 175,000 jobs per month, we won’t close the jobs gap before the end of this decade. To close the jobs gap by 2016, the year of the next presidential election, we have to add more than 300,000 jobs every month.
As we’ve discussed, the sequestration enacted March 1 cut federal spending by $85.3 billion for fiscal year 2013. The sequester not only cut money allocated to federal programs, but also meant reductions for federal spending at the state and local level. States and local governments depend on federal grants and loans to fund essential services and programs, helping them maintain infrastructure, provide education, administer health and social services and ensure public safety. In 2011, federal grants to states and localities totaled $607 billion and accounted for approximately 25 percent of state and local government spending.
A report released by EPI last week finds that the sequestration decreased federal funding for state grants by $5.1 billion in the 2013 fiscal year. Although the March 1 sequester reduced federal grant spending to all states (relative to the continuing resolution federal grant spending already in place), some states were impacted more than others, ranging from a 0.68 percent cut in Tennessee, to a 3.36 percent cut in Wyoming (see Table 1 in the paper).
Following sequestration, the current continuing resolution was signed into law on March 26—less than a month after the budget sequestration began—setting funding levels for the remainder of the fiscal year, and thus impacting grant funding to programs at the state level. The map below illustrates the changes in each state’s fiscal 2013 federal grant funding, compared to fiscal 2012 federal grant spending, as a result of sequestration and funding levels in the current continuing resolution. Differences in how grant funding is distributed are dependent both on how programs function as well as which states participate in programs funded by federal grant money. After accounting for both sequestration and the current continuing resolution, grant funding for 26 states is estimated to increase, while grant funding for the remaining 25 states (including the District of Columbia) is estimated to decrease.
My colleague Tom Hungerford has laid out why he’s not part of the alleged consensus cited by Dylan Matthews that cutting corporate tax rates would boost GDP growth, based on a skeptical look at the research and data. I’d just add a couple of extra points:
First, this is all kind of tangential to the live debate currently going on about corporate tax reform. This debate is sadly all about revenue-neutral reform. So, all research that has used effective average corporate tax rates as explanatory variables in growth regressions is irrelevant to this kind of debate. And the upshot of such reform is even unclear as to what it will do to effective marginal rates—some firms will see their taxes go down, while others will see them go up. So, even if one believed in a huge growth bonanza from significantly cutting corporate taxes—that’s not what the debate in DC is about.
Second, even if one believed the modest growth-spurring impacts of cutting corporate tax rates cited in much of the research that Dylan and Tom discuss, I still don’t think that I’d fall all over myself trying to accomplish this as a high-priority policy goal.
When I was a child, there were times when I wanted to go someplace with a group of friends and my mother would say no. I would then argue that I should be allowed to go “because all my friends are going.” As would be expected, my mother would respond with “suppose all your friends jumped off a cliff, would you?” I would always answer no, of course, but I gather that a number of people would answer “I’d be a damned fool not to.” In his Wonkblog post, Washington Post’s Dylan Matthews appears to be the latest to respond this way when he joins the “consensus around the idea that increases in the corporate tax rate hurt growth.” Before getting into why I am not part of the so-called consensus, I need to first correct a glaring error in Matthews’s blog.
He cites a Tax Notes article (and CRS report) I wrote with Jane Gravelle in 2008. He notes that we concluded: “The traditional concerns about the corporate tax appear valid. While many economists believe that the tax is still needed as a backstop to individual tax collections, it does result in economic distortions.” This conclusion, he claims, contradicts my new analysis of the corporate tax rate. There are two problems with his claim. First, he omitted the next sentence: “These economic distortions, however, have declined substantially over time as corporate rates and shares of output have fallen.”
Read in isolation, the second verification assessment by the Fair Labor Association (FLA) of remediation steps at three Foxconn factories making Apple products might lead one to think that essentially all labor rights violations have been addressed. The FLA’s report, for instance, features the claim that Foxconn has already completed “98.3 percent” of the necessary steps to correct the problems at its factories. But while some of the steps taken – such as reducing work weeks to below 60 hours and certain safety and health improvements – do represent progress, the overall score given by the FLA as well as the accompanying rosy language about reforms are fundamentally deceptive. Consider:
The FLA ignores crucial reforms promised by Apple and Foxconn, including increasing wages enough to offset reductions in work hours and providing back pay for uncompensated work time. On March 29, 2012, the FLA described the basic remedial actions to be undertaken by Foxconn and Apple by July 2013. Paragraph five of this announcement contained the promise that Foxconn would increase compensation enough to offset any reduction in overtime hours. Paragraph six contained the promise that Foxconn and Apple would provide retroactive pay for the many circumstances in which workers had not been compensated for all their overtime hours. Paragraph seven of the March 2012 announcement said a study would be undertaken to determine the amount of compensation necessary to provide for basic needs; according to the FLA’s own survey, 64 percent of workers said their compensation did not provide them enough to meet their basic needs.
Matt Yglesias doesn’t think that Figure B in Tom Hungerford’s new paper on corporate tax rates and economic growth “proves” a non-relationship between the two. He’s right, of course, but then goes on to argue that including this chart specifically, and including charts in blogs generally, is a borderline shady practice. This I don’t really get.
So, I shall make the case for the use of charts with a chart, below.
But, first, a quick thought on another point in Matt’s post. He notes that we at EPI aren’t keen on seeing corporate tax rates cut reformed anytime soon because we like revenue and we “feel that the corporate income tax raises it in a distributionally progressive way.” We do like revenue, but our thoughts on the incidence of corporate tax rates are not “feelings”—they’re pretty evidence-based. The CBO, for example, used to assume that 100% of the corporate income tax fell on owners of capital (a very well-off bunch relative to the rest of the population). Now they assume that 3/4ths does. So our view that most of the incidence of the corporate income tax falls on capital is not some wild-eyed heterodox view.
We’d probably quibble even with the change to put some of the incidence on wages (though I’m not a huge expert in this one), and we know of the growing effort by some economists to claim that the incidence of the corporate income tax is actually borne by workers, but we’re convinced by the counter-evidence (see here (PDF) and here (PDF) for some of this evidence). A side-note—it’s always fun to see people who claim in one venue that corporate tax rates should be cut reformed because the incidence is actually borne by workers claim in another that the corporate income tax is bad because it “double-taxes” capital income. Really, you can’t have both claims.
What we read today (and the rest of this week):
- From the Mouths of Babes (New York Times)
- Study: Tax Cuts Might Drive Income Inequality After All (The Atlantic)
- Disability, Social Security, and the missing context (Columbia Journalism Review)
- Joblessness Shortens Lifespan of Least Educated White Women, Research Says (New York Times)
- Discipline and Punish: The New Unemployment ‘Reform’ (Labor Notes)
- Low interest rates are the final straw for many company pensions (Washington Post)
- The Unemployed Need Bold, Creative Moves from the Fed (Fiscal Times)
- Report: More seniors are living in poverty (Politico)
Piggybacking on my colleague Josh Bivens’ recent post refuting claims that the economy is “holding up surprisingly well,” it seems some in the press corps could benefit from a primer on economic expansion versus economic recovery. Rebounds in certain economic indicators, particularly stock indices and housing prices—very incomplete metrics of overall health being buoyed by the Federal Reserve’s quantitative easing asset purchases—are too often being conflated with or contributing to a “recovery” that presupposes the economy is recovering.
Part of this confusion likely reflects misidentification of the affliction at hand. The U.S. faces a sharp aggregate demand shortfall stemming from the housing bubble’s implosion and a jobs crisis that resulted from this pullback in spending by households, businesses and government. On these fronts, the U.S. is mostly oscillating between recovery and backwards progress, and “treading water” tends to be a better characterization than recovery since the end of 2010, after the Recovery Act’s boost faded and the federal government joined state and local governments on the austerity bandwagon.
President Obama is reportedly planning to nominate economist Jason Furman to replace Alan Krueger as the head of the Council of Economic Advisers. Like Krueger and, for that matter, Austan Goolsbee and Christina Romer who previously served this administration in the same capacity, Furman boasts an impressive resume, with a Harvard economics doctorate as well as stints at the Brooking Institution, the Center on Budget and Policy Priorities (CBPP), and the CEA under President Clinton, among others. If you’re still of the incorrect belief that tax cuts largely pay for themselves (looking at you, Senate Minority Leader Mitch McConnell), do yourself a favor and read his CBPP report explaining the mechanics and empirics of “dynamic scoring” (pdf) and why invoking it as a talisman doesn’t mean one can claim anything one finds politically expedient.
The Beltway coverage of this news is overly focused on the inside baseball politics between the CEA and the National Economic Council, where Furman has been serving as Deputy Director since January 2009. But it’s important to step back and remember that economic policy in recent years has been principally driven not by well-qualified economists with the CEA, NEC, or elsewhere in the executive branch, but instead by conservative congressional obstructionism. Jason Furman’s appointment to the CEA will not alter the troubling reality that the United States is on an autopilot course of premature, excessive austerity and intentionally poorly designed sequestration spending cuts. But even if the ghost of conservative saint Milton Friedman rose up and warned the GOP against such austerity, today’s conservatives in Congress would declare him an apostate and continue their destructive course.
As my colleague Heidi Shierholz has noted, the recent “hold steady” jobs report represents an ongoing disaster for all workers. But historically, and since the Great Recession, unemployment has inflicted significantly more pain on black and Hispanic workers. EPI recently released five reports on unemployment through the recession that reveal the depth of suffering among black and Hispanic workers in states with large minority populations, focusing particularly on black and Hispanic unemployment in Michigan, Mississippi, New Mexico, North Carolina, and Texas. Coupled with historic barriers to employment for people of color, the economic collapse of the recession and painfully slow recovery have taken a much greater toll on African Americans and Hispanics than whites.
The figure below shows the significant disparities in black-white and Hispanic-white unemployment in the U.S. over the last 34 years. African American unemployment rates have almost always been at least twice—and sometimes more than two and a half times—that of whites since 1979. Even at the depths of the Great Recession, when white unemployment was much higher, the black unemployment rate was 1.88 times that of whites. At this disparity’s peak in 1989, the black unemployment rate was 2.71 times the white unemployment rate. Likewise, Hispanic unemployment rates have been at least one and a half times (and, throughout the 90s, more than twice) that of whites since 1979. The Hispanic-white unemployment gap peaked in 1998 when the Hispanic unemployment rate was 2.12 times that of whites. At the end of 2012, the black unemployment rate was more than twice (2.11) that of whites, and the Hispanic unemployment rate stood at more than one and a half times (1.56) that of whites.
The normally excellent Neil Irwin and Ylan Q. Mui at Wonkblog are mostly wrong, I think, in arguing that the economy is “holding up surprisingly well” in a year of austerity. The data they cite to make this judgment are rising prices in both the stock market and home prices and falling gasoline prices.
But rising stock prices are actually pretty irrelevant to most American families, and today they mostly reflect the stunningly high profit margins of American corporations. These profit-margins in turn are boosted by extremely weak wage-growth, as inflation-adjusted wages for the vast majority of American workers have fallen in each of the last three years. In short, one could easily make the case that today’s high stock prices are actually mostly a sign of bad news for American workers.
This week, we learned that Apple is sitting on over $100 billion in untaxed overseas cash, and this cash will remain untaxed until and unless Apple repatriates this income (that is, brings the cash home to the United States).
In a blog post, Jared Bernstein asked about how we can stop this sort of international tax avoidance. The simplest and most direct way of taxing offshore income would be to simply end deferral entirely. Taxing the overseas income of U.S. multinationals would raise revenue, helping ease current budget pressures, and eliminate incentives for complicated tax avoidance schemes.
Not only do millionaires have low tax rates, so do many corporations, with some large corporations paying less in taxes than the typical middle-class American taxpayer. So how do large multinational corporations avoid paying taxes? The full answer is as complicated as the tax code; the short answer involves profit-shifting and deferral.
Differences between House Republicans’ and Senate Democrats’ proposed funding allocations reveal their priorities
Although the House and Senate have yet to reconcile their respective budget resolutions, the House Appropriations Committee forged ahead and recently approved a GOP spending plan for fiscal year 2014, capping base discretionary funding at $967 billion—the level set by the sequestration. The committee also defeated a Democratic proposal that would have set the top-line discretionary funding allocation at $1.058 trillion—the same level of spending called for in both President Obama’s budget request and the Senate budget resolution.
We know that the two chambers of Congress will not likely reach agreement on spending levels for FY2014. But where exactly do they differ? The chart below indicates that there are very minor differences between the House and Senate on Defense, Homeland Security, and Military Construction-Veterans Affairs appropriation levels. (The latter two allocations are the only without disagreement between the two chambers.) The biggest relative differences occur in funding levels for the Financial Services and General Government, Labor-Health and Human Services-Education, and State and Foreign Operations subcommittee allocations. The biggest dollar difference in proposed appropriations between the two chambers is for the Labor-HHS-Education subcommittee allocation, which the House GOP recommends funding $44 billion below both the Senate and the administration’s budget requests for FY2014.
The large increase since 2007 in the unemployment and underemployment rate of young college grads, along with the large increase in the share of employed young college graduates working in jobs that do not require a college degree, underscores that today’s unemployment crisis did not arise because workers lack the right education or skills. Rather, it stems from weak demand for goods and services, which makes it unnecessary for employers to significantly ramp up hiring.
The figure below, from this report on the labor market prospects of the Class of 2013, gives unemployment and underemployment rates for college graduates under age 25 who are not enrolled in further schooling. The unemployment rate of this group over the last year averaged 8.8 percent, but the underemployment rate was more than twice that, at 18.3 percent. In other words, in addition to the substantial share who are officially unemployed, a large swath of these young, highly educated workers either have a job but cannot attain the hours they need, or want a job but have given up looking for work.
Unemployment and underemployment rates of young college graduates, 1994–2013*
* Latest 12-month average: March 2012–February 2013
Note: Underemployment data are only available beginning in 1994. Data are for college graduates age 21–24 who do not have an advanced degree and are not enrolled in further schooling. Shaded areas denote recessions.
Source: Authors' analysis of basic monthly Current Population Survey microdata
Yesterday it was revealed that Apple has shifted roughly $74 billion in profits out of the reach of the IRS in the last three years, mostly by holding this cash offshore. Amazingly, Tim Cook’s response to the congressional investigation that documented this is to call for corporate tax “reform” that will provide further benefits to both his firm and corporations in general. In his testimony (pdf) in front of the Senate Permanent Subcommittee on Investigations today, Cook bulleted his preferred corporate tax reform:
“….comprehensive [corporate tax] reform should:
- Be revenue neutral;
- Eliminate all corporate tax expenditures;
- Lower corporate income tax rates; and
- Implement a reasonable tax on foreign earnings that allows free movement of capital back to the US.”
So, the first and third prongs of this reform agenda are to raise no additional revenue and to lower corporate tax rates. The second prong (eliminate corporate tax expenditures) has some merit, for sure.
An oped from Wilma Liebman, former chairwoman of the NLRB, tops our list of what we read today:
- Clearing NLRB nominees is a clear step forward (Politico)
- The 1 Percent Are Only Half the Problem (New York Times)
- Do Extended Unemployment Benefits Lengthen Unemployment Spells? (pdf, Federal Reserve Bank of San Francisco)
It’s fitting that director Baz Luhrmann chose contemporary artists like Jay-Z to provide the soundtrack in his new take on The Great Gatsby, because in many ways, the Gatsby story could easily be set in current times. (No, we don’t mean hipsters bringing back vests or flapper hairstyles.) Unfortunately, today’s economy shares many of the same sad qualities of the 1920s highlighted in the Gatsby story: increasing financialization, low socioeconomic mobility, and gross wealth and income inequality such that a privileged few live astonishingly well while a large portion of Americans are struggling just to get by.
EPI has been describing these trends for years. In fact, you might consider our flagship publication, The State of Working America, as a sort of modern-day Gatsby, in charts. The prose may not be as artful as Fitzgerald’s, but the economic descriptions are equally alarming.
The Great Gatsby’s protagonist, Nick Carroway, is drawn to New York by the promise of riches to be made on Wall Street. Indeed, the premium to working in the financial sector at that time was better than ever… until recently. As Figure A shows, at the beginning of the Great Depression, earnings per worker in the financial industry peaked at nearly 1.8 times the earnings per worker of all other private sector workers. After the Depression and the regulation that followed, earnings per worker in finance fell back roughly into line with the rest of the private sector. Beginning in the late 1970s, however, earnings per worker in finance again began to take off. By the onset of the Great Recession, they exceeded 1.8 times the earnings per worker of all other private sector workers. With such striking disparities in compensation, who wouldn’t be attracted to the green light of finance?
Happy Friday! Here are a few stories our experts read today:
- How the Case for Austerity Has Crumbled (New York Review of Books)
- My Two (Per)cents: How Are American Workers Dealing with the Payroll Tax Hike? (Liberty Street Economics)
- Poverty as a Childhood Disease (New York Times)
Though it didn’t get much attention, Democrats on the House Committee on Appropriations recently released a report on the effects of sequestration (pdf) and efforts to mitigate its impact. The report is a comprehensive look at sequestration cuts specific to the following areas: public safety, health, education and science, national security, judiciary and legal representation, commerce, housing, seniors, and foreign assistance. Some highlights in the report on the impacts of sequestration:
- NIH funding for research is cut by more than $1.5 billion, which the report estimates eliminates more than 20,000 jobs at universities, labs, and other research institutions.
- Funding for the Center for Disease Control and Prevention is cut by $285 million due to sequestration, inhibiting the CDC’s ability to—among other things—facilitate immunization, combat disease outbreaks, and manage and prevent both chronic and infectious diseases.
- The National Science Foundation loses $365 million due to sequestration, resulting in approximately 1,000 fewer research grants.
Happy Monday. Here’s what we’re reading today:
- Why Washington Saved the Economy, Then Permanently Destroyed the Labor Market (The Atlantic)
- Student Debt and the Crushing of the American Dream (New York Times)
- How Austerity Kills (New York Times)
- Who Can Take Republicans Seriously? (New York Times)
- Major Retailers Join Bangladesh Safety Plan (New York Times)
Various sources have reported on the intense lobbying efforts by industry representatives of the high-tech sector, who seek to influence the outcome of the Senate’s proposed comprehensive immigration reform legislation. The initial version of the Senate bill already grants the industry two of its key demands: an increased number of H-1B visas for university-educated temporary foreign workers (almost tripling the quota), most of whom work in the IT sector, as well as an unlimited amount of permanent resident visas (green cards) for recent foreign graduates of U.S. universities in STEM fields (and a fast track to receive them). So what is the industry hoping to achieve now? The industry is lobbying to remove the few improvements to the H-1B program that Senator Durbin (D-IL) managed to persuade the other seven members of the Gang of Eight to include in the bill. This week, a number of proposed amendments could make that happen.
Here are the simple, common sense rules and innovations included in the Senate bill that relate to the H-1B program:
The Brookings Institution issued a new report on Friday about the H-1B program—a temporary foreign worker program for “skilled” occupations, meaning those that require a college degree—and then issued corrections to it almost immediately afterwards.
The report claims to include a wage analysis on “new data” that, “suggests that the H-1B program helps to fill a shortage of workers in STEM [science, technology, engineering and math] occupations.”
There are two critical problems with the report’s analysis of these data:
First, the data are proprietary, meaning the data are exclusively held by the authors, thus no one can critique or review the study’s presentation of the data or its findings. (The authors obtained the data from two other researchers, who first obtained it through a Freedom of Information Act request.) This kind of approach, where researchers use data that are not available publicly, means that the data and subsequent analysis can never be checked, leaving out a critical step in the scientific process.
Take a quick survey of any major florist’s website and you’ll find that having flowers delivered for Mother’s Day can be a non-trivial expense. With a middle-of-the-road arrangement, service and delivery fee, you can expect to pay upwards of $70. That may be a pittance compared with the gratitude owed to mom, but here’s another way to consider it: for millions of mothers in low-wage jobs, those flowers would cost more than an entire day’s earnings.
Earlier this year, Senator Tom Harkin (D-IA) and Representative George Miller (D-CA) introduced legislation that would raise the minimum wage to $10.10 per hour by 2015. The number of mothers that would be affected by increasing the minimum wage is staggering. As shown in the table below, there are over 22 million mothers with children under the age of 18 working in the United States today.1 If the federal minimum wage were raised to $10.10 per hour, 5.5 million working moms with children under the age of 18—roughly 25 percent of all these working mothers—would see a pay increase.
This week, the seemingly never-ending fiscal policy skirmishes on Capitol Hill revolved around proceeding to a conference committee to hammer out an FY2014 joint budget resolution compromise. Unlike recent years, this budget season has seen both House Republicans and Senate Democrats produce and pass budget resolutions. Now Congressional Democrats are interested in moving forward on discussions toward a budget for FY2014. The problem? After haranguing Senate Dems for not having produced a budget resolution since 2009—before Senator Patty Murray (D-WA) was chairwoman of the Budget Committee—and maligning President Obama for being late in producing his budget alternative, Republicans are refusing to appoint conferees and commence a budget conference committee. Instead of moving forward with the budget process, the GOP has insisted on conditioning the appointment of conferees with an insistence that any conference report not include any new revenue or raise the debt ceiling. In other words, a non-starter.
Given how broken the budget process has been of late, it’s worth a reminder on what a normal spring budget season should look like. Each year, Congress is supposed to develop a joint budget resolution that sets limits on spending, particularly appropriations, as well as targets for federal revenue. After the Office of Management and Budget publishes the president’s budget request in early February, the House and Senate Budget Committees draft and mark-up budget resolutions, which then go to their respective chamber floors for votes (assuming they make it out of committee markup). If adopted in both chambers, a conference committee is then convened between the two bodies to resolve differences between their budget resolutions. (While this notionally is supposed to take place by April 15, it often takes longer.)
As part of the sequester, roughly $2.4 billion is being cut from emergency unemployment insurance compensation (see page 40 of this OMB report (pdf)).
These cuts cause damage in two ways. Most obviously, they mean that unemployment insurance benefits now provide a weaker lifeline to the long-term unemployed and their families, despite the fact that job opportunities have improved very little since the unemployment rate peaked near the end of 2009.
Less well understood is the fact that cutting unemployment insurance benefits will reduce spending in the economy and thereby cost jobs. While the cuts save an estimated $2.4 billion in government spending on unemployment insurance, the loss to the economy is much greater because these cuts have a large “multiplier” effect. Long-term unemployed workers, who are almost by definition cash strapped, are likely to immediately spend their unemployment benefits. Unemployment benefits spent on groceries, clothes and other necessities increase economic activity, and that increased economic activity saves and creates jobs throughout the economy. For this reason, economists widely recognize government spending on unemployment insurance benefits as one of the most effective tools for generating jobs in a downturn. The flip side of this is that cutting spending on unemployment insurance benefits during a period of economic weakness is one of the most costly tools available for reducing the deficit. Reducing spending on unemployment insurance by $2.4 billion will pull about $3.8 billion in economic activity out of the economy—economic activity that would have been supporting around 30,000 jobs.1 In an economy that is generating jobs at a pace that won’t restore full employment for at least another five years, this is incomprehensible.