Working spouses cause inequality? Can this emerging zombie lie be killed?

A major new zombie lie is being launched: The claim that high inequality is due to more working spouses in high-income households and well-off people increasingly marrying other well-off people. This was part of James Q. Wilson’s recent op-ed in the Washington Post, which I addressed in an earlier blog post (though not on this point). My zombie lie detector went wild, however, after reading a very good New York Times article detailing new research showing “the [education] achievement gap between rich and poor children is widening, a development that threatens to dilute education’s leveling effects.” At the end of the article are two statements by conservative public intellectuals, one from Douglas Besharov and one from Charles Murray, attributing income inequality to working spouses.

To recall, here’s what Wilson wrote: “Affluent people, compared with poor ones, tend to have greater education and spouses who work full time.” Wilson then suggests that if these are the drivers of inequality, then it is best not to do anything about the problem, since, in his words, “We could reduce income inequality by trying to curtail the financial returns of education and the number of women in the workforce—but who would want to do that?”

Here’s what the Times‘ Sabrina Tavernise attributed to Murray in her piece:

The growing gap between the better educated and the less educated, he [Murray] argued, has formed a kind of cultural divide that has its roots in natural social forces, like the tendency of educated people to marry other educated people, as well as in the social policies of the 1960s, like welfare and other government programs, which he [Murray] contended provided incentives for staying single.”

And here’s what Besharov told Tavernise:

There are no easy answers, in part because the problem is so complex… . Blaming the problem on the richest of the rich ignores an equally important driver, he [Besharov] said: two-earner household wealth, which has lifted the upper middle class ever further from less educated Americans, who tend to be single parents. The problem is a puzzle, he [Besharov] said. “No one has the slightest idea what will work. The cupboard is bare.”

The basic claim, it seems, is that well-off families are more likely to have working spouses and that the spouses in well-off families are both more likely to have high earnings. Presumably this phenomenon has been growing, or else it cannot explain growing inequality. I address the issue of the role of the growth of two-earner households and inequality in this post but do not address the issue of assortative mating (rich marrying rich). Also, my focus is whether the “working spouses factor” contributes at all to our understanding of the key dynamic of income inequality, the growing income gap between the top 1 percent and the middle class.

To these folks demographic, rather than economic, trends are generating income inequality. Consequently, economic policy has had no role in causing inequality and can not ameliorate inequality either. Of course, this is only the latest effort to reduce inequality to a demographic phenomenon: The State of Working America has addressed other such claims going back to the first edition in 1988.

To explain inequality is to explain first and foremost the tremendous growth of income, wages and wealth that have accrued to the top 1 percent and the top 0.1 percent since 1979. How does the “working spouse” explanation hold up?

The first thing to note is that the presence of a working spouse, even a highly paid one, can potentially impact household income inequality but says nothing about the tremendous divergence of individual wages over the last few decades. Household incomes aggregate the labor income of all household members (which depends on how many members work, how much they work and how much they are paid), non-labor income (capital gains and so on) and any pensions, government transfers and other income. As we know,  the top 1 percent of households managed to more than double its share of national income between 1979 and 2007. Josh Bivens and I have argued that the dynamics underlying growing household income inequality are rising wage inequality, rising inequality in receipt of capital income (capital gains, dividends and so on) and the shift toward more capital income and less wage income. The demographic factor of working spouses is about how people combine into households and does not address and certainly cannot explain the huge increase in the wage growth of the top 1 percent of wage earners versus every other group. Here is the chart on wage growth showing the top 1 percent  gaining 131 percent  between 1979 and 2010 while those in the bottom 90 percent saw their annual wages rise by 15 percent (mostly in the late 1990s).

Second, we can look directly at the two–earner phenomenon among the upper 1 percent and the top 0.1 percent from the work of Jon Bakija, Adam Cole and Bradley T. Heim who analyzed tax returns from 1979 to 2005. (more…)

David Brooks’ bad example

Update (4:10 p.m. ET): Here’s some data (from EPI analysis of the Current Population Survey) on the share of those employed lacking a high school diploma or a GED certificate, labeled “less than high school,” by race/ethnicity and immigration status:

Share of employment with ‘less than high school’ education, 2011

Race/ethnicity

All Native Immigrant
All 8.4% 5.1% 25.9%
White* 4.2% 4.1% 6.0%
Black* 7.2% 6.7% 10.6%
Hispanic 28.6% 11.6% 44.3%
* Excluding Hispanics

Note that just 4.1 percent of the native born white workforce is in this category. Only 5.1 percent of employment of all native-born Americans lacks a high school degree or a GED, with a slightly higher share among employed native-born blacks (6.7 percent).

Original post: I was struck by David Brooks’ example of bad behavior in his New York Times column today, writing, “I don’t care how many factory jobs have been lost, it still doesn’t make sense to drop out of high school.” Paul Krugman was struck by that same sentence. Brooks’ assumption, I guess, is that many workers have low wages because they never completed high school. He’s not alone in thinking that there are a lot of high school dropouts, but this is definitely not true. As the graph shows, the share of the workforce (ages 18-64) who have neither a high school or further degree (including a GED) has dropped tremendously in the last four decades, from 28.5 percent in 1973 to just 8.4 percent in 2011, a trend true among men as well as women. Oh, by the way, half of the “high school dropouts” in the workforce are immigrants, many of whom did not go to school in the United States and came here in their teens or later. You definitely can’t blame the erosion of workers’ wages on their failure to graduate from high school, since the vast majority did.

In fact, the education levels of our workforce have grown tremendously. As another example, the share of the workforce with a college degree or further education has doubled since 1973, growing from 14.6 percent in 1973 to one-third in 2011. And, by the way, the wages of those with a college degree (but no further education) have not increased in inflation-adjusted terms in 10 years, neither in the last recovery between 2002 and 2007 nor since. I wonder what bad behavior on their part caused this to happen.

A budget for adults (especially those who’d like a job)

President Obama’s FY2013 budget request, released today, is bound to get ample criticism from the right (and center-right) for not going far enough on near-term deficit reduction. As a few different articles have already highlighted today (for instance here and here), the president’s budget request does not honor a pledge he made to halve the deficit by the end of his first term. In reality, we’d all be in pretty big trouble if this budget chose to focus on promises as opposed to economic realities. Instead, the budget put forth by the administration today is a remarkably serious one – particularly given that Obama is running for reelection this year. The administration could have relied on gimmicks and austerity measures to focus solely on deficit reduction; instead we got a document that both emphasizes job creation and manages to hit fairly reasonable fiscal targets in the medium term.

The budget includes about $350 billion in temporary tax relief and investments to create jobs and jump-start growth. These investments are heavily front-loaded between FY2012-FY2014 – in fact, 96 percent of the proposed spending on these measures takes place in those years. Much of this investment in job creation is familiar, including policies such as:

  • $94 billion for an extension of the payroll tax holiday for two years
  • $44 billion for reforming and extending unemployment insurance for two years
  • $30 billion to modernize schools over four years
  • $30 billion for teacher stabilization and supporting first responders
  • $50 billion to fund surface transportation priorities through 2022, with the investment front-loaded in the first three years

As we’ve stated before, this job creation package should be evaluated based on its scale, the difference it will make in the coming few years, its effectiveness and efficiency, and the way in which it is funded. The $350 billion figure is a decent amount to be spending on job creation, an amount that would raise employment levels significantly in 2012 and 2013. That is more than we can expect to see Rep. Paul Ryan (R-Wisc.) propose in this year’s House Budget resolution. But with an 11 million jobs deficit, it still falls short of what’s needed.

Though not perfect, the investments highlighted in the budget are fairly well-targeted. Macroeconomic multipliers show that across-the-board, spending on public investments, income-support payments, state-and-local fiscal support, food stamps, infrastructure projects, unemployment insurance, and targeted refundable tax credits garner a much larger bang-per-buck than spending on various tax cuts and credits. And since our economic problems generally still stem from a lack of demand, it makes sense that boosting the ability of consumers to spend should be a top priority for the administration.

The president’s budget “funds” this investment by proposing a greater level of taxation on those who can most afford to pay – rhetoric we have been hearing from Obama for a while now. This includes around $1.5 trillion over 10 years from upper-income tax provisions, which include, among other things, letting the George W. Bush-era tax cuts expire and taxing qualified dividends as ordinary income for those making above $250,000 per year ($200,000 single filers).

Along with addressing the jobs crisis, this budget also puts the federal government on a sustainable fiscal path. The president’s budget achieves primary balance in 2018, meaning that, excluding interest payments, spending does not exceed revenues. Primary balance is a good measure for two reasons. First, interest payments are essentially payments on past—rather than current—policy decisions, so primary balance allows us to use a measure that doesn’t punish current presidents for debt that may have been incurred by past presidents. Second, primary balance also results in a stabilized debt as a share of GDP, and this budget stabilizes debt at 76.5 percent in 2022 after peaking at 78.4 percent of GDP in 2014 and gradually coming down. And while the budget does propose around $4 trillion in deficit reduction over 10 years, around $850 billion of these savings comes from capping Overseas Contingency Operations, and a good deal more comes from pursuing high-income tax cuts and other revenue proposals. Additionally, the president proposes achieving around $600 billion of that deficit reduction through health and other mandatory initiatives, almost half of which would come from Medicare providers.

As we said in a statement earlier today, this budget is not perfect and particularly disappoints when it comes to non-defense discretionary spending levels. Despite this reality, this budget does a pretty good job of investing in job growth while at the same time promoting greater fairness and responsibility.

President Obama’s FY 2013 budget: The Buffett Rule and progressive tax reform

The tax policies in President Obama’s budget request for fiscal year 2013 more closely resemble those proposed for the Joint Select Committee on Deficit Reduction (i.e., the Super Committee) last September than those included in last year’s budget request. Consequently, this year’s budget raises more revenue (ostensibly to finance job creation) and does more to restore tax progressivity than previous budgets. Like the administration’s Super Committee proposals, the president’s 2013 budget proposes comprehensive tax reform, which would aim to raise $1.5 trillion over a decade, relative to current policies, from businesses and households making over $200,000 ($250,000 for joint filers).

In his recommendations to the Super Committee, President Obama proposed that tax reform should be guided by the Buffett Rule – that “no household making over $1 million annually should pay a lower share of its income in taxes than middle-class families pay.” The 2013 budget adopts a more clearly defined Buffett Rule from the president’s State of the Union address, which stated: “If you make more than $1 million a year, you should not pay less than 30 percent in taxes.” In a progressive tax code, effective tax rates are intended to rise with income, but tax code loopholes—overwhelmingly the preferential treatment of capital income over labor income—allow some millionaires and billionaires to pay lower tax rates than middle-class households. While short on details, the president’s 2013 budget suggests that the Buffett Rule would be implemented as a new minimum tax for millionaires, replacing the existing alternative minimum tax (which falls predominantly on upper-middle-class households). The budget also suggests that the Buffett Rule would give some deference to millionaires’ charitable contributions, but would nonetheless likely ensure that tax rates rise with ability to pay.

A recent Congressional Research Service report noted: “Tax reforms that are consistent with the Buffett rule would likely include raising tax rates on capital gains and dividends.” The president’s 2013 budget moves further in this direction than his previous budget requests. The 2013 budget again proposed ending the carried interest loophole and restoring the top rate on capital gains to 20 percent, but this budget also proposes taxing upper-income households’ qualified dividends as ordinary income (instead of a preferential 20 percent rate, as previously proposed). Again equalizing the tax treatment of income derived from work and that derived from investments should be at the core of progressive tax reform. This focus reflects income and inequality trends and raises revenue from those households best able to contribute to deficit reduction (the same households that disproportionately benefit from the last decade’s regressive, deficit-financed tax cuts).

To steer Congress toward tax reform, the president’s budget identifies revenue increases of $1.9 trillion, almost $1.6 trillion of which would come from sunsetting the upper-income George W. Bush-era tax cuts, capping the rate at which tax preferences reduce tax liability for upper-income households, and reinstating the estate tax at 2009 parameters, again all relative to current policy. The remaining tax proposals include closing business tax loopholes, ending fossil fuel preferences, and reforming the international tax code, which look quite familiar. (See For Joint Select Committee, many good options: Progressive revenue proposals would narrow budget gap by trillions for an analysis of the president’s tax proposals for the Super Committee.) Relative to current policies, the tax proposals in the 2013 budget would increase revenue as a share of GDP by 1.5 percentage points over the next decade – nowhere close to restoring revenue adequacy, but nonetheless an improvement over last year’s proposed 1.3 percentage point revenue increase.

Critically, the president’s tax proposals for 2013 appear to raise more revenue than those in his previous budget requests in order to finance a slew of job creation proposals closely resembling the American Jobs Act (which the president proposed financing with many of the progressive tax reforms in this budget, including caps on a wider range of tax preferences for upper-income households). The emphasis on near-term fiscal support gradually financed by tax increases on upper-income households—which will have a relatively small adverse impact on economic activity, unlike spending cuts—is good economic and fiscal policy. Federal tax and budget policy should accommodate bigger deficits today and reduce deficits as the output gap shrinks. The president’s tax policy proposals move in the right direction on this front, but they would also help to restore fairness to the tax code and begin to temper Gilded Age-levels of income inequality.

China responsible for bulk of the U.S. trade deficit in non-oil manufactured goods

The U.S. Census Bureau recently reported that the U.S. goods trade deficit increased from $645.9 billion to $737.1 billion in 2011 (an increase of $91.2 billion, or 14.1 percent). Crude and refined petroleum products were responsible for $61.3 billion, or 67.2 percent of the increase in the total goods trade deficit, as reported by the Census Bureau. The U.S. trade deficit in non-oil manufactured goods increased by $48.9 billion, or more than the residual.¹ The U.S. has a small, growing trade surplus in agricultural goods which increased from $36.2 billion in 2010 to $43.1 billion in 2011. We are, in effect, trading energy and capital intensive cash grains and other farm products for labor intensive manufactured goods.

The U.S. has a large and rapidly growing trade deficit in non-oil manufactured goods, as shown in the figure below.  This deficit reached a peak of $515 billion in 2006 (shown on the right axis), improved slightly in 2007 and then collapsed during the recession in 2008 and 2009 as employment, consumer incomes and demand for manufactured goods—especially durable products like automobiles—fell sharply. As a result, imports and the non-oil manufacturing trade deficit also declined in the same period.

The U.S. trade deficit in non-oil manufactured goods has been growing rapidly since 2009, as shown in the figure, which has contributed to the slow growth of manufacturing employment since the Great Recession. The U.S. lost 2.3 million manufacturing jobs between Dec. 2007 and the employment trough in Jan. 2010. Only 354,000 manufacturing jobs were added through Dec. 2011, an increase of 3.1 percent (BLS 2012).  Manufacturing output, on the other hand, which reached its nadir earlier, in June 2009, has recovered much more strongly, up 16.0 percent since the trough. The difference is due, in part, to the rapid growth of the manufacturing trade deficit shown in the figure.

Throughout this period, imports of manufactured goods from China have continued to grow rapidly. Their share of the U.S. non-oil trade deficit in manufactured goods trade deficit rose steadily and more than tripled between 2000 and 2009 as shown on the red line in the figure (measured on the left axis). The U.S. trade deficit with China in these products increased in every year between 2000 and 2008. They fell only briefly in 2009, and hit new, record levels each year in 2010 and 2011, peaking at $326.1 billion in 2011. The U.S. trade deficit with China in non-oil manufactured products exceeded the overall bilateral deficit because the United States had a small trade surplus with China in raw agricultural products.²

Although China’s share of the manufacturing trade deficit has declined slightly in the past two years, as shown in the figure, China and five other Asian trading partners have been responsible for 80 percent or more of the U.S. trade deficit in non-oil manufactured products for the past three years. These trading partners are South Korea, Hong Kong, Taiwan, Indonesia and Malaysia. These countries have been forced to manipulate their currencies and compete with China on unfair trade practices to avoid loss of market share and falling behind.

Each of these countries has engaged in substantial currency manipulation and four of the six (China, Hong Kong, Taiwan, and Malaysia) have been identified as maintaining heavily undervalued currencies, relative to the dollar.  The share of these six countries in the U.S. manufacturing trade deficits ranged from 92.4 percent in 2009 to 81.0 percent in 2011.

What China has in common with most, if not all, of its Asian trading partners are a set of illegal trade practices including currency manipulation and subsidies and other markets barriers. As noted by the Alliance for American Manufacturing’s Scott Paul, China’s unfair trade policies “are now the single largest impediment to job growth in America.” It is time for the United States to get tough with China and other unfair traders and put an end to these policies. The first and most important step is to get tough with currency manipulators.


¹Detailed data on product and industry trade by country in this post were all based on EPI analysis of data from the U.S. International Trade Commission (2012).

²Note, however, that China has sustained a small trade surplus in processed food and beverage products with the United States for the past four years; this surplus was $386 million in 2011 (U.S. International Trade Commission 2012).  

References

U.S. International Trade Commission (U.S.I.T.C.).  2012.  USITC Interactive Tariff and Trade DataWeb.  Washington, D.C.:  U.S.I.T.C. Available at: http://dataweb.usitc.gov/scripts/user_set.asp (registration required).  Accessed December 9, 2012.

No, NYT, there’s been no expansion of government benefits, no ‘entitlement society’

There was a very interesting story on the front page of the Sunday New York Times, “Even Critics of Safety Net Increasingly Depend on It,” detailing a range of views of people who have an anti-government political orientation yet depend heavily on government supports.

I want to strongly object to one part of the story that seems to support the notion that we’re becoming an “entitlement society.” The story claims that there’s been a major “expansion of government benefits,” which it says “has become an issue in the presidential campaign.” The Center for Economic and Policy Research’s Dean Baker sees some of the same problems.

Many of the facts presented in the story do not support that conclusion and the ones that do seem to support it are misleading. Here’s the key portion:

In 2000, federal and state governments spent about 37 cents on the safety net from every dollar they collected in revenue, according to a New York Times analysis. A decade later, after one Medicare expansion, two recessions and three rounds of tax cuts, spending on the safety net consumed nearly 66 cents of every dollar of revenue.

The recent recession increased dependence on government, and stronger economic growth would reduce demand for programs like unemployment benefits. But the long-term trend is clear. Over the next 25 years, as the population ages and medical costs climb, the budget office projects that benefits programs will grow faster than any other part of government, driving the federal debt to dangerous heights.

There are two things problematic with the comparison between 2000 and 2010. One is that the denominator is revenue when it should be expenditures since revenue has eroded because of tax cuts (acknowledged in the article) and because revenues fall in a recession (2000 had 4.0 percent unemployment, 2010 had 9.6 percent) since the fall in economic activity and income reduces revenue. Revenue as a share of GDP hit a 60-year low in 2010. Here’s what you find when you look at federal budget data: Entitlements (i.e., mandatory spending) as a share of federal expenditures were the same 53 percent of total outlays in 2007 as they were in 2000, so there was no trend towards expansion, at least before the recession hit. The mandatory share rose to 55 percent in fiscal year 2010 and 56 percent in 2011, a small increase.

The second problem is that the article suggests it is describing a situation of expanded benefits when, in actuality, the 2010 endpoint largely reflects that response of existing programs to the recession – more people do get unemployment insurance, Medicaid, food stamps and so on but once unemployment returns to low levels the expanded benefit rolls will retreat. (The American Reinvestment and Recovery Act and subsequent legislation also temporarily expanded the earned income tax credit, child tax credit, unemployment insurance, and food stamp benefits, among other programs – all cost effective fiscal stimulus and prudent economic policies but unlikely to be continued indefinitely.) It is easy to see that the bump up between 2007 and 2010 or 2011 was due to the greater income supports that are generated in a recession; if you take out the “income security” portion of mandatory outlays, which includes unemployment insurance and food stamps, then the mandatory share of outlays was roughly the same 45 percent of outlays in 2011 as its 46 percent share in 2000.

So, there’s no evidence to show we’re becoming an “entitlement society,” just that we’re low on revenues and the economy remains depressed. The citation of the safety net going from 37 percent to 66 percent (of revenues) has nothing to do with permanently expanding program eligibility or higher benefits, but much to do with cyclical factors and revenue erosion.

What about the future path of entitlement spending? Well, the article itself notes that the rise is due primarily to rising medical costs and an older population (i.e., more old people). This is an old story and given that the bulk of the increase is the fast-rising cost of medical services, the answer needs to be controlling the growth of health care costs. It is also the case that these rising health care costs will be a major burden to private-sector employers, so we are not facing a government problem but a national economic challenge. If we were to limit federal health expenditures, a la House Budget Committee Chairman Paul Ryan (R-Wisc.), then the burden of this problem would fall on the elderly, their families, state and local governments, and private-sector employers. This doesn’t solve the problem, it just shifts the costs, likely exacerbating national health care expenditure in the process.

More lessons from testifying: Must explain that one person’s income is another’s cost

I’ve written one blog post already about my testimony this week on the EPA’s new standards for power plants and about how repeating near-universally held views about the economy flummoxed many of the subcommittee members to whom I was testifying.

Here’s another one that puzzled them: my claim that “one person’s income is another’s cost.” This one really buffaloed Rep. Mike Pompeo (R-Kan.), who seemed to think it was an idiosyncratic belief taught only where I went to graduate school.

The context is that I noted that the EPA’s new standards (sometimes referred to as the “toxics rule”) would create some jobs because firms would have to install and purchase pollution abatement and control equipment (scrubbers for smokestacks, for example). I noted that the need to undertake this pollution abatement investment was a cost from the perspective of the power plants, but would end up as income in the hands of workers doing the building and installation of the equipment and owners of firms in the pollution abatement sector.

Pompeo went on a strange tear about setting money on fire (yeah, I didn’t really get it either), but, just to prove that my “one person’s income is another’s cost” formulation is not some liberals-only shibboleth, check out the third slide in this PowerPoint presentation, based on the textbook of Greg Mankiw, an economic official in George W. Bush’s administration. Or this blog post on Freakonomics. Or this, from self-described libertarian Arnold Kling:

“It means that one person’s spending is another person’s income. When I buy a meal at a restaurant, the money I spend ends up as income for restaurant owners, cooks, wholesale food distributers, farmers, and so on.”

Is basic economics really this hard to get?

Anyway, in case Pompeo would like an honest-to-goodness businessman to make the same case, check out this  from a story in Bloomberg Businessweek:

Meanwhile, Thermo Fisher Scientific in Waltham, Mass., is building emission monitors that power plants will need to measure toxins under the new rules. The regulations “could easily add $50 million to $100 million dollars in revenue in a year or two years,” says Chief Executive Officer Marc Casper, “which is significant for a company like ours.” The Institute of Clean Air Companies, a trade association representing businesses that make products to reduce industrial emissions, forecasts the industry will add 300,000 jobs a year through 2017 as a result of the EPA rules.

Tagged

Lessons from testifying before the GOP House: Don’t assume people know basic economic principles

I testified before the House Subcommittee on Energy and Power yesterday regarding the economic impact of new EPA rules regulating toxic air pollution emitted by power plants.  I made the simple point that when the economy is stuck in a “liquidity trap,” such regulatory changes can actually shrink the output gap and create jobs in the short-run by mobilizing idle savings into productive investments – a mobilization that today isn’t occurring through the traditional mechanism (falling interest rates) because we’re at the zero interest rate bound. The argument is far from revolutionary, but nobody else really seemed to be making it, so off to the Hill I went.

What really seemed to flummox some on the subcommittee, however, was when I stated the near-universally held view among macroeconomists that in the long run and if (and only if) the economy begins functioning well again, the unemployment rate a decade from now would best be estimated as “whatever the Federal Reserve wants it to be,” regardless of how many regulatory changes pass through Congress.

Why do I say this? Well, when the economy is working right, the Fed can cool down an overheating economy (man, to have that problem would be nice) by raising policy interest rates or can provide support to a flagging economy by lowering rates. While today’s extraordinarily weak economy has largely disarmed the Fed’s ability to provide a boost by lowering rates (the short-term policy rates the Fed manages have been stuck at zero since the end of 2008), if the economy begins functioning more-normally again then the unemployment rate will revert to pretty much what the Fed wants it to be because the tools at its disposal will be working again.*

This is neither necessarily good nor bad – the Fed may well “want” an unemployment rate much higher than is good for American workers (it’s happened before), but if that’s what they want, then they’ll get it. It’s a little hard to over-emphasize how widely held a view among economists this is. In an academic symposium (sorry, subscription required) on unemployment and monetary policy, not a single participant argued that the Fed doesn’t generally aim for an unemployment target nor did they argue that the Fed normally would not be able to hit it. Instead the argument was about the desirability of the Fed’s actual targets and/or how well the target was being estimated.

Given this consensus, it was a little odd to hear GOP representatives express slack-jawed disbelief about this statement. But it was extremely odd to hear a Ph.D. economist on the panel implicitly agree with them. And even odder was that the economist invoked a macroeconomic model run by a consulting firm, National Economic Research Associates (NERA) in their testimony arguing that that the “toxics rule” would cause economic harm.

But I’ve read the documentation of their study and their model assumes full-employment always and everywhere.** Which, (1) is why they’re wrong about the job-impacts of the rule in the short-run, when unemployment is clearly above any long-run “natural” rate and new investments will shrink the output gap and (very modestly) lower unemployment, and (2) makes it strange that they would deny that unemployment is not driven by regulatory changes. After all, their own model doesn’t admit that anything, regulatory change or anything else, can push the economy off of full-employment.

(more…)

Myths of structural unemployment: The construction dimension

After feedback from readers, I think it would be useful to provide some context for the Economic Snapshot we released yesterday, What does construction have to do with it? The snapshot showed that very little of the rise in overall unemployment between 2007 and 2011 was due to unemployed construction workers (see the graph below). The data presented are the rise in unemployment compared to the rise in “unemployment other than construction.” In the early aftermath of the housing collapse in 2007, the overall unemployment rate was 4.6 percent, just 0.1 percent higher than if there were no construction sector. By 2011, the overall unemployment rate had risen to 8.9 percent and would have been 8.6 percent without construction. Thus, overall unemployment from 2007 to 2011 increased by 4.3 percentage points (going from 4.6 percent to 8.9 percent) and would have risen 4.1 percentage points without any construction sector (from 4.5 percent to 8.6 percent). Just 0.2 percentage points of the overall 4.3 percentage-point rise in unemployment can be explained by higher than average unemployment within the construction sector.

Unfortunately, some readers interpreted this analysis as denying either the real hardship faced by construction workers or the role of the bursting of the housing bubble on the economy. Neither was the case, so let me provide some context.

There has been persistently high unemployment for many years and a debate about what can and should be done about this. There are some prominent policymakers who believe that there is nothing that monetary or fiscal policy can do to address this high unemployment because the unemployment is mostly “structural,” meaning that there are sufficient job openings but the skills of the unemployed do not make them qualified for those jobs. That means it will take education and training of the unemployed and/or a long period of adjustment until we work our way through a structural change. In this view, neither monetary nor fiscal policy can successfully lower unemployment. One of the main narratives associated with this point of view focuses on construction, an intuitively plausible story (though not actually true):  We built up substantial employment in construction during the housing boom, employment that went to relatively “unskilled” workers, and now that the bubble has burst and substantial job losses have resulted, we are left with a large pool of unemployed construction workers who have not yet found themselves new jobs in other sectors.

Consider the interview in the Wall Street Journal last year with Charles Plosser, the president of Philadelphia’s Federal Reserve Bank. After asking Plosser whether monetary policy can change the high unemployment picture, the interviewer, Mary Anastasia O’Grady, paraphrased his unequivocal response: This mess was caused by over-investment in housing, and bringing down unemployment will be a gradual process. Plosser said:

“You can’t change the carpenter into a nurse easily, and you can’t change the mortgage broker into a computer expert in a manufacturing plant very easily. Eventually that stuff will sort itself out. People will be retrained and they’ll find jobs in other industries. But monetary policy can’t retrain people. Monetary policy can’t fix those problems.”

In 2010, Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, said that “a lot” of our unemployment was structural and not subject to influence by Federal Reserve Board monetary policy, specifically:

“Firms have jobs, but can’t find appropriate workers. The workers want to work, but can’t find appropriate jobs. There are many possible sources of mismatch—geography, skills, demography—and they are probably all at work. Whatever the source, though, it is hard to see how the Fed can do much to cure this problem. Monetary stimulus has provided conditions so that manufacturing plants want to hire new workers. But the Fed does not have a means to transform construction workers into manufacturing workers.”

So, the snapshot addresses the structural unemployment issue these observers raise and shows that the unemployment problem goes way beyond the pool of unemployed construction workers. This in no way diminishes the importance of the bursting of the housing bubble in generating the recession nor the severe employment losses in construction. As I wrote in an earlier paper, “It is true that construction has lost many jobs in this downturn, losing nearly 2 million jobs from the start of the recession through the second quarter of 2010. This accounts for about 25% of all private-sector jobs lost. Is this what’s fueling the unemployment problem? The answer is “No, not at all.”"

There were severe job losses in construction and construction has very high unemployment, as it did in 2007. Construction unemployment, however,  did not fuel the rise of unemployment to 10 percent and it does not explain why it currently exceeds 8 percent. We do know that those who lost their construction jobs exited unemployment by either taking jobs in other sectors, leaving the labor force (i.e., giving up) or leaving the country, though we do not know how many chose the particular exit paths. We also know that there would be very high unemployment even if we could set aside the very high and troubling unemployment of construction workers. Solving our unemployment problem is not really about turning construction workers into manufacturing workers (as Kocherlakota suggests) or into nurses (as Plosser suggests). Rather, we need to have more job openings and more jobs in nearly every sector. And a wide array of policies can make that happen, including monetary policy, housing policy, fiscal policy and exchange rate policy. One such federal policy would be to undertake infrastructure projects in transportation and in modernizing schools that would employ construction workers and also generate jobs in related industries as well as throughout the economy as newly employed construction and other workers spend their wages.

Auto industry roars back, everyone cheers (except anti-government conservatives)

I’d like to add some thoughts to Charles Blow’s entertaining and informative blog post about Karl Rove and Chrysler’s “It’s halftime in America” Super Bowl ad. The little dust storm over the commercial is fun to watch, and the public’s reaction—which has been overwhelmingly positive—tells me that Americans might be ready, at long last, to appreciate the single most effective economic intervention of the Obama administration, the rescue of the domestic auto industry.

For those who missed it, the commercial (watch below) has Clint Eastwood narrating scenes of the rebirth of Detroit, both the city and its industry, which were weak from decades of decline and, as Eastwood says, knocked down, but not out, by the Great Recession.

Today, the city’s in worse shape than the industry, but the automakers’ new plants, new models, sales revival and new jobs have created a sense of hope for a lot of people who have seen rock bottom. Against all the odds, Chrysler Corporation, which was not just knocked down, but was declared clinically dead by most experts five years ago, had the strongest year-over-year U.S. sales increase in January and continues to gain market share. Ford and General Motors both posted huge profits last year, and GM regained its place as the world’s auto sales leader.

This nearly miraculous, feel-good story has made conservatives dyspeptic. Mitt Romney and most Republicans in Congress opposed the federal government’s loans and restructuring of GM and Chrysler. They were happy to saddle President Obama with the catastrophic job losses that would have resulted. The Center for Automotive Research forecast the loss of 2.5 million jobs and EPI’s Rob Scott estimated the losses would range between 2.5 and 3 million jobs, while Moody’s Analytics’ Mark Zandi estimated the damage at about 1.5 million jobs.

Conservative opponents like Sen. Richard Shelby (R-Ala.), and even Zandi, who supported the rescue plan, predicted that the rescue would end up costing taxpayers upwards of a hundred billion dollars. They assumed the initial loans would not be repaid and would lead to additional loans when the companies failed to meet their sales and revenue targets.¹ They were wrong. Totally, absolutely wrong. Zandi has, at least, been forthright that things turned out far better than he feared.

Nevertheless, because TARP funds were used to save the auto companies, and because TARP is still widely reviled, most Americans opposed the rescue as just another corporate “bailout.” It didn’t help that the Big 3 were unpopular and their executives were tone deaf and overpaid. Add to this mix a right-wing effort to discredit the United Auto Workers and blame it for the industry’s woes, and it’s easy to see why President Obama has had trouble making people understand what a dramatic success his (and George W. Bush’s) policy has been. What should have been a huge re-election asset has been viewed as a liability, even in Michigan and Ohio!

But maybe the public does get it now. If they do, Rove and Fox News will have every reason to choke on a commercial that never mentions the government or Obama but celebrates the fact that a key U.S. industry just might win the second half.


¹As EPI’s Robert Scott points out, the rescue made both fiscal and policy sense, even if the loans were never repaid.

A cheaper dollar is not enough

My colleague Josh Bivens is right to call Christina Romer on her failure to note the importance of currency manipulation on the plight of U.S. manufacturing. But, he leaves us with the impression that the story ends there, and that a targeted manufacturing policy is simply a poor second-best reaction to the governing class’ refusal to deal with our overvalued dollar. It’s not. Even if Romer had acknowledged the currency problem, she still wouldn’t have been, as it were, on the money.

Romer dismisses the notion of “special treatment” of manufacturing (a euphemism for industrial policy – the policy that still dare not say its name), as a sentimental effort to turn back the tide of history, which conventional economics wisdom tells us has thrown American goods production into its trash heap. In the same news cycle, Larry Katz of Harvard tells the New York Times that an increase in manufacturing jobs is “implausible.”

But what is really implausible is the notion that America’s creditors will continue to finance our current account deficit forever. The mills of macroeconomic adjustment may grind slowly, but sooner or later—with or without a change in U.S. dollar policy—they will grind away the dollar’s inflated position in the world. Assuming an eventual global recovery, foreign investors will eventually find more profitable ways to invest their money (in their own economies, for example) than to keep lending it to American consumers at low rates and with the increasing risk that they will be paid back in devalued dollars.

At that point, the market will force the dollar down, making us more price competitive. But this will not be costless. Given that a large chunk of what we buy—including most of our oil—comes from abroad, the initial impact will be to raise the cost of living here, undercutting real incomes.

Moreover, time has not stood still. After 30 years of surrendering markets and off-shoring production, Americans no longer dominate the upper reaches of the global supply chains. The world is now full of competitors whose governments will use every possible policy tool to keep, and expand, their share of high value-added markets. So, in the absence of something similar here, our workers will be competing on the basis of cheaper labor costs.

It’s already happening. Two tier wages systems, in which younger workers get paid much less are now standard practice in many American factories. As Rich Trumka said to me a few months ago, “What makes you think that two-tiers could not turn to three?” The Obama administration plays up the General Electric decision to bring the production of a water heater back from China to a plant in Kentucky. What it plays down is that the hourly wage went from $20 to $13 per hour.

Some have criticized President Obama’s proposals as cynical election-year half-measures. They may be right. Still, it is, finally, a step in the right direction. Even with a cheaper dollar, laissez-faire domestic policy is not going to bring back the American Dream.

‘Nonsense fact’ about union workers used in Super Bowl ad

That’s how the Washington Post fact checker, Glenn Kessler, put it in his review of the following assertion used in the Super Bowl ad (watch below) by the Center for Union Facts*: “Only ten percent of people in unions today actually voted to join the union.”

Kessler dug in to see where that came from and apparently it is an “estimate [of the] the proportion of employees who both would have voted for the establishment of a union at their companies and were still in their jobs.” As Kessler points out, this has no bearing on the extent to which workers currently covered by collective bargaining would vote to maintain collective bargaining. It is as relevant, as Jared Bernstein points out, as “saying Virginia isn’t a state because none of its current residents voted for statehood.”

What are the facts? Richard Freeman (Harvard University) and Joel Rogers (University of Wisconsin) report on page 69 in their book, What Workers Want, that 90 percent of union workers wanted to keep their union based on their answer to the question, “If a new election were held today to decide whether to keep the union at your company, would you vote to keep the union or get rid of it?”

Union workers have many special legal rights and protections. For instance, union workers by law have the right to vote for union officers and any dues increase, initiation fee or assessment. The laws protecting internal union democracy are far stricter than those for corporate governance and shareholder rights. Plus, workers also have clear rights to decertify unions. This ad and this “fact” do not capture what union worker rights are nor even attempt to reflect what union workers’ views are of collective bargaining.

In fact, a much larger share of the non-managerial workforce wants a union than has a union. Freeman wrote in 2007:

“Given that nearly all union workers (90%) desire union representation, the mid-1990s analysis suggested that if all the workers who wanted union representation could achieve it, then 44% of the workforce would have union representation.”

So, if workers could freely have a union when they wanted one, union representation in the United States would be on par with that of Germany.


*By the way, the CUF is just a small part of an array of misleading public relations efforts conducted by Richard Berman on behalf of special interests.

The tax expenditure of the 1%

The Tax Policy Center’s new report on the distribution of tax expenditures strengthens the case for increasing tax progressivity and raising needed revenue by ending the preferential treatment of capital income (subject to a 15 percent tax rate versus a top marginal income tax rate of 35 percent). TPC’s analysis looks at seven broad categories of individual income tax expenditures: exclusions, above-the-line deductions, the preferential treatment of capital gains and dividends, itemized deductions, nonrefundable tax credits, refundable tax credits, and other miscellaneous tax expenditures. Guess which category of tax expenditure provides by far the most lopsided benefit to upper-income households?

That would be the way the tax code preferences capital income over wage and salary income, compounded by the heavy concentration of capital income at the top of the earnings distribution. In 2011, the top 1 percent of households by cash income received a whopping 75.1 percent of the benefit from the preferential treatment of capital gains and dividends. The broad middle class—defined here as the middle 60 percent of households by cash income—received only 3.9 percent of that benefit. Upper-income households also do well by tax exclusions and itemized deductions, but the share of these tax expenditures accruing to the top 1 percent of households—at 15.9 percent and 26.4 percent, respectively—don’t come close to the windfall afforded by a 15 percent rate on capital income.

This should come as no surprise if you’ve read about the Buffett Rule and former Massachusetts Gov. Mitt Romney’s 13.9 percent effective tax rate: Capital income is terribly concentrated at the top of the earnings distribution and the preferential tax treatment of capital income even allows some millionaires and billionaires to pay lower effective tax rates than many middle-class households. Indeed, a recent Congressional Research Service report suggested that the tax reforms most consistent with implementing the Buffett Rule would be raising tax rates on capital gains and dividends. Additionally, TPC’s distributional analysis of taxes on long-term capital gains and qualified dividends shows that the top 1 percent of households by cash income (with income above $533,000) will pay 70.5 percent of capital gains and dividends taxes in 2011, contrasted with just 2.3 percent for the broad middle class (with incomes between $17,000 and $103,000).

Recently, the increasing concentration of capital income at the top of the earnings distribution has been the biggest driver of income inequality, followed by changes in tax policy. Since the mid-1990s, the biggest swing in tax rates has been dropping the top capital gains rate from 28 percent to 15 percent and slashing the top rate on qualified dividends from 39.6 percent to 15 percent. Today’s preferential treatment of capital gains is often considered the most regressive feature of the tax code; taxing capital income as labor income would be an extremely progressive way to raise revenue and push against after-tax income inequality.  Eliminating the preferential treatment of capital gains and dividends would raise effective tax rates by 4.5 percentage points for the top 1 percent of households, while raising effective tax rates by 0.1 percentage points or less for the middle class, according to TPC. Doing so would raise substantial revenue from those households best able to contribute to deficit reduction. Measured with interactions, TPC estimates that the preferential treatment of capital gains and dividends cost $77.7 billion in 2011.

Comprehensive tax reform will have to raise more revenue and restore a greater degree of progressivity to the tax code, so that effective tax rates continue to rise with ability to pay. Equalizing the tax treatment of ordinary income and capital income would substantially advance both objectives.

Unpaid internships: A scourge on the labor market

I was happy to see the New York Timesonline debate about unpaid internships, sparked by the latest lawsuit against a major corporation for exploiting an unpaid workforce. A recent graduate of Ohio State University, Ms. Xuedan Wang, is suing the Hearst Corporation for its failure to pay her during four months of work at Harper’s Bazaar, work that allegedly included directing the work of other interns, in addition to record-keeping and overseeing the pick-up and delivery of fashion samples.

As Steven Greenhouse reported in April 2010, it has become common for profit-making businesses to ignore the minimum wage and overtime laws and employ young workers without compensating them and, as Ms. Wang’s lawyers point out, without paying Social Security taxes, unemployment taxes, or worker’s compensation premiums. This not only deprives the so-called interns of coverage under these important programs, it deprives the trust funds of needed revenue. Four months of minimum wage work would cost a New York employer more than $400 in payroll taxes and several hundred dollars in worker’s compensation premiums.

Despite the magnitude of the tax losses nationwide, few state governments have tackled these illegal unpaid internships, and the federal government has failed to litigate a single enforcement case, although it might have settled enforcement actions without litigation or publicity. Given the hostile budgetary and oversight environment in Congress, I suspect the Labor Department has decided to avoid taking on the corporate interests that profit from this tax avoidance and unpaid labor. The chronically underfunded Wage and Hour Division still does not have a Senate-confirmed administrator, and the Republican members of the House Education and the Workforce Committee have made it clear that they frown on zealous enforcement of the law.

An earlier lawsuit against Fox Searchlight, another profit-making enterprise that exploited unpaid interns while making the movie Black Swan, reveals just how pernicious this practice really is. One plaintiff was a 2009 Wesleyan University graduate, but another was a 42-year old accountant with an MBA. The lesson? Once businesses get away with exploiting young people, it isn’t long before they treat older workers just as badly.

I first saw signs that the unpaid internship had slid far down the greasy slope when the Times and Wall Street Journal reported several years ago that adult dislocated workers, 30-somethings who had held jobs for many years, were reduced to doing significant, skilled work for free as “interns” in for-profit businesses while surviving on unemployment insurance.  Everything was wrong with this: there was no educational component, the “interns” worked for several months without pay, and the employers escaped all of their normal obligations to pay wages and taxes.

Back in 2006, Anya Kamenetz nicely summarized the key ways that unpaid internships damage the labor market and the ability of the 99 percent to earn a decent living. They undermine the meritocracy that allocates jobs and rewards people for their skills and gumption rather than for the wealth of their parents; they depress wages by creating an oversupply of people willing to work not just for low wages, but literally for nothing; they depress expectations and create an over-identification with employers; and – as compared with paid internships — they damage the career prospects of the young people who take them.  More recently, Kamenetz argued that the responsible institutions need to drag the unpaid internship mess out of the shadows and clean it up: “It’s time for employers, in cooperation with the government and colleges, to step up and create higher-quality apprenticeships, paid jobs, and co-op programs to replace the ill-defined, unpaid internship.” Given that many colleges and universities reportedly require students to take an internship before graduation, they do bear some moral responsibility for the educational content and legality of the experience. Apparently, however, they will be reluctant partners in this effort. When the Labor Department issued guidance on the six principles for a legal unpaid internship, a group of university presidents fired off a protest letter to Secretary Hilda Solis. The universities have a cozy deal collecting tuition for semesters in which their students get farmed out as free labor to employers, and they don’t want the government to interfere, no matter what the law requires.

(more…)

Romer argues against ‘special treatment’ for U.S. manufacturing (gasp, somebody smart is wrong on the Internet!)

Oh no, the economy’s “paging Dr. Romer” feature seems to have developed a glitch. For those who don’t know, Mike Konczal suggested the “PDR” feature a while back, noting that, “Anytime someone associated with the Obama Administration, past or present, says something that is probably wrong about the economy in 2011, we break out Christina Romer saying the correct thing in early 2009.”

And it’s true that on the most important questions of the past couple of years, Romer has been admirably correct and as loud as policymakers with real influence are generally allowed to be. This makes her recent column in the New York Times that much more disappointing. The problem starts and ends with the title – which normally isn’t the author’s fault but in this case actually encapsulates her argument pretty well: “Do Manufacturers Need Special Treatment?”

She argues that recent debates about the importance of helping the manufacturing sector (started in large part by President Obama’s calls to do so in the State of the Union address) are essentially about the costs and benefits of providing this “special treatment” to manufacturing.

This is a very odd read of the current situation. The main problem facing U.S. manufacturing today is a value of the dollar that leads to mammoth trade deficits in the sector. This problem in turn stems largely from the policy of many of our important trading partners to peg the value of their currency at levels that insure very large deficits; as well as from our own policy of not doing anything about this unbalanced trade. Correcting this currency misalignment would provide large benefits to U.S. manufacturers, would reduce the foreign debt of the U.S., and would boost living standards in our trading partners. It’s not clear why calling to undertake this extremely obvious policy intervention is akin to arguing for “special treatment for manufacturers.”

And yes, it’s getting old saying this again and again. But, not as old as people debating issues of trade and manufacturing without wrestling with what is by far the most important policy angle of it.

Lastly, just as a data note, Romer repeats what is a very common canard about manufacturing employment: “Unemployment today is high, but not because of a decline in manufacturing. That decline has been going on for 30 years…”

Depends on what you mean by “decline.” Manufacturing as a share of total employment has been shrinking for decades – and this is not necessarily a terrible thing, so long as it simply reflects faster productivity growth in this sector. But, for 35 years, between 1965 and as recently as 2000, manufacturing employment never dipped below 16 million (and never got above 19.5 million), meaning that it was actually quite stable and not in obvious decline. Then, the sector lost 3 million jobs in the 2000 recession and never recovered them, largely because of subsequent very large increases in manufacturing trade deficits. The sector today employs less than 12 million workers:

Is it unreasonable to expect manufacturing to reach the share of overall employment it last attained in 1965 (27 percent – which would be 36 million jobs)? Yes. But, given a real recovery and intelligent exchange-rate policy, is it unreasonable to expect that it could reach its overall employment level of 1965 (around 16.5 million)? Not at all.

And it wouldn’t even require “special treatment.”

And look, Romer knows all of this. See? But given that no administration in recent decades has done anything about chronic dollar overvaluation – a clear policy failure – is it a shock that many have decided to try to advocate for help for manufacturing through other means? Of course not – but surely the right move here is not arguing against help for manufacturing based on a hypothetical that assumes status quo policy is mostly neutral towards the sector. Instead it’s providing those rightly concerned that current policy is damaging the the sector with the strongest arguments to end this damage.

Another win for the 1%: ‘Right to work’ signed into law in Indiana

When Indiana Gov. Mitch Daniels signed a “right-to-work” bill into law on Wednesday, working people and unions lost another battle in the relentless war the 1 percent have been waging against the 99 percent. Right to work (RTW) does not guarantee anyone a job. Rather, it makes it illegal for unions to require that each employee who benefits from a union contract pays his fair share of the costs of administering it. By making it harder for workers’ organizations to sustain themselves financially, RTW aims to undermine unions’ bargaining strength and eventually eliminate them.

MORE: See EPI’s recent research on RTW

Twenty-two states—predominantly in the South —already had right-to-work laws, mostly dating from the McCarthy era. But since the Republican sweep of state legislatures in 2010, a coalition of corporate lobbies, right-wing ideologues and conservative operatives have seized the moment to push RTW into traditionally union-friendly parts of the country. They’ve targeted Minnesota, Ohio, Michigan and New Hampshire for their next campaigns.

RTW is sold as a job creation strategy, but as Gordon Lafer and Sylvia Allegretto have shown, it’s a big lie. In fact, it’s all about cutting wages, which is what happens when unions are weakened or eliminated. The Chamber of Commerce is almost honest about this wage-cutting goal: They explain that “unionization increases labor costs,” and therefore “makes a given location a less attractive place to invest new capital.” Unfortunately, workers do get lower wages from RTW, but the jobs never come. As EPI has shown, the impact of RTW laws is to lower average income by about $1,500 a year and to decrease the odds of getting health insurance or a pension—for both union and non-union workers. Yet when Oklahoma (the last state before Indiana to pass RTW) passed RTW in 2001, the jobs never materialized. The number of companies coming into the state—supposed to increase by “eight to ten times”—instead decreased by 30 percent.

Gov. Daniels and his right-wing allies want workers to believe that RTW will be a big draw for companies making relocation decisions, but surveys show it’s irrelevant, ranking 16th on a list of factors small manufacturers consider. And for higher-tech, higher-wage employers, nine of the 10 most favored states are non-RTW, led by liberal, pro-union Massachusetts.

Fifty years ago, Martin Luther King Jr. warned against “false slogans such as ‘right to work’… . [Whose] purpose is to destroy labor unions and the freedom of collective bargaining by which unions have improved wages and working conditions of everyone.”

The U.S. economy has been squeezing the middle class for decades, with wages stagnating and median household income actually falling over the last decade. RTW is a factor in this decline. It’s time to stand up for decent wages and benefits, to stand up for unions, and to stop the RTW virus from spreading any further.

The ‘end of the segregated century?’

In a study released this week, two Manhattan Institute researchers heralded the “end of the segregated century.” But their report used a measure of segregation that masks important demographic and economic trends. A measure of segregation that is more relevant for policy and more intuitively reasonable reveals that the neighborhood exposure of African Americans to whites is no greater today than it was 60 years ago, and is considerably less than it was in 1940.

In some respects, racial residential segregation continues to get worse, not better. Low-income African Americans are more segregated from upper-income African Americans, leaving more poor black households in “truly disadvantaged” neighborhoods where educational success of children is nearly impossible. And we can also expect segregation to increase, even by the Manhattan Institute’s overly optimistic measure, as the foreclosure crisis forces more black families into more racially homogeneous and poorer neighborhoods.

For more, read this detailed critique of the Manhattan Institute study that EPI published today.

On Brooks’ muddled defense of the top 1%

Yesterday, we critiqued an essay by James Q. Wilson on income inequality. Today, it’s New York Times columnist David Brooks’ turn. Brooks presents another defense of the top 1 percent, one that is just plain wrong about income trends and the income divide in America. And if he got his facts from Charles Murray, then Murray is wrong too. I just can’t let this one slide:

“Democrats claim America is threatened by the financial elite, who hog society’s resources. But that’s a distraction. The real social gap is between the top 20 percent and the lower 30 percent. The liberal members of the upper tribe latch onto this top 1 percent narrative because it excuses them from the central role they themselves are playing in driving inequality and unfairness.”

Brooks would have us believe that there’s commonality among the top fifth and the only losers are those in the bottom 30 percent. So, let’s examine how the various slices of the population have fared to see whether: the 1 percent sticks out, whether trends for the rest of the top 20 percent are more closely aligned to the top 1 percent or to the bottom 80 percent, and whether the bottom 30 percent fares differently from the rest, especially the middle. The simple answer is that the top 1 percent enjoyed far superior wage and income growth than every other segment of the population and that the lowest 30 percent does not stick out as faring worse than the broad middle class. The mantra of the top 1 percent and the other 99 percent corresponds to the actual facts, as we have pointed out before. So has the Congressional Budget Office. In this post, I will present data from the end of the 1980s recovery, 1989, until the end of the last recovery in 2007.

Here’s a look at inflation-adjusted hourly wage trends for each decile from 1989 to 2007, using computations of the Current Population Survey, which unfortunately does not allow us to examine the 1 percent—I do so below with other data. For the uninitiated, the 20th percentile is those who earn more than 20 percent of the workforce but less than the other 80 percent.

In terms of wage growth, the bottom 20 percent saw faster growth than the middle, the entire middle from the 30th to the 70th percentiles saw comparable wage growth of about 10 percent, and the best wage growth starts at the 90th percentile and is even better at the 95th percentile (growing 26.7 percent). So, if there’s a divide here, it starts at the upper 10 percent and there’s a great commonality among the bottom 90 percent. By the way, almost all of the wage growth for the bottom 90 percent occurred in the late 1990s boom from 1995 to 2000. Last, there was a period when the fortunes of the bottom 20 percent (not 30 percent) fared far worse than the broad middle, but that was in the 1980s.

But what about the top 1 percent? For that we need to look at Social Security wage data which allows us great detail at the top but not much within the bottom 90 percent. These are inflation-adjusted annual wage trends from 1989 to 2007:

Looks to me like the top 1 percent fared remarkably better than everybody else and that the top 0.1 percent, with 106.5 percent wage growth really distinguished themselves. These wage trends put the top 1 percent with wages 20 times that of those in the bottom 90 percent, up from ratios of 15-to-1 in 1989 and 9.4-to-1 in 1979.

Perhaps Brooks was referring to household incomes and not to individual workers’ wages, so let’s turn to CBO data on income growth (pre-tax) between 1989 and 2007. (CBO provides income levels for each fifth and the top 10 percent, top 5 percent and top 1 percent, and I have deduced the trends for other categories to flesh out the picture).

The income trends for the bottom 95 percent vary but look pretty similar across the bottom 80 percent (from 16.5 in the lowest fifth to 20.2 percent in the fourth fifth, with the middle fifth faring essentially the same as the bottom). If anything sticks out, it’s the 118.5 percent income growth of the top 1 percent, whose incomes grew four times as fast as those in the bottom three-fourths of the group Brooks wants to label privileged—the top fifth. The income divide that Brooks sees does not appear in our world, at least from what we can learn from wage or income data.

‘Increase and Index the Minimum Wage Week’

It’s not easy to have a week named in honor of a worthy cause, but this week has turned into “Increase and Index the Minimum Wage Week.” In Connecticut, House Speaker Chris Donovan has announced his support for a two-step increase in the state’s minimum wage to $9.75, with indexing after that. In New York, Speaker Sheldon Silver introduced a bill to raise the minimum wage there to $8.50 with indexing after that. And here at EPI, my colleague Mary Gable and I released a paper documenting the positive economic impact of a proposed increase in the Illinois minimum wage. A 2011 proposal to increase the Illinois minimum wage over a four-year period to $10.65 would have put nearly $4 billion in the hands of minimum-wage earners in Illinois, in turn creating approximately 20,000 new jobs (similar forthcoming 2012 legislation would do the same). As if all that wasn’t enough, yesterday we had GOP presidential candidate, Mitt Romney, speaking in favor of indexing the minimum wage.

Of course, this is not a new suggestion. EPI Economist Heidi Shierholz wrote in 2009 that we should Fix it and Forget it.” And the concept is pretty simple: Rather than having earnings of minimum-wage earners eroded by inflation, let’s put a mechanism in place to ensure that our lowest-paid workers keep up with the increased costs of meeting basic needs. (As seen in the figure, the minimum wage doesn’t have a very good track record of even meeting the federal poverty level, which we know to be a very inadequate measure of what it takes to make ends meet.)

Ten states already have some sort of indexing, including eight states that had automatic increases Jan. 1. Given the disconnect between wages (generally stagnant at the lower end) and both corporate profits and productivity (both doing very well, thank you), it seems that increasing the minimum wage and indexing it to inflation is a very modest proposal. It’s also a small step that can be taken to address the growing income disparity that has drawn so much attention in recent months.

Tracking GDP and jobs: When repeating the same thing over and over actually provides useful information

Following the release of last week’s report on GDP growth, I wrote the following for a press advisory:

“Gross domestic product grew in the fourth quarter of 2011 at the fastest rate since the first half of 2010 – but any celebration should be muted. The 2.8% growth rate for the quarter was well below expectations and the year-round growth rate for 2011 was only 1.7%, a rate that would not generate reliable declines in unemployment should it continue…”

And the GDP report before that one I wrote*:

“The Bureau of Economic Analysis reported today that the economy grew by 2.5% in the most recent quarter – meaning that it has grown by only 1.6% over the last full year – this sluggish growth is the root cause of the stubbornly high unemployment rate we’ve seen over that time. While a double-dip recession does not seem to be in the cards, this does not by a longshot mean that the economy is healthy.”

And the one before that one I wrote:

“Gross domestic product grew at a 1.3% rate in the second quarter of 2011 and has averaged just 1.6% growth for the entire first half of 2011. This anemic growth is why the unemployment rate stopped falling and actually began rising during these same six months. Worse, the rush to fiscal austerity will make the problems of slow growth and joblessness even worse.”

In short, I’ve been pretty boring over this time in my reactions to subsequent data releases. Take a look at the jobs day releases from my colleague Heidi Shierholz and you’ll see a similar blizzard of same-old-same-old calls that job growth is positive but not fast enough blah blah blah.

But, this week’s update by the Congressional Budget Office of their potential GDP series lets me show why this unvarying string of negativity is actually informative; we just aren’t recovering. The figure below plots the ratio of actual GDP to potential GDP – with potential GDP being the amount of economic output we’d be producing if all workers and factories were fully employed. The gap between these two series (creatively named “the output gap”) is a measure of how far away we are from full recovery. And for the past year or more we have made essentially no progress on this front. Another way to put this is “zero is not the magic number” – GDP (or employment) growth can come in positive forever without actually moving the economy any closer to full recovery. And each month/quarter/year that we do not close the gap between actual and potential GDP is another month/quarter/year that we’re simply leaving hundreds of billions of dollars on the table (cumulatively around $3 trillion and counting since the start of the recession).

So, given this, would writing more unpredictable reactions to each new data release over the past year actually have been informative? Or misleading?

*Note that these “quick takes” were reactions to “advance” estimates of GDP – the growth rates for these quarters have since been revised by BEA.

SNAP for the economy

Today, Congresswoman Rosa DeLauro held a press conference to discuss food stamps and the critical role they play in our economy. She asked several experts, including myself, to discuss the role of food stamps in helping people and helping the economy. I’ve summarized my comments below:

First, food stamps help people. About 46 million people participate in the Supplemental Nutrition Assistance Program (SNAP), which translates into over 1 in 7 Americans who use food stamps. Nearly 75 percent of SNAP participants are in families with children, and more than one-quarter of participants are in households with seniors or people with disabilities. Food stamps primarily help children – roughly 50 percent of those on food stamps are under the age of 18. Over 40 percent of all recipients live in households where family members are employed.

Food stamps go to people truly in need. To be eligible, households have to make a gross income below 130 percent the poverty line and a net income (once all deductions are applied) of less than 100 percent of the poverty line. The average monthly allowance is about $130 per person. In 2010, these modest payments kept over 5 million people out of poverty.

Second, food stamps provide extremely effective support for the overall economy. Food stamps go to people that are cash strapped, by definition, which means they spend the money right away, putting the cash received directly back into local businesses and grocery stores. Nearly all macroeconomic forecasters agree that food stamps are among the most effective forms of fiscal support to create economic activity and jobs.

Third, SNAP is a very efficient program, with 92 percent of SNAP benefits going directly to people to spend on food (the remainder is low administrative costs of running the program, determining eligibility, and the like, and other food assistance). When the money goes to people, they spend it and stimulate the economy on the order of $1.5 to 1.7 for every dollar spent. This means that the $78 billion spent on food stamps in 2011 led to $115 billion in overall economic activity.

Finally, SNAP swelled because the economy entered the worst recession since the Great Depression and remains severely depressed even 18 months after the official recovery began. And this expansion of SNAP was a good thing – benefits keep 5 million people out of poverty and are universally considered some of the most effective fiscal support available to help an economy that is projected to see unemployment rates above 8 percent until 2015. Cutting these benefits would simply be a mistake for families and a mistake for the economy.

Jobs are a top priority in this country at this time. If our main goal is to create jobs, we need to stimulate demand. To stimulate demand, we need to put money in the hands of people who will spend it.  One of the more efficient and effective ways to put money in the hands of people who will spend it is food stamps.

Obama’s SOTU claim is right: Regulations can improve the free market

Rules to prevent financial fraud or toxic dumping or faulty medical devices — these don’t destroy the free market.  They make the free market work better. — President Obama, State of the Union Address, 1/24/12

Over the past year, discussion over regulations has frequently been distortedly one-sided, as if their only possible effect on the economy and markets is to cause damage. The Obama administration itself has often failed to add balance to this conversation, so it was heartening to see the president lay out a more comprehensive assessment in his State of the Union address.

In the address, President Obama focused most on the financial crisis and regulations. He, appropriately, stated that the roots of the economic collapse and ongoing economic troubles included regulatory inadequacy:  “In 2008, the house of cards collapsed.  We learned that mortgages had been sold to people who couldn’t afford or understand them.  Banks had made huge bets and bonuses with other people’s money.  Regulators had looked the other way, or didn’t have the authority to stop the bad behavior.”

So the effective implementation of strong financial regulations can not only provide needed protections to individual borrowers and savers, they can also abet financial stability, in all these ways making the free market “work better.”

A fuller version of the President’s claim would also include the following reasons why regulations can help the free market work better and help the economy.

  • Even outside of the financial sector, weak or absent regulations can be a direct threat to the economy and employment. Inadequate regulation contributed to the BP oil spill and its substantial economic costs. Inadequate regulation can also undercut the faith of consumers in an industry’s products because when dangerous products are being produced the public is naturally less likely to buy them. This story recently applied to the food industry. In the wake of too many product horror stories and weak regulation, the food industry supported stronger regulations in the form of the Food Safety Modernization Act of 2010.
  • Regulations can have broad economic benefits that may not be apparent at first blush. Clean air regulations, for instance, significantly improve the health of workers and children, resulting in lower health care costs and more productive workers.
  • Regulations often spur technological innovations that boost productivity. Michael Porter of Harvard Business School—a self-described Republican and an eminent specialist on how companies and nations compete—has hypothesized that properly designed environmental regulations can lead to so much innovation that they completely offset the costs of compliance.
  • Regulations ensure that firms do not act in ways that place unacceptable costs on those outside the firm, or on the society as a whole; these “externalities” are themselves a form of “market failure.” For example, economists would say that much of the externality (or external costs) of air pollution has been overcome with regulations designed to correct this market failure (a term which refers to any market result that does not result in optimal results for society).  Once, manufacturers could pollute the air at will. With regulations, laws now require manufacturers to reduce pollutants and to incorporate into their production processes the costs of disposing of waste. This has benefited both the public at large as well as the private sector (companies benefit, for instance, when their workers are not breathing polluted air caused by other firms).
  • The direct cost of complying with regulations translates into increased employment. For example, an environmental regulation will mean more jobs for those engaged in pollution abatement. Further, it is possible that regulations may produce more labor-intensive production processes.  Compliance can particularly benefit job creation when labor markets are slack, and companies generally have substantial surplus cash, as is now the case; companies do not have to divert such spending from other investments, and plenty of workers are available to meet any increases in demand.

This isn’t to suggest that the only potential effect of any regulation is to improve free markets, but it is to suggest that the relationship between regulations and the market is a complicated one, and frequently positive. For those interested in more detail, please see this report from a year ago on the role of regulations and the economy.

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Bush-era tax cuts remain the obstacle to fiscal sustainability

Earlier this week, the Congressional Budget Office released its Jan. 2012 Budget and Economic Outlook, which showed a sustainable fiscal outlook over the next decade provided Congress leaves the budget on autopilot. The current law baseline—the legislated status quo—depicts the budget deficit averaging only 1.5 percent of GDP over the next decade (fiscal years 2013-22), public debt peaking at 75.1 percent of GDP in FY2013, and the public debt-to-GDP ratio gradually falling to a more-than-sustainable 62.0 percent of GDP by FY2022. This picture is not perfect—the fiscal drag from the debt ceiling deal and expiring tax provisions is projected to slow growth to an anemic 1.1 percent of GDP in 2013 (and unemployment projections were raised half a percentage point across the decade)—but it is certainly fiscally sustainable in the out years, after the economy has recovered.

And the single biggest policy threat to this sustainable fiscal outlook? Congress might extend all the George W. Bush-era tax cuts over the next decade, to the tune of $4.4 trillion over a decade. That’s $3.8 trillion (-9.1 percent) in revenue loss and $657 billion (+15.5 percent) in additional debt service. Yes, deficit-financed tax cuts increase spending. CBO’s current law baseline projects cumulative budget deficits of $3.1 trillion, so continuing the Bush-era tax cuts would more than double the scope of fiscal stress.  (These calculations assume that Congress will continue patching the alternative minimum tax and attribute a $1.1 trillion interaction between the policies to the Bush tax cuts, which pushed more households into the AMT, significantly increasing the cost of the AMT patch.) Measured differently, the hefty opportunity cost of the Bush-era tax cuts averages 1.9 percent of GDP in revenue loss and another 0.3 percent of GDP in increased interest spending over 10 years.

Under current law, the budget will begin running sustained primary surpluses (where revenue exceeds non-interest spending) starting in FY2015. If Congress patches the AMT, primary surpluses begin in 2017. If the Bush tax cuts are extended, the budget never reaches primary balance. (Primary balance is a common metric for sustainability: while it does not necessarily stabilize debt as a share of GDP—which depends on interest rates, outstanding debt levels, and GDP growth—it’s a decent approximation.)

The Bush tax cuts remain expensive, ineffective, and unfair, and permanently extending even a portion of them—which President Obama proposes to do for 98 percent of households—makes it difficult to adequately fund public investments, economic security programs, and national security spending. Congress and the public have to accept that the federal government must either collect significantly more revenue (above that projected under current law) or renege on commitments insuring that seniors, the poor, and the disabled are provided with health care and a degree of retirement security. Like it or not, we can’t afford the New Deal, the Great Society, and the Bush tax cuts.

On Wilson’s muddled defense of the top 1%

Last week, the Washington Post published an essay by James Q. Wilson that’s bound to generate controversy. While Wilson acknowledges rising income inequality, his analysis of the factors driving the trend is seriously flawed. Furthermore, he belittles the need to tax the rich more in order to help the poor or to address overall inequality.

Wilson rightly acknowledges the growth of income inequality and correctly notes:

“The mere existence of income inequality tells us little about what, if anything, should be done about it. First, we must answer some key questions. Who constitutes the prosperous and the poor? Why has inequality increased?”

It is after this point that his argument goes off track. While there is much to comment on, I will only address a few issues, starting with Wilson’s explanation of rising inequality. He writes, “Affluent people, compared with poor ones, tend to have greater education and spouses who work full time.” Wilson then suggests that if these are the drivers of inequality, then it is best not to do anything about the problem, since, in his words, “We could reduce income inequality by trying to curtail the financial returns of education and the number of women in the workforce—but who would want to do that?”

It is true that those at the top have more education and are more likely to have a working spouse, but this hardly explains the large increase in inequality over the last 30 years. Let’s start with the role education plays in growing wage inequality. Wilson points out that those with at least a college degree saw wage growth far greater than those lacking a high school degree. While Wilson cites the data incorrectly (he cites Bureau of Labor Statistics data on “hourly” wages when they are actually median weekly earnings of full-time workers, and he flips the genders for college-educated wages), his point holds true: Wages have risen more for the college-educated (increasing 20 percent for men and 33 percent for women) over the last three decades than for those lacking high school degrees (with the wages of these workers falling 31 percent for men and 9 percent for women).

However, these data essentially compare the top 30 percent or so to the bottom 10 percent. In terms of explaining the surge in wages for the top, his analysis mostly misses the mark. After all, what we really need to explain is why the top 1 percent of wage earners saw their annual wages rise by 131 percent from 1979 to 2010—and why the top tenth of the top 1 percent saw their wages grow 278 percent—while wages for the bottom 90 percent increased just 15 percent (see the graph below).

Moreover, noting someone’s education does not explain why their wages rose or fell. After all, the reason why CEO pay has exploded in the last few decades is not because most CEOs happen to have college degrees. Rather, it’s due to a self-serving system that ensures CEOs reap the fruits of their company’s rewards.

As for Wilson’s point on working spouses, I’ll leave it to him to prove that this is a major driving factor behind the trends starkly depicted in the graph above.

Another serious flaw in Wilson’s argument is his contention that the existence of some economic mobility somehow negates the need to be concerned about high and rising income inequality. He illustrates mobility by pointing out that within nine years one can rise from being a business school student to earning a big Wall Street salary and a hefty yearly bonus. While this is true enough, Wilson misses the point yet again; business school students have traditionally been upwardly mobile. Instead, what is useful to know is whether someone from a poor or lower-middle-income family has the same or better chance of attaining such a position than in an earlier generation. The answer is quite clear that mobility within one’s lifetime (the chance of becoming that Wall Street banker) is no greater now than in the past. Moreover, the earning potential of today’s young workers is more tightly linked to their parents’ income than before. The existence of some mobility (and some variability from year to year) does not lessen the concern about inequality. (Also, see Dean Baker’s critique of the mobility data Wilson uses.)

In short, Wilson’s dismissal of inequality based on who the rich are, and why inequality has grown, is not very persuasive. However, the most curious part of Wilson’s piece is his contention that taxation is not relevant to income inequality:

“Making the poor more economically mobile has nothing to do with taxing the rich and everything to do with finding and implementing ways to encourage parental marriage, teach the poor marketable skills and induce them to join the legitimate workforce. It is easy to suppose that raising taxes on the rich would provide more money to help the poor. But the problem facing the poor is not too little money, but too few skills and opportunities to advance themselves.”

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Are federal workers overpaid?

The Congressional Budget Office released a report today claiming that “the federal government paid 16% more in total compensation than it would have if average compensation had been comparable with that in the private sector, after accounting for certain observable characteristics of workers.” Specifically, the report finds that average wages were roughly the same in both sectors, but that the value of benefits was almost 50 percent higher in the public sector (the overall difference comes to 16 percent because the bulk of compensation takes the form of wages).

CBO cautions, however, that “estimates of the costs of benefits are much more uncertain than its estimates of wages, primarily because the cost of defined-benefit pensions that will be paid in the future is more difficult to quantify and because less-detailed data are available about benefits than about wages.” This a serious understatement. In fact, the results appear to hinge entirely on the interest rate used to discount pension benefits, which isn’t even mentioned in the report.

Though the report itself provides no useful information about how the cost of particular benefits was estimated, a working paper by the same author indicates that CBO probably used a 5 percent rate of return to discount the value of future pension benefits (in other words, $105 in pension benefits next year is valued at $100 today). In practice, this means that if the rate of return on pension fund assets turns out to be higher than 5 percent, which is very likely, the present cost of funding future pension benefits will be lower than CBO estimated.

Where does the 5 percent discount rate come from? CBO based this on a 4 percent “risk-free” yield on Treasuries, with a little wiggle room to account for the fact that pension benefits aren’t quite risk-free (“federal pension obligations are not protected by the Constitution, and the pension obligations of private-sector employers are only partially covered by the Pension Benefits Guarantee Corporation”). If you’re wondering why the riskiness of pension benefits matters rather than the expected return on pension fund assets, that’s a very good question.

With compounding, using a nearly risk-free discount rate can double or even triple the cost of pensions compared to using expected returns on actual pension fund assets. Admittedly, expected returns are uncertain, and the uncertainty itself imposes an indirect cost on pension sponsors. But if you’re going to consider indirect costs like uncertainty, you should also factor in indirect advantages for employers, like reduced turnover.

The experts consulted by CBO for this report include my EPI colleague, Heidi Shierholz, as well as two researchers on the other end of the political spectrum, Andrew Biggs of the American Enterprise Institute and Jason Richwine of the Heritage Foundation (Biggs and Richwine were also consulted for the working paper). Though it’s nice that CBO considered a range of opinions, it’s a shame that Biggs, Richwine and others have been successful in convincing CBO and others to use low Treasury yields to estimate the cost of future pension benefits. A paper to be released next week by EPI also shows that Biggs and Richwine use highly unorthodox methods in comparing public- and private-sector pay. Among other things, they ignore enormous differences in educational attainment between teachers and private-sector workers.

It’s not time to cut back on extended unemployment insurance

Congress is debating whether to renew legislation that has extended unemployment insurance benefits for the long-term unemployed for up to 99 weeks (73 weeks of federal benefits beyond the regular 26 weeks of state-financed benefits). The decision should be consistent with the original decision to extend benefits, based on the condition of the economy and the likelihood that jobless workers will be able to find paid employment.

The unemployment rate, which was 8.3 percent in Feb. 2009 when the American Recovery and Reinvestment Act (ARRA) was enacted, and was 8.5 percent in Dec. 2011, is one measure, but not the best measure, of the need for extended benefits. The best measure is probably the ratio of long-term job seekers – the population that receives extended benefits – to available job openings. That ratio was 1.1 to 1 when ARRA put the 99 weeks of benefits in place and was still a much higher 1.8 to 1 in Nov. 2011.

This very high long-term job-seekers ratio indicates that the economy has not recovered enough yet to reduce the number of weeks of unemployment insurance benefits the jobless may receive. There are still more than 5.5 million Americans who have been seeking work for 27 weeks or more. Their ability to find work, to find employers willing to hire them after they have been unemployed for 6 months or a year, is greatly reduced.

Congress should reject Congressman Dave Camp’s (R-Mich.) legislation to eliminate 40 weeks of potential benefits or even 20 weeks, which some reports have mentioned as a compromise. Rep. Camp is off-base when he claims that 59 weeks of benefits is “a level consistent with prior recessions.” There has not been a single recession in the last 70 years that approached today’s levels of long-term joblessness. Both the number of long-term unemployed and the share of the unemployed who have been unemployed for more than 27 weeks are about double the levels of any other post-war recession.

Congress should renew the program of extended benefits as it is until the end of 2012.

Record low capacity utilization in electric sector inconsistent with “regulations kill jobs” mantra

The rate of capacity utilization in the electric utility sector dropped below 80 percent in 2011. This is the lowest level on record, with data going back to 1967, or nearly a half-century ago. The figure is far below the average utilization rate of 89 percent over this period.  (See figure below.)

The exceptional degree to which there is unused capacity in the electric utility industry (or the “electric power generation, transmission, and distribution” sector as defined by Federal Reserve Board data) is entirely at odds with the notion that new regulations finalized or proposed by the Environmental Protection Agency are holding back job growth. To the contrary, this trend is consistent with the theory that such regulations can lead to modest increases in employment, since the compliance costs they lead to would not compete with other investments by this sector.

If regulation was holding back investment in the utility sector, one would expect there to be high capacity utilization rates. Companies would be relying heavily on existing capacity rather than investing in new capacity because they would be deploying investments on regulatory compliance, or because they were fearful new regulations would undercut their return on new investments.

While the existence of large, unused capacity is thus inconsistent with the notion that regulations are thwarting job creation in the electric utility industry, it is completely consistent with the notion that the lack of stronger demand is holding back increased investments in facilities or more hiring. Why make such investments when current resources are far from being fully utilized? The data suggest that until demand picks up more rapidly and cuts into excess supply, accelerated investments will not occur.

The broad attacks on regulation advanced over the past year have consistently featured the supposedly dire consequence of EPA regulations on the utility industry. The capacity utilization data for all of 2011 provide additional evidence that these attacks have been misplaced. Instead, the data are consistent with earlier EPI work finding that lack of demand, not regulations or regulatory uncertainty, underlie the modest pace of job growth and that now might be an especially timely moment to advance new regulations.

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A minimum-wage increase in Illinois: Helping working families in the Land of Lincoln

The Illinois state legislature begins its next session this week and will likely debate a bill that will raise the state minimum wage from $8.25 to $10.65 over four years—providing a substantial boost to the state’s lowest-paid workers and the economy. The measure will mirror a similar proposal from last year, S.B. 1565, which would have raised the minimum wage in four steps and, after reaching $10.65, would have tied future increases to inflation. That measure would give 1.1 million low-wage workers a raise, providing more than $3.8 billion in increased wages for directly affected workers.

During the last 30 years, the real value of the Illinois minimum wage has eroded and working families’ incomes have essentially stagnated, reflecting the rest of the nation’s growing wage inequality. Restoring Illinois’ minimum wage to its pre-erosion level would help to return it to its original intent as a policy that sets wage standards for low-wage workers at a level that is high enough to be meaningful. Restoring the value of the minimum wage through incremental annual increases will ensure that it never again strays from its original purpose as a basic protection of fair wages.

We know that a minimum-wage increase will boost the earnings of working families in Illinois—an added bonus is that it’s a tool for economic growth. It spurs spending by the workers who get the raise, thereby increasing economic activity and, in turn, creating jobs. It’s time that the American worker starts to share in the prosperity that corporate America has enjoyed—thanks to the growing productivity of workers—since the 1970s. A minimum-wage increase in Illinois would mean a shift from corporate profits to the America worker and would start to reverse the trend of increasing inequality evident since 1973. While corporate America enjoyed more than 200 percent growth in profits from 1973 to 2006, the real value of the Illinois minimum wage in 2010 was only 14 percent higher than it was in 1973. During the same period, American workers’ productivity increased almost 100 percent. The graph below shows this overwhelming disconnect:

Keeping the real value of the Illinois minimum wage at a level that allows low-wage workers to afford basic necessities is  a policy that Illinois families cannot afford to lose—most minimum-wage workers are at least 20 years old and have total family incomes of less than $45,000. The consumer spending of workers affected by this increase will create a direct stimulus effect, pumping more than $2 billion into the economy and creating 20,000 jobs.

Amid persistently high unemployment (9.8 percent in Illinois), a resulting lack of wage growth, and a severe jobs deficit in Illinois, there will be no upward pressure on wages for a very long time. Since raising the minimum wage helps working families, does not cause job loss, and is a boost to the economy, now is exactly the time to increase the minimum wage.

Austerity’s effect on state job growth

David Leonhardt of the New York Times has a chart on the Economix blog today that shows how austerity measures at the federal, state, and local levels have held back growth in the U.S. economy over the past year and a half. As the blue line from his chart indicates, despite gains in the private sector, public sector growth was negative every quarter since Q3 2010.

What does this look like in terms of jobs? As you can guess, it isn’t pretty. In a blog post last September, I noted that government job losses are at the heart of overall job losses in numerous states since the recession officially ended in June 2009. Just to coincide with the timeframe I’ve noted from Leonhardt’s chart, the table below shows the change in government employment, total job losses for industries that lost jobs, and government losses as a percentage of total losses by state since Aug. 2010. The Dec. 2011 state unemployment rates and net change in employment figures are shown as well.

The numbers are pretty explicit: For the United States as a whole, every major industry except for government has gained jobs since Aug. 2010. Federal, state, and local governments have lost 440,000 jobs over that timeframe, accounting for 100 percent of losses for industries that lost jobs. Just to clarify, this does not mean that only government workers lost their jobs, but for every non-government worker in the country that lost a job over the past four months, at least one more job was created someplace else in that industry.

At the state level, government accounted for more than half of all job losses for industries that lost jobs since Aug. 2010 in 27 states, and made up 100 percent of losses for industries that lost jobs in Arizona, Idaho, Massachusetts, North Dakota, Oregon, Pennsylvania, and Texas. Government losses also made up more than 50 percent of losses in seven of the 10 states with the largest number of jobs lost, and six of the 10 states with unemployment rates above 9.5 percent.

Of course, the private sector will absorb some of these losses and thankfully we have seen a positive net change in employment for most of these states since Aug. 2010.  But make no mistake, the idea that drastic cuts to public budgets would somehow spur private-sector growth is a myth that has undermined recovery efforts both in the United States and in Europe. In reality, cuts to public-sector budgets have a significant negative private-sector impact. As my colleague Ethan Pollack has demonstrated, “for every dollar of budget cuts, over half the jobs and economic activity will be lost in the private sector.” Net change in employment since Aug. 2010 may be positive for most states, but it’s frustrating to think how much better these job numbers might be if we hadn’t spent the past 16 months shooting ourselves in the foot.

Research assistance by Natalie Sabadish

Massive tax cuts don’t square with professed concerns about public debt

The Washington Post editorial board astutely notes that the budget busting tax plans of the GOP presidential candidates contradict purported concerns about the budget deficit and national debt. Relative to the inadequate revenue levels collected by current tax policies, the tax plans would lose between $180 billion and $900 billion in 2015 alone—or between 1.0 percent and 4.9 percent of GDP. Former Massachusetts Gov. Mitt Romney’s tax plan and former Pennsylvania Sen. Rick Santorum’s tax plans, respectively, represent the low and high end of this range, but former Speaker of the House Newt Gingrich gives Santorum a run for his money with a tax plan that would lose $850 billion, or 4.6 percent of GDP, in 2015.

Under an extension of current policies, the budget deficit is projected to average around 4.3 percent of GDP over the next decade, which is unsustainable in the sense that debt as a share of the economy will continue to rise instead of stabilizing in the second half of the decade. Despite all the fear mongering rhetoric about Washington’s fiscal malfeasance heard from the GOP campaign trail, some of the candidates’ tax plans would more than double the budget deficit over the next decade.

The Post’s editorial board notes that the revenue loss estimates (calculated by the Tax Policy Center) are static scores, meaning that they don’t include growth effects (i.e., dynamic scores). Yet the growth legacy of the last round of deficit-financed, regressive tax cuts—the kind supply-siders love and the kind being floated on the campaign trail—proved a massive flop. This new round of massive tax cuts would either be deficit financed—trading public (di)savings for private savings—and/or financed with deep cuts to public investments and economic security programs, which would drag on growth (among other adverse economic outcomes). Mr. Santorum’s proposed balanced budget amendment, for instance, would force unfeasibly draconian spending cuts across the entire federal budget. His tax plan wouldn’t raise anywhere close to 18 percent of GDP, where he has proposed capping federal spending—current tax policies will raise only 17.6 percent of GDP over the next decade.

The distributional implications of these tax plans are just as concerning as their revenue impact and are amplified by their budgetary impact, which will force spending cuts that don’t show up in TPC’s distributional table. As the Post notes: “It makes no sense to further benefit the wealthiest taxpayers at a time when spending programs for the most vulnerable would be on the chopping block — of necessity, given the candidates’ pledges to cap spending. In their fiscal consequences these cuts would be disastrous; as a matter of fairness, even more so.”

Massive tax cuts don’t square with fiscal responsibility, as aptly demonstrated during the George W. Bush administration. Massive tax cuts targeted toward upper-income households will, however, exacerbate income inequality and undercut the middle class by defunding public investments and economic security programs. But the fiscal debate is not about the budget deficit, the public debt, or the middle class: It is about federal revenue and spending levels as a share of the economy, as epitomized by Grover Norquists’ Taxpayer Protection Pledge. Until conservatives reenter the realm of reality and acknowledge that revenue levels must go up, not down, fiscal responsibility and a sustainable trajectory for debt will remain unattainable.