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.

Maybe Reagan was onto something…

Paul Krugman makes some good points about “post-modern” recessions (i.e., the last three, starting in 1990, 2001, and 2007, and which have all been followed by agonizingly slow recoveries) and then ends by asking, “And what about Reagan? Reagan who?” in making the point that very fast recovery following the 1981 recession was largely driven by monetary policy decisions.

This is mostly right, but, let’s look at the behavior of government spending following the last four recessions (i.e., the 1981 recession as well as the three “post-moderns”). The graph below measures real government spending relative to the previous business cycle peak.

So, 16 quarters after the start of the 1981 recession government spending was up nearly 19 percent relative to the pre-recession peak, while 16 quarters after the Great Recession of 2007, it’s up less than 1 percent. Let’s do some quick math. If we mimicked government spending growth from the 1981 recovery, government spending today would be about 18 percent higher than it was in the last quarter before the recession began – adding about $440 billion (in $2005) to overall GDP. This would lead to a roughly 3 percent boost to GDP and more than 3 million extra jobs not including any multiplier effects. Put a run-of-the-mill 1.4 multiplier on this and you have well over 4 million extra jobs – or roughly 40 percent of the entire “jobs gap” caused by the Great Recession that would now be filled.

Yeah, this is one thing about the 1981 recovery I’d like to replicate.

The Fed’s longer-run goals: Defining success down?

Yesterday, the Federal Reserve released a statement regarding its “longer-run goals and monetary policy strategy.” What seemed to the biggest news for most covering the release was the Fed’s identification of an explicit inflation target: 2 percent annualized growth in the personal consumption expenditures’ price index (oddly, they don’t specify just the “core” price index that removes more volatile items – not sure why).

This is pretty big news – and pretty bad news. While they leave themselves plenty of wiggle room to go above this target during particular circumstances, the economy could benefit greatly from an inflation target substantially above this 2 percent for the next several years, and it’s hard to see how yesterday’s statement makes this much easier. One could argue that by establishing a “long-run target” of 2 percent, the Fed could then justify shorter-term inflation targets above this level to make up for particularly disinflationary periods (like, say, the past four years), but again, the statement was pretty explicit about the 2 percent long-run target and not explicit at all about going above this in the near-term.

Bigger news, perhaps, was the statement’s identification of the “longer-run normal rate of unemployment” as being between 5.2 and 6 percent. This was always going to be the danger of a deep, drawn-out recession – policymakers will be tempted to declare “mission accomplished” well before unemployment has reached pre-recession levels (5 percent in Dec. 2007, 4.6 percent for the annual average of 2007), let alone before reaching levels that actually sparked widespread (and non-inflationary) wage-growth (the 4.1 percent average for 1999 and 2000, for example).

This is an old story – policymakers, particularly at the Fed, have for much of the past 30 years preemptively moved against higher rates of inflation by slowing the economy as unemployment has reached predetermined “longer-run normal” rates (the exact jargon and acronym for this magical rate that the economy allegedly cannot go below without sparking runaway inflation varies). Through much of the 1980s and early 1990s, economists more concerned with lower rates of unemployment than battling incipient inflation (sometimes called “inflation doves,” though I prefer “unemployment hawks”) argued that the Fed should at least test the limits of lower unemployment before short-circuiting recovery. And the late 1990s expansion proved them right – unemployment fell far below the contemporaneous estimates of the “longer-run normal rate” and yet inflation failed to accelerate.

Failing to heed this lesson and declaring that the best possible outcome that can be reached is an unemployment rate up to 1.5 percent higher (translating to three million extra unemployed workers) than what prevailed in the year before the Great Recession hit will just constitute one more severe casualty of this episode.

Discriminatory mortgage lending intensifies racial segregation

On December 21, Bank of America settled a Justice Department complaint alleging racial discrimination in mortgage lending by its Countrywide subsidiary. But underlying issues are far from resolved. Longstanding federal inaction in the face of widespread discriminatory mortgage lending practices helped create, and since has perpetuated, racially segregated, impoverished neighborhoods. This history of “law-sanctioned” racial segregation has had many damaging effects, including poor educational outcomes for minority children.

Bank of America’s Countrywide subsidiary was not alone in charging higher rates and fees on mortgages to minorities than to whites with similar characteristics, or in shifting minorities into subprime mortgages with terms so onerous that foreclosure and loss of homeownership were widespread. Racially discriminatory practices in mortgage lending (known as “reverse redlining”) were so systematic that top bank officials as well as federal and state regulators knew, or should have known, of their existence and taken remedial action.

Such complicity in racial discrimination by federal and state banking and thrift regulators is nothing new; in the past, they were complicit in “redlining”—the blanket denial of mortgages to minority homebuyers.

In the cases both of redlining and reverse redlining, regulatory failure has been destructive to the goal of a racially integrated society. Redlining contributed to racial segregation by keeping African Americans out of predominantly white neighborhoods; reverse redlining has probably had a similar result. Exploitative mortgage lending has led to an epidemic of foreclosures among African American and Hispanic homeowners, exacerbating racial segregation as displaced families relocate to more racially isolated neighborhoods or suffer homelessness.

The legal settlement requires Bank of America to spend $335 million to compensate victims of Countrywide’s discriminatory lending practices. This sum, while the largest fund to date for compensation of victims of discriminatory subprime lending, is still insufficient to restore their access to homeownership markets and to middle-class neighborhoods. In consequence, it will also do little to address the comparatively poor educational outcomes of children who are now more likely to grow up in racially segregated communities, nor the damage to learning that results when schooling has been disrupted by an unstable housing situation.

MORE: A comment on Bank of America/Countrywide’s discriminatory mortgage lending and its implications for racial segregation

SNAPSHOT: Good credit didn’t protect Latino and black borrowers

State of the Union: Manufacturing a Better Future

In his State of the Union Speech last night, President Obama outlined a blueprint for rebuilding the economy the right way, by rebuilding American manufacturing, expanding clean energy investments and by fixing our broken infrastructure. Kudos to him for continuing to highlight this important issue, but he failed to mention the main cause of our manufacturing woes in the first place: currency manipulation.

First, some background. China currently engages in massive intervention in currency markets, buying U.S. dollar-denominated assets to boost the value of the dollar and keep their own currency artificially cheap. This acts as a subsidy to U.S. imports from China, and it raises the cost of U.S. exports — both to China and to every country where U.S. exports compete with goods coming from there. Of the nearly 6 million manufacturing jobs we lost between Jan. 2000 and Dec. 2009, 2.8 million jobs were displaced by growing trade deficits with China between 2001 and 2010.

Manufacturing employment is growing again, with 322,000 jobs added in the past two years. But millions of jobs have been left on the table. By ending currency manipulation with China and other Asian countries, we could create up to 2.25 million jobs over the next 18 to 24 months, boost GDP by up to $285.7 billion, and reduce the federal budget deficit by up to $857 billion over the next 10 years.

The president proposed some well-intended changes in tax policy designed to reduce incentives for manufacturing firms to outsource production abroad and to encourage them to bring jobs home. But tax policies only work around the margins of manufacturing employment. We need to go after root causes of manufacturing job loss such as currency manipulation by China and other Asian nations.

The Senate passed a bill last fall that would allow the Commerce department to penalize imports from China that have benefited from illegal currency manipulation. But House leaders will not allow the measure to come to a vote.  The Obama administration has failed to do its part as well. Six times they have refused to identify China as a currency manipulator, denying the elephant in the room.

There are certainly other unfair trade practices beyond currency manipulation worth fighting.  China provides illegal subsidies to domestic and foreign firms in a wide range of industries including steel, glass and paper. It also subsidizes clean and green technology industries, and maintains extensive barriers to imports of manufactured goods from the United States and other countries. The president announced important steps to create a new trade enforcement unit to bring together resources from across the government to attack unfair trade practices. This will allow the government to initiate new unfair trade cases against China and other unfair traders.

But with a gridlocked Congress held hostage by the Republican controlled House that has refused to compromise with the Senate or the administration, President Obama’s hands are tied on new initiatives that require congressional approval. Certainly, there is more that he could do to fight unfair trade, for example by confronting China over currency manipulation. But the administrative measures outlined in his SOTU address will begin to make a difference.

Mitch Daniels, deficit peacock

In issuing the Republican rebuttal to the State of the Union address, Indiana Gov. Mitch Daniels had the audacity to present himself as a fiscal conservative and lecture President Obama on economic policy. Daniels presenting himself as a fiscal conservative is farcical: The tax cuts he pushed through for President George W. Bush as director of the Office of Management and Budget (OMB) are responsible for roughly half of today’s structural budget deficit and half the public debt accumulated last decade. And as expensive as they were, those tax cuts failed to spur even mediocre job growth; Daniels and Bush presided over the weakest economic expansion since World War II, leaving Daniels with a dismal legacy as an economic policymaker.

Daniels ran OMB from Jan. 2001 to June 2003; during his tenure, he helped craft the 2001 and 2003 Bush tax cuts. (Later tax acts accelerated implementation of some of these tax cuts, but this is when the real fiscal malfeasance occurred.) When Daniels took charge of OMB, the Congressional Budget Office (CBO) was projecting a $5.0 trillion (4.0 percent of GDP) budget surplus over the next decade. When he left office, CBO was projecting a $1.4 trillion (-1.0 percent of GDP) budget deficit over the next decade. Roughly $4.8 trillion of the fiscal deterioration resulted from legislation enacted over 2001-2003; the tax cuts alone added $2.6 trillion to the public debt over 2001-2010. (The other major drivers of this fiscal deterioration were the wars in Afghanistan and Iraq, which Daniels didn’t bother to pay for or even put on budget.) The 2001 recession certainly contributed to the emerging deficits—just as half of this year’s deficit can be chalked up to economic weakness—but the Bush administration’s economic policies ensured a mediocre economic recovery.

From Flickr Creative Commons by republicanconference

Though this supply-side snake oil was peddled as economic stimulus, the Bush-era tax cuts failed every test of good stimulus: They were gradually phased-in, they were targeted to upper-income households likely to save rather than spend, and they were intended to be permanent. Better economic policy could have alleviated the ensuing ‘jobless recovery.’

These tax cuts were the dominant economic policy during the worst economic expansion since World War II, measured by economic growth, employment, or compensation (trough-to-peak from 4Q2001 through 4Q2007). Real GDP growth averaged only 2.7 percent annually, the slowest of all the post-war expansions (averaging 4.8 percent economic growth annually). The economy only gained 97,000 jobs a month on average—not even enough to keep pace with population growth. (By contrast, job growth averaged 237,000 per month under President Clinton, when we had higher tax rates.) Real total employee compensation grew only 2.3 percent annually, contrasted with average annual compensation growth of 5.0 percent growth in post-war expansions.

Instead, the Bush tax cuts exacerbated inequality with a huge giveaway to those who didn’t need it: The top 1 percent of earners received 38 percent of the Bush tax cuts even though these households captured 65 percent of income gains during this expansion, leaving just scraps for the middle class. The Bush-era tax cuts can only be characterized as a costly economic policy failure.

Michael Linden of the Center for American Progress coined the phrase “deficit peacock” for self-purported deficit hawks interested in attention but uninterested in fiscal responsibility. Paraphrasing Linden’s birding guide, these deficit peacocks: 1) Never mention revenues; 2) Offer easy answers; 3) Support policies that make the long-term deficit problem worse; and 4) Think our budget woes appeared suddenly in January 2009. This summarizes Daniels to a tee. For him to lecture President Obama on fiscal responsibility is shameful.

Obama’s State of the Union speech sends the right signals

President Obama’s State of the Union address builds on his speech in Osawatomie, Kan. in December and that is a very good thing. That speech identified “whether this will be a country where working people can earn enough to raise a family, build a modest savings, own a home, and secure their retirement” as the key issue and argued against “you’re-on-your-own economics,” the economic perspective that says everyone should fend for themselves. We have increasingly followed such a vision over the last few decades and the results are clear, “fewer and fewer of the folks who contributed to the success of our economy actually benefitted from that success. Those at the very top grew wealthier from their incomes and investments than ever before.”

In contrast, the SOTU speech said, “We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by. Or we can restore an economy where everyone gets a fair shot, everyone does their fair share, and everyone plays by the same set of rules.”

Obama pointed the way with a “blueprint for an economy that’s built to last – an economy built on American manufacturing, American energy, skills for American workers, and a renewal of American values.”

This is a much more encouraging policy vision than that offered by any of the president’s possible political opponents in the upcoming election; their policies are various versions of cutting taxes, especially on incomes obtained from wealth, redistributing the tax burden onto middle-class and low-income families and generating large permanent deficits. This is doubling down on the failed policies of the past.

Of course, whether Obama’s plan can lead to the desired results will depend on a political configuration that allows such policies to be legislated. It also depends on having a budget policy that actually delivers on the expanded public investments in innovation, education, infrastructure and manufacturing that are central to this strategy. That requires reversing the current course of budgets which imply major retrenchment of public investments over the next 10 years. The president’s establishment of the Buffett rule can help in this regard, especially since the SOTU clarified it as, “If you make more than $1 million a year, you should not pay less than 30 percent in taxes.” It would be stronger and more effective if we just taxed earned and unearned income at the same rate.

Last, as the president has noted at other moments, the typical working family has not benefited from productivity gains and economic growth over the last three decades. His pillars of growth (clean energy, infrastructure, innovation, education and skills) will strengthen productivity growth but do not directly address the need to reconnect pay and productivity growth. That requires low unemployment, a much higher minimum wage, better and actually enforced labor standards, and establishing in practice the ability of workers to conduct collective bargaining. It requires a trade policy (and exchange rate policies) that does not undercut our manufacturing sector. It requires the administration to stop its silly mantra of doubling exports and ignoring imports since the reality is that it is the ‘net’ of these two that affects growth and jobs. It requires building an economy where the financial sector is not dominant. And, that will require policies opposed by wealthy interests, a difficult trick in the age of Citizens United. That means we will need to weaken the impact of money in our democracy. There’s nothing easy about this path, but there is no alternative if we truly seek a democracy and an economy that work for everyone.

Apple execs (like everyone else) overlook global exchange rates

Charles Duhigg and Keith Bradsher have a justly buzzed-about article in the New York Times this week on how the production of the iPhone (and Apple products more generally) has become almost completely globalized. A quick but important addition to their story, though, is the role of exchange rates. Yes, I’m getting boring on this topic, but, exchange rates are by far the single most important determinant of U.S. trade performance, so if the question is “why isn’t X made in the US anymore,” it’s very likely that the answer remains “the dollar is overvalued.”

And, strikingly, even the Apple-specific timeline fits the data regarding the biggest exchange rate development – China’s mammoth intervention in international currency markets to keep their own currency from rising vis-à-vis the dollar. This is how Duhigg and Bradsher write it up:

“In its early days, Apple usually didn’t look beyond its own backyard for manufacturing solutions. A few years after Apple began building the Macintosh in 1983, for instance, Mr. Jobs bragged that it was “a machine that is made in America.” In 1990, while Mr. Jobs was running NeXT, which was eventually bought by Apple, the executive told a reporter that “I’m as proud of the factory as I am of the computer.” As late as 2002, top Apple executives occasionally drove two hours northeast of their headquarters to visit the company’s iMac plant in Elk Grove, Calif. But by 2004, Apple had largely turned to foreign manufacturing….”

So, after 2002 Apple more and more turns to China for manufacturing? Huh. Not surprising – the graph below shows that the pace of Chinese accumulation of U.S. reserves (which leads inexorably to rising pressure on the dollar’s value, keeping Chinese products more competitive in U.S. and global markets) coincides with an accelerating increase in the U.S./China trade deficit around this time as well.

There is, after all, a reason why economists harp on the importance of the exchange rate – it drives lots and lots of hugely important economic decisions. As China intervenes to keep the value of its currency from rising against the dollar, this gives them an ever-increasing cost advantage versus the United States. The result is lots and lots of individual firm-level decisions (like Apple’s) to produce in China rather than the United States (because the exchange rate makes it cheaper) and the sum of these individual decisions cumulate to a huge aggregate trade deficit. The macro downsides of this trade deficit have been documented plenty of places, but if you’re writing about any feature of the US/China economic relationship and not mentioning this currency issue, you’re essentially writing Hamlet without the prince.

It’s frankly kind of amazing that Apple executives quoted in the article tell stories about how their global sourcing shifts are really about American skills, while managing to not mention global exchange rates. After all, there is an obvious trend in exchange rates and currency intervention that hamstring American competitiveness vis-à-vis China in the early-to-mid 2000s – but it’s awfully hard to make the case that American workers just got a lot dumber at the same time. But maybe blaming American workers can get some government subsidies for Apple to hire and train people in the U.S., while pointing out the effect of exchange rates might just lead to calls to rebalance the status quo U.S./China trade relationship – a status quo that has served Apple (and many other global manufacturers) very well.

A firewall has risen

It’s a pretty cool name for an otherwise drab concept. Yet, firewalls should matter to anyone who cares about government’s ability to promote economic growth, broadly shared prosperity, and social justice. Let’s start from the beginning, with the entire budget at $3.5 trillion (budget authority in 2011). Set aside mandatory programs—such as Social Security, Medicare, Medicaid, unemployment insurance, and other social safety net programs—and interest payments. All told, that’s about $2.1 trillion of the budget, or two-thirds of the total. The remaining third of the budget is discretionary spending, about 58 percent of which is defense and war spending. The rest (the green slice) is everything else: homeland security, veterans benefits, roads and bridges, education, energy , health, and environmental research, consumer protection, law and order, community development… it’s all in there. This portion of the budget, which comprises a paltry 14 percent of the total, is referred to with the exciting name “non-defense discretionary.”

Because discretionary spending is appropriated each year, Congress can only cut it for the current or upcoming budget year. Instead, it can cap discretionary spending, as it did last August when it passed the Budget Control Act (BCA). These caps act as procedural obstacles to appropriating more than a specified amount in future years (also known as “out-years”). BCA institutes caps on the out-years, but only a single discretionary cap (excluding war spending). This worried progressives because it could allow conservatives in Congress to increase spending on the Department of Defense and pay for the increase with even further reductions in non-defense. In other words, it would provide conservatives with a double-win: They get to spend more on the Department of Defense even as the rest of the government faces cuts, and they get to use those defense increases to their advantage, to force even larger cuts to the non-defense budget than would otherwise be required if the entire discretionary budget were cut proportionately. This is where firewalls come in. Earlier this month, the Office of Management and Budget and the Congressional Budget Office each released an update on what happens next now that the Super Committee has failed. Most people have been focused on the sequestration provisions, which don’t take effect until 2013 (and will be heavily impacted by the election outcome). But, quietly, something else happened: As per the BCA law, automatic firewalls between defense and non-defense are now the law of the land. We should always be worried that conservatives will play the defense budget against the non-defense budget, but the new caps, which put separate limits on defense and non-defense, will make that eminently more difficult. And without further ado, here are your new budget caps!

And a little historical context…

Obviously, this isn’t exactly shared sacrifice. Non-defense discretionary, at 3.2 percent of GDP, is already below the 35-year average of 3.9 percent. Yet these caps cut this portion of the budget by almost $100 billion more than the defense budget, bringing it down to 2.5 percent of GDP, the lowest level in more than 35 years (as far as the budget authority data extends).

‘Reformers’ playbook on failing schools fails a fact check

Education “reformers” have a common playbook. First, assert without evidence that regular public schools are “failing” and that large numbers of regular (unionized) public school teachers are incompetent. Provide no documentation for this claim other than that the test score gap between minority and white children remains large. Then propose so-called reforms to address the unproven problem – charter schools to escape teacher unionization and the mechanistic use of student scores on low-quality and corrupted tests to identify teachers who should be fired.

The mantra has been endlessly repeated by Secretary of Education Arne Duncan, and by “reform” leaders like former Washington and New York schools chancellors Michelle Rhee and Joel Klein. Bill Gates’ foundation gives generous grants to school systems and private education advocates who adopt the analysis. In Chicago, Mayor Rahm Emmanuel makes the argument, and in New York, Mayor Michael Bloomberg has frequently sung the same tune.

And now, New York Gov. Andrew Cuomo has joined in. On Dr. Martin Luther King Jr.’s birthday last week, the governor cast attacks on unionized teachers as a defense of minority students against the adult bureaucracy. “It’s about the children,” Mr. Cuomo said. Because of failing public schools, “the great equalizer that was supposed to be the public education system can now be the great discriminator.”

But this applause line about school failure is an “urban myth.” The governor, mayor and other policymakers have neglected to check facts they assume to be true. As a result, they may be obsessed with the wrong challenges, while exacerbating real, but overlooked problems.

Careful examination discloses that disadvantaged students have made spectacular progress in the last generation, in regular public schools, with ordinary teachers. Not only have regular public schools not been “the great discriminator” – they continue to make remarkable gains for minority children at a time when our increasingly unequal social and economic systems seem determined to abandon them.

We have only one accurate performance measure. The government administers periodic reading and math tests to samples of fourth, eighth and 12th graders. Called the National Assessment of Educational Progress (NAEP, pronounced “nape”), it is less subject to corruption than standardized tests now legally required of all schoolchildren.

NAEP samples are only large enough to produce reliable national and (for fourth and eighth graders) state estimates, but not for classrooms or schools. Thus, principals or teachers suffer no consequences for poor NAEP scores, giving them no incentive to steal time from instruction to drill on NAEP-type questions.

Not every selected student gets identical NAEP questions. Scores aggregate answers from different students’ booklets, covering different topics from the math and reading curriculums. In contrast, state and city standardized tests change little each year; teachers can predict which of many topics will likely appear, and focus instruction on those.

Here’s what NAEP shows: Average black fourth graders’ math performance in regular public schools has improved so much that it now exceeds average white performance as recently as 1992. The improvement has been greatest for the lowest achievers, those in the bottom 10 percent. Eighth graders show similar, though less dramatic trends. The black-white gap has narrowed little because whites have also improved.

These irrefutable facts characterize both the nation as a whole, and New York State specifically. In fact, New York State’s black children made enormous gains in the 1990s, and much slower gains once the federal No Child Left Behind, and Mayor Bloomberg’s and Chancellor Klein’s test-based reforms kicked in. From 1992 to 2003, for example, black fourth graders’ math performance jumped 22 scale points (about two-thirds of a standard deviation). From 2003 to 2011, the gain was only 5 scale points.

There is something perverse about using Dr. King’s  birthday as the occasion for an accusation that schools have been the “great discriminators” when those schools have been boosting the achievement of African Americans at a far more rapid rate than they’ve been able to boost the achievement of whites.

Overall, the national and New York State data are hard to reconcile with a story that schools are filled with teachers having low expectations, poor training, and complacency arising from excessive job security, and the way to fix public schools is more accountability for student test scores. (more…)


You can’t measure tax progressivity while ignoring income trends

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Gingrich nonsense

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

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

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

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

From Flickr Creative Commons by Gage Skidmore

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

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

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

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

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

Krueger links progressive taxation, income inequality, and economic mobility

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

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

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

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

Income inequality is a policy choice

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

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

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

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

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

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

Asking the wrong question about presidents and jobs

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

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

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

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

From Flickr Creative Commons by Secretary of Defense

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

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

Trade and jobs – why make it so hard?

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

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

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

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

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

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

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

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

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

False signals on the need for college graduates

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

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

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

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

Table 1: Employment growth by education, ages 25+

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

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

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

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


Quarter 4


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

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

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

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

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

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

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

Shouldn’t everyone be listening to Nouriel Roubini?

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

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

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

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

From Flickr Creative Commons by presidential office

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

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

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

Capping federal spending at 18% of GDP is still infeasible

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

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

From Flickr Creative Commons by Gage Skidmore

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

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

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

Consumers need a strong Financial Protection Bureau

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

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

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

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

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

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

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

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

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

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

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

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

Romney’s tax plan for the 1%

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

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

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

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

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

Mobility remains low as inequality increases

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

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

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

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

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

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

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

Unpaid internships hurt mobility

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

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

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

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

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

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

A happy (economic) 2012 is far from guaranteed

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

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

As Yglesias puts it:

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

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

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

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

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

Happy Holidays from EPI

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

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