Addressing price parity concerns

The Atlantic‘s Derek Thompson had a nice write-up on the Future of Work paper that EPI released April 27. In his article, Thompson included a bar chart illustrating “where poverty lives,” showing the 10 states with the highest share of workers making less than poverty-level wages, as defined in the paper. Thompson’s chart also included the share of workers in these states making between 100-200 percent of poverty wages. His bar chart clearly demonstrated that in these states, between 70-80 percent of workers earned less than twice the official poverty threshold for a family of four in 2010, or around $46,000 annually. (As a side note on poverty measures, my colleague David Cooper did a nice blog post explaining how a more dynamic method of assessing poverty—the Census Bureau’s Research Supplemental Poverty Measure—both defines millions more Americans as being impoverished and shows a far greater proportion of people living at very modest means, when compared with the official measure.)

A few commenters on Thompson’s piece brought up a good point in regards to comparing wages by geographic location (in this case by state). Some were quick to point out that the 10 states with the highest shares of workers earning at or below poverty level wages were “red states,” while others pointed out that the analysis did not take into account purchasing power parity—that is, the fact that the purchasing power of a dollar may be different in Manhattan than it is in rural Kansas. Their point was simply that a worker earning $10 per hour in Kansas may actually fare better than someone earning far more who has to pay rent and buy goods and services in a traditionally pricey market such as New York City, San Francisco, or Washington, D.C.

The table below adjusts for this by inflating the poverty wage used in the paper—$10.73 per hour in 2010—by a regional price parity index calculated by the Bureau of Economic Analysis (I actually averaged their measures for 2005 and 2006 that come from a BEA Research Spotlight titled Regional Price Parities: Comparing Price Level Differences Across Geographic Areas). The table shows the adjusted poverty wage level by state and the share of people in each state earning at or below that level. While Hawaii is somewhat of an anomaly due to its geographical separation from the lower 48 states by 2,500 miles of ocean, the next three states with the highest shares of workers earning less than the adjusted poverty wage are New York, California, and New Jersey; all states that contain very large metropolitan areas (as well as more rural areas). An even more accurate breakdown of regional purchase parity would show differences between rural and urban areas, as well as safety net services available for low-wage workers by region, but that is beyond the scope of this blog post.

Table 1

Adjusted share of workers earning poverty wages by state, 2010

State 0-100% poverty wages Adjusted poverty wage
Hawaii 40.6% $14.04
New York 38.4% $14.10
California 37.8% $13.75
New Jersey 31.8% $13.42
Rhode Island 31.6% $12.24
Nevada 27.7% $10.74
Connecticut 27.5% $13.20
Illinois 26.3% $10.81
Michigan 26.3% $10.04
Massachusetts 26.2% $12.99
New Hampshire 26.2% $12.21
Florida 25.2% $10.59
Oregon 25.0% $10.29
Arizona 24.5% $10.22
Texas 24.5% $9.81
Virginia 23.8% $10.96
Delaware 22.5% $11.44
Vermont 22.2% $10.80
Maryland 21.7% $11.38
Pennsylvania 21.4% $10.06
Washington 21.2% $11.08
Tennessee 20.6% $9.00
Colorado 20.6% $10.46
Alaska 19.8% $11.24
Ohio 19.5% $9.42
Indiana 19.0% $9.16
Minnesota 18.8% $10.20
Georgia 18.3% $9.48
North Carolina 18.2% $9.41
Louisiana 18.2% $8.76
Maine 18.0% $9.92
Utah 17.6% $9.37
Mississippi 17.5% $8.42
Wisconsin 17.4% $9.82
Kentucky 17.4% $8.69
Alabama 17.0% $8.50
Oklahoma 16.5% $8.67
Idaho 16.5% $8.87
New Mexico 16.4% $8.91
Nebraska 15.6% $9.39
Missouri 15.5% $8.79
South Carolina 15.3% $8.92
Kansas 14.8% $8.97
Wyoming 14.6% $9.31
Montana 14.4% $8.87
Arkansas 14.2% $8.34
Iowa 14.0% $8.95
District of Columbia 13.1% $10.61
South Dakota 12.4% $8.67
North Dakota 10.7% $8.28
West Virginia 6.9% $7.33

Source: Author's analysis of Current Population Survey Outgoing Rotation Group microdata, Bureau of Economic Analysis data
Note: Data were calculated using poverty data for a four-person household

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The bottom line in this state-by-state comparison is not whether the states that show a high share of low-wage workers are red or blue; it’s rather to illustrate the often-enormous shares of people earning very low wages. As this National Low Income Housing Coalition report points out, for full-time individuals earning what they call the “renter wage,” a two-bedroom unit is unaffordable in nearly every state. The report also has some really interesting data, broken down by state, metropolitan area, and county, that shows how many full-time minimum wage jobs a household would need to hold to afford at two-bedroom fair market rent (FMR) unit. The data shows that whether or not low-wage workers are living and working in New York County (3.8 full-time minimum wage jobs to afford a FMR two-bedroom) or Wichita, Kan. (1.7 full-time minimum wage jobs to afford a FMR two-bedroom), their wages are likely not sufficiently covering their expenses.

How Romney can show support for working women

From 2007 to 2011, 70 percent of the jobs lost in the state and local public sector were jobs held by women. This amounts to roughly 765,000 jobs. Since 2011, we have continued to see public-sector job losses, and, unfortunately, it is a good bet that the declines will continue.

The Obama administration has provided aid to state and local government in a variety of ways. For example, the American Recovery and Reinvestment Act (ARRA) injected more than $180 billion into state and local government. This aid has helped preserve significant numbers of jobs held by women. Women can be found in all types of public-sector jobs, but they are overrepresented in the public sector, in part, because they are more likely to be teachers. So far, $90 billion from ARRA has gone to education.

Out of a desire to appeal to women voters, Mitt Romney’s campaign has been making misleading statements about President Obama’s record. One way for Romney to show legitimate support for working women is to promise that, if elected, he will provide ample federal aid to state and local government. Unfortunately, Romney’s current commitment to shrink government means that he will put even more women out of work.

Underemployment isn’t a ‘myth’ for recent college grads

As readers of this blog are well aware, the labor market remains in terrible shape in the aftermath of the worst downturn since the Great Depression; this is evident in a wide array of economic data and is not disputed in the economics profession. Graduating into said labor market (in which the level of voluntary quits remains weak) with little to no work experience or wage history isn’t an enviable position, as my colleagues Heidi Shierholz, Natalie Sabadish, and Hilary Wething detail in their new paper The Class of 2012: Labor market for young graduates remains grim. Which is why I was flabbergasted by Abigail Johnson’s and Tammy NiCastro’s recent blog post Get Over It: The Truth About College Grad ‘Underemployment.’ Their title is plenty revealing, but here’s the gist of their argument:

“In recent weeks, there have been a slew of articles that reported how difficult things will be for this year’s college graduates because they can expect to be unemployed or “underemployed” … It’s not clear where the concept of being “underemployed” came from. But it’s damaging and counterproductive.”

The Bureau of Labor Statistics’ (BLS) U-6 Alternative Measure of Labor Underutilization—often referred to as the underemployment rate—is not a myth. It’s defined as such: “Unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force.” EPI’s State of Working America website even tracks it on a monthly basis across educational attainment, gender, and race and ethnicity. Here’s what it looks like by educational attainment:

Not a pretty picture. Since the onset of the recession more than four years ago, underemployment has roughly doubled across all educational attainment levels (a clear indicator that the economy suffers from a sheer lack of aggregate demand—the economy is running $853 billion below potential output—rather than “structural” employment problems). With so much excess slack in the labor market, employers have all the bargaining power, hence anemic wage growth and the “employed part time for economic reasons” (i.e., involuntarily) part of the underemployment rate. Horatio Alger can’t set his hours worked—there simply aren’t enough hours of work being demanded in the depressed economy.

And as Shierholz, Sabadish, and Wething detail, it looks much, much worse for recent high school and college graduates entering the labor market. Over the last year, the unemployment rate averaged 31.1 percent for recent high school graduates and 9.4 percent for recent college graduates. The underemployment rates averaged 54 percent and 19.1 percent, respectively. High unemployment and underemployment, and accompanying depressed earnings early in career, will result in long-term economic scarring, particularly diminishing lifetime earnings. Beyond underemployment as measured by the BLS, skills/education-based underemployment (so called “cyclical-downgrading”) will contribute to lifetime earnings scarring; as my colleagues note, “entering the labor market in a severe downturn can lead to reduced earnings, greater earnings instability, and more spells of unemployment over the next 10 to 15 years.”

In suggesting that college grads should be grateful to take a job at Starbucks because they aren’t “entitled” to anything more, the authors blithely overlook that recent college graduates working at Starbucks part-time for economic reasons are likely displacing hours from someone with lower educational attainment. This is in no way an indictment of any such recent graduates. This is to say what’s truly damaging and counterproductive is economically illiterate “thought pieces” breeding complacency about the state of the labor market and the policy response to the Great Recession. Neither a college degree nor government can guarantee recent grads “good jobs” or full-time employment, but between the Great Depression and the Great Recession, government prioritized stabilizing the economy and targeting full employment—to the benefit of workers of all educational attainment levels. Underemployment of recent graduates is not a myth being cooked up to breed entitlement as the authors imply; it’s a reality and tragic failure of policymakers to address the jobs crisis.

Video: Paul Krugman discusses his new book

Yesterday, Nobel-winning economist and New York Times columnist Paul Krugman spoke at EPI about his new book, End this Depression Now! A key point of the book and his speech is that there’s a common and very wrong belief that the economy is like a morality play: Lots of people made irresponsible decisions in the run-up to the economic collapse, and, like a hangover, they must now suffer the consequences of their actions.

As Krugman points out, the majority of the people who have been hurt by this crisis do not deserve the blame. Over eight million people lost their jobs and, with an unemployment rate of more than 8 percent for more than three years now, many of those same workers, along with new entrants to the labor market, have been unable to find jobs. Their jobs disappeared through no fault of their own, and the pace of their return is nowhere near sufficient to get everyone back to work anytime soon.

More importantly, Krugman points out that, unlike a hangover that needs to be waited out, we could easily fix the economy now and put these millions of people back to work. First, we should halt the fiscal austerity efforts that recently doomed the British economy. Second, we should embark on aggressive fiscal expansion to boost consumer and business spending, stimulating demand for goods and services and creating jobs. As Krugman notes, this is basic Econ 101. All we need is the political will.

What world of fiscal policy is Michael Gerson inhabiting?

Michael Gerson’s recent op-ed in the Washington Post hailed Rep. Paul Ryan (R-Wis) as the champion of “Reform Conservatism,” largely out of admiration for Ryan’s budget. In doing so, Gerson displayed a remarkable misunderstanding of both Ryan’s budget and fiscal policy at large. This adulation of Ryan—totally divorced from the policy specifics supposedly legitimizing Ryan—is exactly the inside-the-Beltway nonsense driving Jonathan Chait apoplectic (see his New York Magazine piece on Ryan).

Gerson’s major offenses are twofold, but he manages to hit both in the same sentence: “[The Ryan budget] deals seriously with the fiscal crisis — which, driven by demographics and cost increases, is a health entitlement crisis.”  Let’s take these one at a time.

First off, Ryan’s budget is not serious—it’s gimmicky above and beyond the point of credibility. The Ryan budget proposes $4.5 trillion in tax cuts financed with a giant asterisk that wouldn’t come close to raising that much revenue and then simply “assumes” its desired revenue level (and forces the Congressional Budget Office to do the same in their long-term analysis). Under more reasonable assumptions about feasible “base-broadening,” the Ryan budget would push public debt north of 74 percent of GDP by the end of the decade, and roughly 84 percent of GDP if the tax cuts were entirely deficit-financed. (Ryan claims to hit 62 percent—we’re not talking rounding errors.)

Secondly, our long-run fiscal challenges overwhelmingly stem from the dual problems of escalating national health care expenditure and an addiction to tax cuts. Demographic change and health care inflation will certainly drive up federal health expenditure, but these trends are a broader national economic challenge with ramifications for the federal budget, not vice versa. And demographic change can’t be reformed away—it compels more revenue, not less.

So how seriously does Ryan deal with these underlying economic challenges? Not at all: He offers an accounting solution for the federal government—turning Medicare into a voucher system and slashing Medicaid—that would exacerbate national health expenditure. Economists Dean Baker and David Rosnick estimated that Ryan’s FY2012 budget would increase national health expenditure by $30 trillion over 75 years if seniors purchased Medicare-equivalent plans on the private market; that’s because Medicare is 11 percent cheaper than an equivalent private plan and is projected to be 28 percent cheaper by 2022. (The more likely result is more health expenditure as well as worse coverage and care.) Forsaking the economies of scale and purchasing power of Medicare would shift costs from the federal balance sheet to businesses, households, and state governments, while worsening the economic challenges at hand. Incidentally, the Affordable Care Act took the opposite approach—using government’s market share to lower costs—and it’s showing early signs of working; as the New York Times reported last week, national health spending has slowed markedly over the last few years. While much more can be done on this front, the latter is a serious approach to an economic problem, unlike slashing health care for the impoverished and disabled as the Ryan budget proposes.

Furthermore, long anticipated demographic change is a reality that compels looking at both sides of the budget ledger and viewing historical benchmarks as poor guides for setting policy. Gerson even acknowledges that revenue must realistically rise above a post-war historical average of around 18 percent of GDP (versus 17.8 percent under current policy and 18.3 percent magically assumed in the Ryan budget, over the next decade); but he then turns a blind eye to the reality that, short of unspecified offsets, the Ryan budget would drop revenue to 15.5 percent of GDP over the next decade according to the Tax Policy Center. Deficit-financed tax cuts also increase spending on debt service, which—like Gerson argues of health care—threatens to crowd out other government functions (under current policies, net interest spending—swollen by deficit-financed tax cuts—will exceed nondefense discretionary spending by the end of the decade). Gutting health care spending to partially finance massive, regressive tax cuts in no way equates to “addressing the fiscal crisis,” as Gerson adamantly claims Ryan is doing.

Gerson wants to believe the Republican Party cares about deficits, but their diametrically opposed focus is reducing taxes—overwhelmingly for those at the top of the income distribution. Ryan’s budget would indeed deeply cut health care spending, but it is neither focused on deficits nor serious; it’s about doubling-down on the Bush-era tax cuts. And the only serious things about the Bush-era tax cuts were the hole they blew in the federal budget and their dismal economic legacy.

Racial inequality and the black homicide rate

I had the privilege of attending the W.K. Kellogg Foundation’s America Healing Conference last week. The America Healing initiative promotes racial healing to address racial inequity, and, in doing so, works “to ensure that all children in America have an equitable and promising future.”

At the conference, the honorable Mitchell J. Landrieu, the mayor of New Orleans, gave a moving, passionate, and brave speech about homicide in black communities. He challenged us to consider whether we devalued black lives by not paying sufficient attention to the more common forms of homicide in black communities, and instead reserved our activism for homicides that could be conceived of as involving racism.

Landrieu made an important point, but I think he also missed a number of other significant points. The black homicide victimization rate is six times the white rate, so this is clearly a worthy issue to address. But, it is important to note that the black homicide victimization rate was cut in half from 1991 to 1999. It declined 49 percent while the white rate declined 39 percent. Too often we assume that things are always getting worse. It is beneficial to acknowledge this dramatic positive change, while also acknowledging that there is much more to be done. Since the 1990s, however, the black and white homicide rates have basically been flat.

Landrieu failed to acknowledge that much of the work done by the participants of the conference, if successful, is likely to reduce homicide rates. Homicide rates are driven by a very complex mix of psychological and sociological factors that are not yet completely understood by criminologists. Probably the majority of the conference attendees work in areas that have the potential to reduce homicide rates.

Some of the participants work to improve educational outcomes for blacks. Research suggests that increases in the educational attainment, particularly of males, will reduce homicide rates. (Males are more likely to commit homicide, and it is likely that their social and economic circumstances may play a big role in homicide rates.)

Healthy children do better in school and also have lower rates of criminal offending. All aspects of health, especially in the early years, probably matter, but we should be especially concerned about the very high rates of black children’s exposure to lead. There are strong links of lead exposure to violent crime. Thus, the participants who are concerned with reducing racial disparities in children’s health can also be seen as working to reduce homicide rates.

Concentrated economic disadvantage, poverty, and unemployment have all been found to be predictors of homicide rates. Participants working to improve the economic conditions of black communities can also be said to be working to reduce homicide rates.

A number of other aspects of racial inequity that the attendees to the conference work on are also likely to be drivers of higher black homicide rates. Thus, it is not accurate to say that the participants of the conference were not regularly working to address homicide.

Finally, while the mechanisms to reduce homicide rates are not yet completely understood, the response to bad policing, bad laws, and racial-biased individuals is clearer. In part, it may be for this reason that there can be highly visible mobilizations around these issues. A relatively quick mobilization might change bad police practices, undo a bad law, or change the behavior of a specific racially-biased person. Undoing racial inequity in all of the factors found to drive homicide rates—health, education, economics, and more—will require a longer and deeper struggle. Read more

It’s executives and the finance sector causing surging 1% income growth!

That the incomes of the top 1 percent have fared fabulously is well known, and deservedly so. But it was not until the analysis of tax returns by Jon Bakija, Adam Cole, and Bradley Heim that it could be documented that the doubling of the income share of the top 1 percent could be directly traced to executive compensation and finance-sector compensation trends. The new EPI paper, CEO pay and the top 1%: How executive compensation and financial-sector pay have fueled income inequality, which previews some of the findings from the forthcoming State of Working America, does exactly that.

Between 1979 and 2005 (the latest data available with these breakdowns), the share of total income held by the top 1.0 percent more than doubled, from 9.7 percent to 21.0 percent, with most of the increase occurring since 1993. The top 0.1 percent led the way by more than tripling its income share, from 3.3 percent to 10.3 percent. This 7.0 percentage-point gain in income share for the top 0.1 percent accounted for more than 60 percent of the overall 11.2 percentage-point rise in the income share of the entire top 1.0 percent.

The increases in income at the top were largely driven by households headed by someone who was either an executive or in the financial sector as an executive or other worker. Households headed by a non-finance executive were associated with 44 percent of the growth of the top 0.1 percent’s income share and 36 percent in the growth among the top 1.0 percent. Those in the financial sector were associated with nearly a fourth (23 percent) of the expansion of the income shares of both the top 1.0 and top 0.1 percent. Together, finance and executives accounted for 58 percent of the expansion of income for the top 1.0 percent of households and an even greater two-thirds share (67 percent) of the income growth of the top 0.1 percent of households.

The paper also presents new analysis of CEO compensation based on our tabulations of Compustat data. From 1978–2011, CEO compensation grew more than 725 percent, substantially more than the stock market and remarkably more than the annual compensation of a typical private-sector worker, which grew  a meager 5.7 percent over this time period.

One way to illustrate the increased divergence between CEO pay and a typical worker’s pay over time is to examine the ratio of CEO compensation to that of a typical worker, the CEO-to-worker compensation ratio, as shown in the figure. This ratio measures the distance between the compensation of CEOs in the 350 largest firms and the workers in the key industry of the firms of the particular CEOs.

Figure A

CEO-to-worker compensation ratio, with options granted and options realized,1965–2011

CEO-to-worker compensation ratio, with options granted and options realized,1965–2011

Note: "Options granted" compensation series includes salary, bonus, restricted stock grants, options granted, and long-term incentive payouts for CEOs at the top 350 firms ranked by sales. "Options exercised" compensation series includes salary, bonus, restricted stock grants, options exercised, and long-term incentive payouts for CEOs at the top 350 firms ranked by sales.

Sources: Authors' analysis of data from Compustat ExecuComp database, Bureau of Labor Statistics Current Employment Statistics program, and Bureau of Economic Analysis National Income and Product Accounts Tables

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Though lower than in other years in the last decade, the CEO-to-worker compensation ratio in 2011 of 231.0 or 209.4 is far above the ratio in 1995 (122.6 or 136.8), 1989 (58.5 or 53.3), 1978 (29.0 or 26.5), and 1965 (20.1 or 18.3). This illustrates that CEOs have fared far better than the typical worker over the last several decades. It is also true that CEO compensation has grown far faster than the stock market or the productivity of the economy.Read more

Apple’s executive pay, profits, and cash balance show ability to assist its factory workers

Apple’s latest “blowout” quarterly report, as well as an examination of its executive pay levels, underscores how easy it would be for the company to improve the working conditions of the Foxconn workers in China assembling Apple products. As Ross Eisenbrey and I summarized recently: “Apple workers in China endure extraordinarily long hours (in violation of Chinese law and Apple’s code of conduct), meager pay, and coercive discipline.”

Apple could insist that Foxconn pay these workers more and treat them fairly, and could easily pay for any additional costs. (The workers in question are employed in factory lines dedicated only to producing Apple products.) To offset these costs, Apple could modestly raise the price of its products to be sure, but it could also readily offset these costs through some combination of tiny reductions in profits, small trims in its cash balance, or adjustments in its pay to executives.

  • The total compensation of the investigated Chinese workers making Apple products amounts to just 3 percent of Apple’s profits. In its most recent quarter Apple’s after-tax profits equaled $11.6 billion. By comparison, over an overlapping three-month period, the total compensation of the 288,800 Foxconn workers making Apple products equaled an estimated $350 million – or 3.0 percent of its after-tax profits. (I calculated this figure based on the average monthly pay of all Foxconn factory employees, including supervisors, found by the Fair Labor Association; the number of workers are those working in the three factories investigated.) This finding parallels a finding in a recent blog by Ross: labor costs at Foxconn are a “miniscule part of the iPhone’s costs.”
  • The total annualized compensation of the investigated Chinese workers making Apple products amounts to just 1 percent of Apple’s cash/securities surplus. At the end of the most recent quarter, Apple had $10.1 billion in cash and cash equivalents, $18.4 billion in short-term marketable securities, and $81.6 billion in long-term marketable securities, for a total balance of $110 billion. By comparison, the total annualized compensation of the 288,000 Foxconn workers making Apple products is about $1.4 billion – or 1.3 percent of Apple’s cash/securities surplus.
  • In 2011 and 2012, the top nine members of Apple’s executive team had total compensation equal to about 90,000 Chinese factory workers making its products. My just-released analysis found that in 2011, Apple’s nine-person executive leadership team received total compensation of $441 million. This was equivalent to the compensation of 95,000 factory workers at Foxconn assembling Apple products (making an estimated $4,622 per year).

In 2012, the executive team is on track to receive compensation of at least $412 million. This conservative estimate is equivalent to the compensation of 89,000 of the Chinese factory workers making Apple products.

The Social Security trustees report—now what?

As I wrote in an earlier blog, Social Security’s projected shortfall is around 20 percent larger than last year, though still less than one percent of GDP over the 75-year projection period. This doesn’t change the basic story that costs are rising from around 5 to 6 percent of GDP before leveling off after the Baby Boomer retirement, with costs at the end of the period slightly lower as a share of GDP than in the peak Boomer retirement years.

Raising Social Security taxes on both employers and workers from 6.2 percent to around 7.6 percent would close the projected shortfall.1 But there are better ways to raise the necessary revenue. The fairest and simplest is eliminating the cap on taxable earnings, which is currently set at $110,100. Though people pay income and Medicare taxes on all earned income (and will soon pay Medicare tax on unearned income as well), earnings above $110,100 aren’t subject to Social Security tax. Scrapping the cap would close 71-87 percent of the shortfall, depending on whether or not you increase benefits for high earners to reflect their higher contributions. Other no-brainers include covering newly-hired public-sector workers who currently aren’t in Social Security (closing 6 percent of the shortfall) and subjecting Flexible Spending Accounts and other salary-reduction plans to Social Security taxes (closing 9 percent).

Another option that has more mixed support among Social Security advocates is gradually increasing the contribution rate to offset increases in life expectancy. This would increase taxes very slowly—by 0.01 percentage points per year, much more slowly than projected wage growth—and would close around 15 percent of the shortfall if the increase began in 2025, after the gradual increase in the normal retirement age from 65 to 67 had been fully implemented. The advantage of this option is that it might take the issue of life expectancy, a favorite of Social Security alarmists, off the table. The disadvantage is that everyone would pay more, even low-income workers and others who’ve seen little or no increase in life expectancy. It’s also worth noting that it doesn’t raise that much money, because, contrary to myth, rising life expectancy is a relatively small factor in the emergence of the projected shortfall. A much bigger factor is slow and unequal wage growth, which has increased corporate profits and pushed a growing share of earnings above the cap, eroding Social Security’s tax base (see chart).

Source: Social Security Administration

Putting these together—scrapping the cap, covering public sector workers, taxing FSAs, and offsetting life expectancy through a gradual increase in the contribution rate—would be more than enough to close the projected shortfall. You can come up with your own plan by looking at the first column of figures in the table starting on p.8 here and dividing by 2.67 (the projected shortfall expressed as a share of payroll).

Thanks to blog reader “Susan” and my friend Liz, whose questions prompted this follow-up post.


1. The combined increase (1.4 percent multiplied by two, or 2.8 percent) is slightly more than the size of the actuarial deficit measured as a share of payroll (around 2.7 percent) because some compensation would likely shift to untaxed benefits. This measure also conservatively assumes the trust fund should have enough at the end of the period to pay for a year of benefits without additional contributions, even though Social Security is primarily a pay-as-you-go program. Strictly speaking, the unfunded obligation is closer to 2.5 percent of payroll according to the trustees report.

Glenn Kessler’s wrong call on Romney’s Buffett Rule chicanery

I thought I’d never say this, but I think my colleague Andrew Fieldhouse is being soft on Glenn Kessler, writer of the Washington Post‘s Fact Checker column. Long story short, Mitt Romney and the Republicans are criticizing the Buffett Rule for only raising $47 billion. Democrats say that score is bogus because it’s measured against a current law baseline in which the Bush tax cuts expire, and instead are using a $162 billion score that is measured against current policy (all the Bush tax cuts are assumed to continue). Kessler ends up defending the current law score and criticizing Democrats and other Buffett Rule supporters for using the current policy score.

Kessler’s wrong on both points. For conservatives to claim that the Buffett Rule only raises $47 billion over a decade is simply nonsense. The only groups that measure policy impacts with the assumption that the Bush-era tax cuts will expire are those that are legally required to do so: the Joint Committee on Taxation and the Congressional Budget Office. In contrast, Wisconsin Rep. Paul Ryan, President Obama, and even Romney, all use an adjusted current policy baseline that assumes the Bush tax cuts will be extended.

Second, Kessler, argues that progressives are wrong to use the $162 billion score against current policy because it overlaps with other tax policies they support, namely expiration of the upper-income Bush tax cuts. This is ridiculous, but complicated, so bear with me.

Let’s start with the very basic point that most policies have interaction effects with other policies. That’s why it’s important when creating a budget to consider the order in which you want to layer policies on top of a baseline. In other words, each policy is scored against a changing baseline in which all the previous policies have already been adopted. It doesn’t matter to your top-line deficit impact, of course, but the scoring of many policies depends on whether they are preceded by other policies with which they interact—particularly when it comes to tax policy.

But scores for individual policies outside of the context of a larger comprehensive package are always scored against the same baseline. Kessler is implying that the Democrats and Republicans should use different baselines reflective of their policy preferences. But this would undermine the entire purpose of a baseline, which is to make sure that everyone’s numbers are calculated using the same assumptions so that the differences reflect only the policy differences. In other words, Kessler is defending Romney and the GOP for using a baseline that they use in no other circumstance, and criticizing progressives for using a baseline that they—along with everyone else—use consistently.

Since Kessler is seemingly the closest thing our political system has to a court of law, let’s examine the legal holding he’s just created: Scores must be measured against a baseline that reflects your other policy proposals. This creates a number of problems. First off, not everyone that supports the Buffett Rule supports all the same policy proposals. Let’s say I’m a congressman who opposes letting any Bush tax cuts expire—am I allowed to use the $162 billion score? What if I’ve been vague on the subject of the Bush tax cuts but strongly support the Buffett Rule, what score would I use then without violating Kessler’s rule?

Second, as I mentioned earlier, the order of the policies matter. Kessler argues that the $162 billion overlaps with the $849 billion from the top two rates, so the $162 billion is wrong. But that assumes that Democrats intend to layer the Buffett Rule on top of the rate increase—if they do the Buffett Rule first, then the $162 billion score is accurate.

See how complicated this gets? Heck, I probably lost most of you once you read the word “baseline” in the third sentence. So let’s make it simple. Right now, pretty much everyone uses a current policy baseline. They may differ around the margins—for example, should the baseline assume tax provisions like the research and experimentation credit get extended?—but they’re mostly the same. Generally, when people  are using scores that aren’t against this baseline, they’re intentionally being misleading. And rather than encouraging that behavior, Kessler should call it out. After all, isn’t that his job?

Understanding the wedge between productivity and median compensation growth

One of the key dynamics of our economy for more than 30 years has been the divergence between productivity growth and compensation (or wage) increases for the typical worker. This divergence between pay and productivity has been increasingly recognized as being at the heart of the growth of income inequality. I am proud that Jared Bernstein (yo, Jared!) and I were the first ones to call attention to this, which we did in the introduction to The State of Working America 1994/1995, which was published on Labor Day in 1994. At that time, we were responding to the oft-repeated claim that wage stagnation experienced by most workers was caused by the post-1973 productivity slowdown. Get productivity up and all would be OK, we were told. Bob Rubin told us reducing the deficit would help accomplish that. By plotting productivity and median wage growth together, we were able to demonstrate that even though productivity growth was indeed historically slow in the preceding two decades, the growth of the median wage had substantially lagged even this anemic productivity growth. As it turns out, productivity growth accelerated in 1996 and has remained higher than in the 1973-1995 period since. Interestingly, the gap between productivity and median hourly compensation growth has grown at its greatest rate over the 2000-11 period despite productivity growth that continued to outpace the 1973-95 rates.

Understanding the driving forces behind the productivity-median hourly compensation gap is the subject of a new paper, The wedges between productivity and median compensation growth, that previews a portion of the analysis in the forthcoming State of Working America. This research reflects the results in a more technical paper, Why Aren’t Workers Benefiting from Labour Productivity Growth in the United States, that I co-authored with Kar-Fai Gee, an economist at the Canadian Centre for the Study of Living Standards (CSLS). The paper is in the spring 2012 issue of the International Productivity Monitor(edited by Andrew Sharpe and published by CSLS, on whose board I am proud to serve).

During the 1973 to 2011 period, labor productivity rose 80.4 percent but real median hourly wage increased 4.0 percent, and the real median hourly compensation (including all wages and benefits) increased just 10.7 percent. These trends are shown in the table below. If the real median hourly compensation had grown at the same rate as labor productivity over the period, it would have been $32.61 in 2011 (2011 dollars), considerably more than the actual $20.01 (2011 dollars). Consequently, the conventional notion that increased productivity is the mechanism by which living standards increases are produced must be revised to this: Productivity growth establishes the potential for living standards improvements and economic policy must work to reconnect pay and productivity.

The objective of our new paper is to provide a comprehensive and consistent decomposition of the factors explaining the divergence between growth in real median compensation (note the paper focuses on median wages while I have simplified the analysis here to focus on median compensation) and labor productivity since 1973 in the United States, with particular attention to the post-2000 period. In particular, the paper identifies the relative importance of three wedges driving the median compensation-productivity gap: 1) rising compensation inequality, 2) declining share of labor compensation in the economy (the shift from labor to capital income), and 3) divergence of consumer and output prices.

The following table is based on this paper and will be in the new edition of State of Working America that will be released on Labor Day. This decomposition is of economy-wide productivity growth, real average hourly compensation growth of all workers (including the self-employed), and the median real hourly compensation of workers age 18-64. See the paper for technical details.


Reconciling growth in median hourly compensation and productivity growth, 1973-2011

1973-79 1979-95 1995-00 2000-11 1973-11
A. Basic trends (annual growth)
Median hourly wage -0.26 -0.15 1.50 0.05 0.10
Median hourly compensation 0.56 -0.17 1.13 0.35 0.27
Average hourly compensation 0.59 0.55 2.10 0.95 0.87
Productivity 1.08 1.29 2.33 1.88 1.56
Productivity-median compensation gap 0.52 1.46 1.21 1.53 1.30
B. Explanatory factors (percentage point contribution)
Inequality of compensation 0.02 0.72 0.97 0.59 0.61
Shifts in labor’s share 0.03 0.23 -0.40 0.69 0.25
Divergence of consumer and output prices 0.46 0.51 0.64 0.24 0.44
Total 0.52 1.46 1.22 1.52 1.29
C. Relative contribution to gap (percent of gap)
Inequality of compensation 4.8% 49.6% 80.0% 38.9% 46.9%
Shifts in labor’s share 5.5% 15.4% -32.5% 45.3% 19.0%
Divergence of consumer and output prices 89.7% 35.0% 52.5% 15.8% 34.0%
Total 100.0% 100.0% 100.0% 100.0% 100.0%

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Austerity in the UK — losing the argument and the economy

New data from the United Kingdom indicates that its economy has seen six consecutive months of economic contraction—the rule of thumb definition of recession.

The lesson here should be pretty plain: this is the utterly predictable (and predicted  in real time) result of these policies.

Let’s be even more concrete: If the U.K. had just followed the fiscal stance of the United States over the past two years, they would not have re-entered recession. Adam Posen of the Bank of England recently estimated that the U.S. fiscal stance has contributed about 3 percent extra to overall GDP growth compared to a scenario where they had followed the U.K. stance. And this gap has actually widened in more recent years (and is projected to widen even further for 2012).

Posen’s estimate crucially includes the drag from state and local governments in the U.S., so it’s not like this overall fiscal stance in the U.S. over this time has been wildly expansionary. Just matching the U.S. fiscal support over this time period would have been a pretty modest goal.

But of course, this goal was rejected by the conservative government elected in mid-2010, and instead the U.K. has followed a plan based on austerity.

There is plenty to lament in policymaking responses to the crisis of the past four years, but the U.K. fiscal tightening may well be the single most avoidable own-goal over the period. Greece, for example, really can’t run expansionary fiscal policy right now (at least not without help from the core countries of the eurozone) without getting savaged by bond markets that will push up interest costs on debt.

The U.K., on the other hand, faces no such constraints. They print their own currency so they cannot be forced into default by bond markets, and there has been no upward pressure at all on their debt-servicing costs since the Great Recession began (see chart below). There is, in short, no actually-existing macroeconomic problem that austerity addresses. Instead, the swing towards it has been driven by ideology. And it has not turned out well.

Attempt to block labor election modernization goes down in flames

For most of the last year, Washington business lobbyists and various right-wing organizations have been engaged in an all-out war against the National Labor Relations Board, the agency that protects the right of employees to join a union if they want to. The NLRB has been excoriated for an enforcement action against Boeing, for requiring employers to post a notice letting employees know what their basic rights are under the law, and for trying to modernize its 65-year-old procedures for union representation elections. In addition, congressional Republicans have taken extraordinary steps to block President Obama from appointing a full five-member board to lead the agency and decide cases.

Yesterday, Republican senators failed in an effort to block the NLRB’s election modernization rule. The Senate defeated a resolution of disapproval 54-45, with all Democrats opposed and all but one brave Republican, Sen. Lisa Murkowski of Alaska, crossing party lines. The resolution would have repealed the new rule and prevented the NLRB from adopting a new one to replace it.

One of the ironies of these right-wing attacks on the NLRB’s attempt to streamline representation election procedures is that it belies conservatives’ supposed dislike of excessive bureaucracy and frivolous litigation. Typically, business leaders and anti-government activists charge that government processes are plagued with unnecessary delays, for example in FDA approval of new drugs or medical devices. When it comes to rushing a product to market that might cause disabling injuries or even death, conservative critics usually side with speed over lengthy review.

Likewise, when the issue is the prevention of illegal immigration and the preservation of jobs for American citizens, leading businesses and trade organizations call for limited review and speedier determinations. Recently, for example, 40 multinational corporations wrote President Obama to complain that the State Department takes too long to issue visas to companies that want to bring foreign workers to the United States. The companies object to having government officials ask for evidence about the need for particular foreign computer techs, even though the Inspector General has found widespread fraud and abuse in visa applications. And nothing is more common than to hear officials of the Chamber of Commerce complain about frivolous litigation and laws that enrich attorneys–“full employment for attorneys!”–when the purpose of a law is to allow average citizens to sue after their health or safety has been jeopardized by corporate misbehavior.

So here, in the case of a regulation designed to reduce the opportunities for lawyers to delay representation elections through frivolous litigation, the Chamber is showing its real agenda. Efficiency no longer matters; the more time bureaucrats spend reviewing legal arguments that add nothing to a decision, the better.

Here’s a recent example involving T-Mobile: A union petitioned to represent a unit of 14 technicians in Connecticut. T-Mobile argued that five engineers should have been added to the unit. The law is clear that an employer cannot require that professional employees be added to a unit of non-professional employees, and engineers are regularly found to be professional employees. T-Mobile claimed that these engineers were different, forcing four days of hearings that wasted government resources. The new rules would have given the NLRB’s Hearing Officer the authority to require the employer to make an offer of proof as to how its engineers were “different” from the hundreds of cases in which engineers with college degrees were found to be professional employees, thus eliminating at least three of the four days of hearings and needless legal expenses.

Why are business lobbyists suddenly in favor of inefficiency and delay? Because delaying the date of the election gives the employer more time to harass and intimidate workers who otherwise might vote for a union.

Cornell researcher Kate Bronfenbrenner and her colleague Dorian Warren examined thousands of union representation cases and documented that employers engage in intense campaigns of abusive anti-union activity. They also found, as the NLRB put it, “a longer period between the filing of a petition and an election permits commission of more unfair labor practices with corresponding infringement upon employee free choice, while a shorter period leads to fewer unfair labor practices.”

Employers call the NLRB’s new election rules the “ambush election” rules because they remove various automatic appeals and such built-in delays as an arbitrary, automatic 25-day delay after the board issues an order for an election. This waiting period alone gave an extra three weeks to employers to hold captive-audience meetings (even to require employees to attend them outside of normal work hours), to subject employees to repeated one-on-one sessions with their supervisors, and to figure out which employees support the union and which do not.

The NLRB has realized that its old rules tilted the playing field toward anti-union employers and ultimately discouraged employees from exercising their right to choose without interference. An honest assessment and a modest amount of consistency would lead most observers to agree that the new rules are fair and sensible.

Sequestration will slow the recovery and job growth, period

Wednesday morning, the House Budget Committee is holding a hearing on “Replacing the Sequester”—the sequester being the automatic spending cuts established by the debt ceiling deal that are scheduled to kick in next year. It’s a safe bet that Republicans will scream about defense cuts being bad for jobs, but let’s just remember that ALL these cuts are bad for joblessness in the short-run. (Defense and nondefense spending are split roughly evenly on the sequester chopping block.) We’ve been asked many times “how much” of an impact sequestration would have on near-term employment and here are our best estimates:

These estimates reflect the impact of sequestration on total nonfarm payroll employment at the end of each fiscal year. They assume a fiscal multiplier of 1.4 for general government spending, which is Moody’s Analytics most recent public estimate of the government spending multiplier. While we use the same multiplier for all cuts, we’d guess that these likely slightly overstate the adverse economic impact resulting from defense spending cuts and understate job losses from domestic spending cuts. Budgetary programs for lower-income households in the discretionary budget—such as housing assistance and the special supplemental food program for women, infants, and children (WIC)—as well as infrastructure spending have particularly high multipliers. And to the extent that cuts to spending by the Department of Defense come from capital-intensive weapons acquisitions rather than reductions in personnel strength, the impact on employment would be milder. Regardless, any cuts in the near-term (unless they are ploughed into more spending somewhere else) are going to constitute a drag on the still-weak recovery.

Cutting government spending reduces aggregate demand and worsens joblessness while the economy is running well below-potential output. Conservatives’ selective Keynesianism—which pops up in their advocacy for defense spending and tax cuts, among other priorities—applies to the rest of government spending and the national income and product accounts, too.

Romney opposes the Buffett Rule? Why would that be?

Via the Washington Post‘s Fact Checker by Glenn Kessler, I see that Mitt Romney has adopted the specious “if it doesn’t fix the entire problem, it’s not worth doing,” objection to the Buffett Rule. Romney brushed aside the Buffett Rule because the $5 billion in revenue it would raise for fiscal 2013 relative to current law would only fund government for 11 hours.

First, it’s interesting to note that Romney and other individuals deriving the vast majority of their income from investments benefit tremendously from the lack of a Buffett Rule (which is more accurately characterized as the Romney Rule). The Paying a Fair Share Act—the Senate’s legislative version of the Buffett Rule that was filibustered last week (in spite of 72 percent public support)—would serve as a millionaires’ alternative minimum tax. When fully phased in, it would apply a minimum tax rate of 30 percent on adjusted gross income less charitable contributions (modified by the limitation on itemized deductions—temporarily repealed as part of the Bush tax cuts—if reinstated).

Mitt Romney’s 2010 tax return showed $21.6 million in adjusted gross income and $3.0 million in charitable giving. Had the Paying a Fair Share Act been fully in effect, Romney would have paid roughly $5.6 million in taxes for an effective tax rate of 25.8 percent, instead of the $3.0 million in taxes and 13.9 percent effective tax rate he paid for the year. That’s because the Buffett Rule is an indirect way to close the preferential rates on capital gains and dividends, as well as the carried interest loophole, that produced Romney’s rock-bottom tax rate.

Second, there’s an enormous amount of hypocrisy and insincerity going on here. As I recently noted, this ice-thin defense against popularly supported progressive tax policies is often used by the same people who spend inordinate amounts of time on defunding the National Endowment for the Arts, National Public Radio, Planned Parenthood, or other small budgetary line-items. Romney himself devotes eight full pages in his economic plan to his proposal to cut job training programs, which together represent one-half of 1 percent of the budget.

Furthermore, the Buffett Rule would raise far more than advertised. The cited estimate by the Joint Committee on Taxation (JCT) is based on current law, meaning that the Bush-era tax cuts are assumed to expire. Kessler notes that liberals have been pointing to a different JCT score based on current policy showing $162 billion in new revenue. But Kessler dismisses liberals’ use of the current policy score because other tax policies they support—namely expiration of the upper-income Bush tax cuts—would overlap with the $162 billion. True. But then you need to talk about the entire package and give the Democrats $47 billion in addition to the $849 billion that would be raised over the next decade by letting the upper-income tax cuts expire. Conversely, if we’re adjusting baselines for stated policy preferences, conservatives should be citing the $162 billion figure with regard to the Buffett Rule, reflecting continuation of all the Bush tax cuts.

Regardless of revenue scores, conservatives will again trot out the “if it doesn’t fix the entire problem, it’s not worth doing” line—but it’s ludicrous to argue that $896 billion is such a trivial sum that it’s not worth pursuing. That’s more than the first round of Budget Control Act spending cuts and caps conservatives’ extracted by hijacking the statutory debt ceiling. Accounting for net interest savings, the Buffett Rule coupled with expiration of the upper-income Bush tax cuts would save more than $1 trillion over a decade and reduce the debt-to-GDP ratio by 4.2 percentage points by 2022, relative to current budget policies. By all objective accounts, this is serious deficit reduction that would seriously improve fairness in the tax code. Strange, how purported concerns about the public debt fade into the ether when tax increases—or tax cuts—are on the table.

The 2012 Social Security trustees report in a nutshell

According to the trustees report released today, the 2012 Social Security surplus is projected at $57.3 billion in 2012. Social Security will continue to run a surplus through the end of the decade. As a result, the trust fund will grow from $2.74 trillion in 2012 to a peak of $3.06 trillion in 2020 (Table VI.F8 on p. 206).

Social Security is now running a “cash-flow deficit,” which means it is running a deficit if you exclude the $110.4 billion Social Security is earning in interest on trust fund assets (Table VI.F8 on p. 206). Social Security will begin running a deficit as it is commonly understood in 2021, when it begins drawing down the trust fund to help pay for the Baby Boomer retirement. This is perfectly natural: the trust fund was never supposed to grow indefinitely, but was meant to provide a cushion to help pay for the retirement of the large Baby Boom generation. That said, the Great Recession and weak recovery pushed up the date that Social Security will first begin to tap the trust fund to help pay for benefits.

If nothing is done to shore up the system’s finances, the trust fund will be exhausted in 2033, three years earlier than projected in last year’s report (p.3). When the trust fund is exhausted, current revenues will still be sufficient to pay 75 percent of promised benefits (p. 11). Even in this worst-case scenario, future benefits will be higher than current benefits in inflation-adjusted terms, but because wages are projected to rise over time, these benefit levels will replace a shrinking share of pre-retirement income.

The projected shortfall over the next 75 years is 2.67 percent of taxable payroll (0.96 percent of GDP). This is 0.44 percentage points larger than in last year’s report (p. 4 and Table VI.F4 on p. 197). Slightly more than one-tenth of the deterioration (0.5 percentage points) is due to the changing valuation period, and the rest is due to updated data and near-term projections and changes in longer-term assumptions.

The single biggest factor is the weak economic recovery, which has a significant impact on the short-term outlook (slower growth in average earnings, low interest rates, and high unemployment). The short-term outlook is notably more pessimistic than either the Congressional Budget Office or many business economists forecast, assuming that unemployment will remain above 8.9 percent in 2012 and above 8.0 percent through 2014 (see Table V.B2 on p. 105). The weak economy is also to blame for short-term drops in birth and immigration rates, which have longer-term demographic repercussions.

Other changes appear unrelated to the weak economy, notably an assumption that average hours worked will decline by 0.05 percent per year (no decline was projected in last year’s report). This is explained as due to an aging workforce as well as “historical data and trends.”

Changes since last year’s report Change in 75-year balance
(% of taxable payroll)
(1) Change in valuation period: -0.05 ppts.
(2) Change in short-term economic projections due to weak recovery and higher-than-anticipated cost-of-living adjustment: -0.14 ppts.
(3) Changes in demographic assumptions: -0.05 ppts.
(4) Assumption that average hours worked will decline: -0.07 ppts.
(5) Increase in projected disability rates: -0.04 ppts.
(6) Changes in various methodological assumptions: -0.08 ppts
Total after rounding: -0.44 ppts

The fashion industry’s illegal unpaid internships

Here’s an ad (chosen at random), typical for the fashion industry these days, that brazenly flouts the federal and state minimum wage laws:

Production Intern

The Cynthia Rowley Production Team is currently looking for interns for Summer 2012. [We are also looking for interns to start IMMEDIATELY as well!!] — Summer 2012 interns would be expected to start at early-mid May to August. [if you can start sooner, that is even better]

Cynthia Rowley has long been a fashion and style authority, with a namesake collection that includes women’s wear, beachwear and wetsuits, men’s wear, eyewear, handbags, shoes, baby, home sewing products, tools, legwear, shapewear, and ‘dress-up’ band-aids.

Cynthia has appeared on “Project Runway” and “America’s Next Top Model,” and her work has been featured in nearly every major magazine and newspaper domestically and internationally. She is also a judge on the new show “24-Hour Catwalk” with Alexa Chung.

The intern would be required to work closely with the production team and would have a range of responsibilities which include running errands from our studio/offices to the garment district in midtown, working on tech packs, specing garments, organizing production pieces that come in, deal with showroom/runway samples and fit samples, source trims & fabrics for production, taking pictures of garments, assisting in fittings etc.

-Interns should have basic knowledge of Adobe Photoshop and Illustrator, Microsoft Office programs (Word & Excel)
-Interns should be familiar and comfortable with specing garments
-Comfortable doing light pattern work & pattern corrections
-Know how to cut patterns and fabric for samples
-Interns need to be energetic and outgoing… they will be interacting with many people within our offices (design team, PR team, etc), cutting rooms, and domestic factories in midtown
-Organized and responsible
-Have good time management

**THIS IS AN UNPAID INTERNSHIP, but it would be a great hands-on experience in the fashion industry and a resume booster! If you need the internship for school credit we would be more than happy fill out any required paper work and/or complete letters of recommendations.

Please send all resumes and cover letters ASAP to: (please do not send cover letters and resumes as attachments… put them in the body of the e-mail)

Plainly, this should be a paid, entry-level position. It requires computer skills and fashion industry knowledge. There’s no pretense of close mentoring or vocational education. The intern will “be required to work.” This is employment, and this is exploitation.

But it’s a “resume booster!” That’ll help pay your rent, your student loans, and the cost of food and transportation.  Not!

According to the brand’s website, its fashions are “sold in better department, specialty, and online stores, as well as approximately sixty Cynthia Rowley retail shops around the world. … Cynthia Rowley’s collections have been featured in nearly every major national and international fashion publication, and she maintains a regular celebrity clientele including: Julia Roberts, Scarlett Johansson, Parker Posey, Kristen Wiig, Rebecca Romijn, Anne Hathaway, and Maggie Gyllenhall.”

Cynthia Rowley and most other employers in the fashion industry can afford to pay the minimum wage to their skilled, organized, and responsible employees. The New York Department of Labor should monitor “internship” postings by the fashion industry and begin enforcing New York’s minimum labor standards.

Why resurrect budget dinosaurs and bad economic policy?

On Tuesday, Senate Budget Committee Chairman Kent Conrad (D-N.D.) marked up, but didn’t vote on, a budget modeled off of the report by National Commission on Fiscal Responsibility and Reform co-chairs Erskine Bowles and Alan Simpson (often called the “Bowles-Simpson” report), which failed to garner the requisite support of a super majority of the Fiscal Commission’s members in Dec. 2010.

A budget alternative based on (albeit significantly to the right of) the Bowles-Simpson report recently went down in flames in the House of Representatives—by a crushing vote of 382-38. Stan Collender recently published an excellent piece on the cult-like efforts and failed politics of resurrecting the Bowles-Simpson report since its demise. Essentially, politicians and pundits cling to the Bowles-Simpson report as a talisman to signal their “seriousness” about reducing budget deficits. But it’s worth looking at the dismal economic fundamentals behind the Bowles-Simpson grandstanding, because the report’s recommendations were and remain terrible economic policy. It’s just one more reminder that “popular among Washington pundits” rarely correlates with “good economic policy.”

In Dec. 2010, my colleague Josh Bivens and I estimated that the Bowles-Simpson report would have sharply reduced aggregate demand and employment by failing to accommodate near-term stimulus and prematurely moving toward deficit reduction:

“One of the guiding principles of the Co-Chairs’ plan reads “Don’t Disrupt a Fragile Economic Recovery,” but the details make clear that this is nothing but lip service to the persistent economic challenges this country will face for years. Rather than budgeting for more desperately needed fiscal stimulus in the near-term, their sole acknowledgement of the Great Recession and the painfully slow recovery since it ended over a year ago is to “start gradually; begin cuts in FY2012.”

That diagnosis has only solidified in the interim. Here was the Bowles-Simpson four-pronged approach to supposed economic stewardship:

  • Reduce the deficit gradually, starting in FY2012
  • Put in place a credible plan to stabilize the debt
  • Consider a temporary payroll tax holiday in FY2011
  • Implement pro-growth tax and spending policies

How prudent would it be to have begun deficit reduction in fiscal 2012? At the start of the fiscal year (Oct. 2011) the unemployment rate stood at 8.9 percent and real GDP had grown a meager 1.6 percent in the year to 4Q 2011—not exactly the robust recovery that could accommodate deep fiscal retrenchment. Fiscal stimulus required more than consideration and a fully paid for payroll tax holiday—bigger deficits and a mix of spending measures and targeted tax cuts were needed (and actually enacted, albeit on a vastly insufficient scale). And it’s downright disingenuous to pawn off big spending cuts, particularly to the non-security discretionary budget, as a pro-growth spending policy. Collectively, this amounts to economic pain with little to no budgetary gain: Berkeley economist Brad DeLong estimates that in light of current growth and interest rates, fiscal expansion is entirely self-financing with regard to the long-run fiscal outlook; conversely, fiscal contraction would be largely to entirely self-defeating.

Beneath this pretense, Bowles-Simpson proposed $50 billion in primary spending cuts for FY12 and $138 billion for FY13 (as well as $4 billion and $29 billion, respectively, in tax increases which would have exerted a much smaller fiscal drag per dollar than spending reductions). Further obstructing recovery, the Bowles-Simpson report would not have accommodated the piecemeal stimulus that Congress has enacted since Dec. 2010, including $227 billion for payroll tax cuts, $95 billion in emergency unemployment compensation, $44 billion for expanded refundable tax credits, and $22 billion for (admittedly less effective) business investment incentives.

Relative to the course Congress has taken, the adverse economic impact proposed by the Bowles-Simpson report is stark. The Moment of Truth Project rescored the Bowles-Simpson report based on the Congressional Budget Office’s March 2011 baseline. For an apples-to-apples comparison, I’ve adjusted non-interest outlays and revenue for economic and technical—but not legislative—changes to the CBO’s budget projections since that March 2011 baseline. Relative to current budget policy, the Bowles-Simpson plan would have reduced non-interest spending by $53 billion in FY12 and $79 billion in FY13 and increased revenue by $107 billion in FY12 and $167 billion in FY13 (largely reflecting the payroll tax cut). As a result, economic output would be 1.3 percent lower in FY12 and 2.0 percent lower in fiscal 2013. This shock to aggregate demand would reduce nonfarm payroll employment by 1.6 million jobs in FY12 and 2.4 million jobs in FY13, again relative to current budget policies.

Piecemeal stimulus was far from optimal—but also unequivocally preferable to a deficit reduction grand bargain that would have thrown recovery off track. This isn’t to suggest that Congress has done a bang-up job with economic policy since Dec. 2010; the Budget Control Act (i.e., debt ceiling deal) was terrible fiscal policy and passing the entire American Jobs Act would have done substantially more to reduce joblessness than merely continuing the payroll tax cut and emergency unemployment compensation. But the public should be relieved that American policymakers haven’t fully embraced European-style austerity, thereby choking off economic recovery with nothing to show for it. It’s time for Washington to stop trying to breathe life back into the Bowles-Simpson plan and let it die the obscure death it deserves.

Cutting public investments to protect “the children” — or, when the cure is much worse than the malady

Policymakers in D.C. have a long history of focusing on the wrong problem (how many screamed about the housing bubble and buildup of private debt in the mid-2000s, for example?). This history continues today – you can’t follow economic debates taking place inside the Beltway for long without inevitably hearing somebody thunder about the “burdens we’re placing on our children and grandchildren” with current budget deficits. This formulation has become so common that almost nobody bothers questioning it anymore. But in fact, policies aimed at cutting today’s budget deficits are actually more threatening to our kids’ economic futures than these deficits themselves.

It may help to review the economic case for when one should worry about budget deficits. If the government begins running large deficits when the economy is healthy, this means that it must increase the money that it’s borrowing, essentially walking into the market for loans and sharply bidding up their demand. This increase in demand will cause interest rates (the “price” of borrowing) to rise, and these new higher prices will convince private companies to forego some investment projects that they otherwise would have undertaken. This results in a smaller capital stock and hence less-productive economy bequeathed to the next generation. Voila, generational theft!1

The responses to why these arguments do not apply to the current situation have been made many times before. The price of borrowing has not risen, and that’s not an unsustainable fluke. Instead, it’s precisely because the economy is depressed. So, no private capital formation is being crowded-out (and in fact, lots is probably being crowded-in as government deficits support spending and demand, and this spending and demand is actually the biggest near-term driver of private investment) – in fact, private-sector capital formation, after a horrendous fall during the teeth of the Great Recession, is one of the few real sources of strength in the latest recovery.

But is it really so bad that policymakers want to attack a non-existent problem (i.e., the federal budget deficit crowding-out private investment)?


Most importantly, near-term reductions in deficits will place a substantial drag on an already-weak recovery. Given that the economy grew at less than 2 percent in 2011, this is not the time to be sharply applying the brakes.

Further, if frantic efforts to cut spending result in reductions in public investments (and they will), then something truly perverse will happen: productive investments will be sacrificed in the name of … preserving productive investments.

Take a look at estimates of the nation’s wealth (pie chart below, from the Office of Management and Budget – and note as well that near-identical estimates (see p. 195) were made by the OMB during the Bush administration):

Half of the nation’s overall capital stock consists of human capital, or education. This is largely financed publicly. And, over a third of the equipment and structures capital stock is owned publicly. In short, when figuring out the actual wealth that we’re passing on to the next generation, one must take public investments into account.

Yet, we’ve already allowed this public investment to lag in recent decades. Cutting it further today and tomorrow actually would put a burden on our children and grandchildren (unlike, say, accommodating larger budget deficits). A new EPI paper released yesterday surveys estimates of just how much we could gain by engaging in a program of expanded public investment over the next decade. It is serious money for the economy, and even the federal government itself would largely recoup the costs of this investment through tax revenues gained by the extra growth and job-generation this public investment could boost if it was undertaken while the economy was still weak. And I’ve probably even underestimated this fiscal offset in the paper.

Despite anguished cries about the fate of “our children,” it seems clear that the rush to slash spending will continue and one obvious casualty is going to be the public investments that are actually valuable to the next generation. Sadly, public investment has become a bit of a political orphan in recent decades, largely because of a mid-1990s productivity surge that happened without an increase in public investment. What this has meant is that with no constituency advertising its benefits, too many people and policymakers are genuinely unaware of the stakes in cutting it. But these stakes are large – unless coming decades see something analogous to another IT boom, we shouldn’t expect post-1995 rates of productivity growth to be sustained in the face of further public investment cutbacks.

Lastly, the target list for aiming lots of public investment funds at in coming decades is long: basic infrastructure, early-childhood education, health care, and research and development. These are pretty common areas where it’s agreed that lots of public investment money could be productively channeled. But there is also the obvious case of investments to cut greenhouse gas emissions and mitigate the worst effects of climate change. There is overwhelming evidence that these are investments that should be done, and because making them would primarily benefit those children and grandchildren that policymakers in D.C. are so solicitous of, it seems like this should be a slam-dunk.

1. This is, strictly speaking, the “closed-economy” case for how deficits can harm the economy. The “open-economy” case has no more empirical support for it operating today, so we’ll skip it for now.

Apple’s iPhone profits dwarf its labor costs

Apple and its key manufacturing partner, Foxconn, have been justifiably criticized for their labor practices in China, which include excessive, oppressive and illegal overtime hours, hazardous conditions, inappropriate and sometimes forced labor of 16-18 year-old student “interns” on night shifts, and wages so low that 64 percent of workers claim they don’t cover basic needs.

Many observers have remarked that with Apple’s gigantic profits, it can afford to ensure better treatment of its production workforce. A close examination of the iPhone’s cost structure leaves no doubt.

Various market researchers, including iSuppli and Horace Dediu of Asymco, have broken down the costs of the iPhone, which Apple sold to wireless carriers for an average price of $630 in the fourth quarter of 2011. All agree that Foxconn’s assembly cost— approximately $15, or 2% of the total—is a miniscule part of the iPhone’s cost. Apple’s estimated $319 profit per phone is at least 20 times the cost of producing the iPhone. In fact, because the labor cost is only part of Foxconn’s costs, which include energy, property, and its own profit, Apple’s profit per phone is more than 20 times the labor cost.

With tax day upon us, file these numbers away

So far this year, the IRS has received 99 million tax returns and distributed an average refund of $2,794. If you still haven’t submitted your return, or filed an extension, you have until midnight to do so. Thankfully, there’s no such deadline for looking over these tax figures — as depressing as they might be:

1. The 400 highest income filers paid an average tax rate of 16.6 percent in 2007 (before the Great Recession). Dividends and net capital gains accounted for 73.4 percent of the adjusted gross income for these filers, explaining why their average effective tax rate is just a shade above the 15 percent preferential rate on unearned income.

2. Presidential candidate Mitt Romney, who has an estimated net worth between $190 million and $250 million, paid an effective tax rate of 13.9 percent in 2010 on $21.7 million in income because of the carried interest loophole and the preferential tax rates on capital gains and dividends.

3. In 2011, the top 1 percent of households by cash income received 75.1 percent of the benefit from the preferential treatment of capital gains and dividends. The middle class, meanwhile, received only 3.9 percent of that benefit.

4. Over the past 35 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, courtesy of the Bush-era tax cuts. The Bush tax cuts also lowered the rate on qualified dividends—previously taxed as ordinary income—from 39.6 percent to just 15 percent.

5. The Bush tax cuts cost $2.6 trillion over the last decade, accounting for roughly half of the increase in the public debt over this period, while failing to generate a robust (or even mediocre) economic recovery.

6. Roughly half of the Bush tax cuts went to the highest-income 10 percent of earners, even though these earners captured more than 90 percent of national income gains between 1979 and 2007.

7. The top 1 percent of earners received 38 percent of the Bush tax cuts, despite capturing 65 percent of income gains during the Bush economic expansion (2002-2007).

8. Continuing the Bush-era tax cuts would cost $4.4 trillion over the next decade, which would single-handedly move the country from a sustainable to unsustainable fiscal path.

9. The additional tax cuts in Wisconsin Rep. Paul Ryan’s budget—beyond continuing the Bush tax cuts, which would be financed with deep spending cuts—have no offset and would lose $4.6 trillion in revenue over a decade, blowing a huge hole in the budget.

10. Massive, unaffordable tax cuts were also the currency of the Republican presidential primary race, with proposed tax cuts that would lose up to $900 billion annually—which at 4.9 percent of GDP would more than double projected budget deficits under a continuation of current policies—above and beyond the costly Bush tax cuts.

Follow Andrew Fieldhouse on Twitter: @A_Fieldhouse

Did Greg Mankiw really just brandish his $170 textbook as evidence of the benefits of unfettered competition?

There’s plenty wrong with this Greg Mankiw article (see here), but one thing I haven’t seen pointed out yet [ah, here’s somebody else pointing it out, with a little less snark than this post] is the strangeness of Mankiw using his textbook as an example of fierce competition in a crowded market, unburdened by meddlesome government.

What’s strange about this? Well, what keeps me from selling PDFs of Mankiw’s textbook for $5 each online? The same thing that keeps his own students (who are, by the way, assigned this textbook by Mankiw himself; I  wonder if he’s ever once decided, based on the merits, that anybody else had a superior text on the market?) from scanning the book and passing it back and forth for free: government enforcement of copyright law.

Is having government act as a bill collector for textbook companies and authors good economic policy? Probably not, but I think it’s safe to say that textbook authors pretending as if the price tag on their books reflects only supply and demand curves functioning in perfectly competitive markets probably shouldn’t be trusted on sweeping claims about the proper role of government in determining economic outcomes.

Tax breaks for saving

I come from a family of penny pinchers. My parents had to support themselves at young ages, and their thriftiness put them and their children through college. Though I’m a big spender compared to my parents (it would horrify them to know I’m on a first-name basis with our local Thai food delivery guy), I’m still careful to put away money for retirement.

Despite my personal predilections, I think it’s time we reexamined our knee-jerk support for tax breaks for saving. Admittedly, it’s much harder than in my parents’ day to save your way into the middle class. For instance, a new Center for Economic and Policy Research report points out that the number of hours a minimum-wage worker has to work to pay for college has more than tripled over the past three decades. Nevertheless, it’s quite difficult to design tax incentives that actually help ordinary people save—as opposed to simply lowering taxes for high-income households.

Our tax code contains a mess of contradictory provisions that both encourage and discourage saving. These range from 529 plans for college saving to the mortgage interest deduction, which subsidizes borrowing. Among the costliest of the savings incentives are those designed to promote saving in 401(k)s, IRAs and other retirement plans. According to Treasury estimates, the present value of tax breaks for 401(k) plans alone was $83 billion in 2010 (see Table 17 here), not counting payroll tax losses.

Problematically, two-thirds of these (and other) tax breaks go to taxpayers in the top income quintile (households with roughly more than $103,000 in income in 2011). Aside from the fact that upper-income households need less help saving for retirement than low- and middle-income households, these tax breaks do little to increase saving since most high-income households already save and simply steer funds to tax-favored accounts (see footnote 27 here for an overview).1

These upper-income tax subsidies are ripe for trimming. Erskine Bowles and Alan Simpson, co-chairs of the president’s fiscal commission, suggested capping tax-preferred contributions to the lower of $20,000 or 20 percent of income, as well as again taxing capital gains and dividends at the same rates as ordinary income. (The two proposals are related because the value of tax deferrals for retirement saving depends on the taxes that would otherwise be paid on investment earnings.)2

Though there’s not much else to like in the Bowles-Simpson plan, 401(k) tax breaks are a good place to look for budget savings. Even better would be reducing the contribution limit to $10,000 or less, as few people can afford a $10,000 contribution, let alone $50,000 (the maximum combined employer and employee contribution). Research by two Treasury Department analysts found that reducing the total contribution limit to $10,000 would have little effect on taxpayers making less than $75,000, but that roughly 80 percent of taxpayers with incomes greater than $150,000 (and 45 percent of taxpayers with incomes between $75,000 and $150,000) would see a tax increase. Affected taxpayers in the highest income group would lose a tax break averaging $3,166, even though the $10,000 cap would reduce their 401(k) contributions by only a third, on average.

As Drexel law professor Norman Stein points out in a working paper presented at a recent University of Virginia Tax Study Group panel, supporters of the status quo offer three less-than-compelling arguments in defense of maintaining 401(k) tax breaks: that their cost is exaggerated; that encouraging employers to offer 401(k)s on behalf of highly-compensated employees indirectly helps lower-income workers even if they reap little of the tax benefit; and that these tax incentives actually cost nothing if you believe that consumption, rather than income, should be taxed. Read more

Sure, it’s weak, but this ‘so-called recovery’ is no weaker than the last one, Greg Mankiw

On Monday, EPI labor economist Heidi Shierholz pointed out that job growth during the current recovery has been stronger than job growth during the recovery following the 2001 recession. In addition, the jobs recovery from the Great Recession isn’t too far off the pace following the 1990 recession; private sector job growth 33 months into the 1990 recovery was 3.4 percent, while it’s 2.7 percent for the current recovery. Shierholz’s main point is that it’s the historic length and severity of the Great Recession, and not unprecedentedly poor job growth in the recovery, that explains why we’re still so far from full employment 33 months since the recession officially ended.

Greg Mankiw, however, isn’t about to highlight that fact. Mankiw, who was chairman of the Council of Economic Advisers under George W. Bush from 2003-05 and currently serves as an economic adviser to presidential candidate Mitt Romney, posted the graph below on his blog last weekend with the dismissive headline, Monitoring the So-called Recovery:

The graph shows the employment-to-population ratio (or EPOP) going back to 2004. We see the EPOP drop steeply during the Great Recession, followed by a mostly flat trajectory since. But let’s add a line to Mankiw’s graph for a direct comparison of this recovery to the last one:

It’s clear from the figure that EPOP fell much further and faster during the Great Recession than the 2001 recession. But looking to the right of the vertical line, we see that EPOP growth (or lack thereof) in the current recovery follows the same trend (i.e., flat) as the recovery after the 2001 recession. In other words, the key difference between EPOP at this point in the current recovery versus the same point in the last recovery (during which Mankiw chaired the CEA) is the length and severity of the recession that preceded them.

Yes, this recovery is slow, and certainly there is no excuse for the current complacency from policymakers about the jobs crisis, but the folks over at Angry Bear have a good adage for Mankiw: “People who live in glass houses should be careful about throwing rocks.”

With research assistance from Heidi Shierholz and Hilary Wething

The utter wrongness of people who complain about double-counting Medicare savings

In a post today, the Committee for a Responsible Federal Budget reiterated its position that it is double-counting to argue that the Affordable Care Act both reduces the deficit and extends the life of the Medicare trust fund. Chuck Blahous, the Medicare actuary who started this mess, and Peter Suderman over at Reason agree.

Their position is wrong, wrong, wrong. First, let’s clarify the baseline. CRFB points out, correctly, that there are two baselines to choose from. The Trust Fund Baseline, which is used by Blahous, assumes that a program’s spending is constrained by the resources in its trust fund. If the trust fund is gone, the spending will automatically be cut. The Unified Budget Baseline, on the other hand, assumes that spending on programs will continue as scheduled, and the federal government will simply borrow money to ensure that benefits are not cut.

As many pointed out, the Blahous baseline is ridiculous. If spending is constrained by the trust fund, then we don’t have a problem. But the main purpose of the Affordable Care Act—heck, why we’re talking about deficit reduction in the first place!—is the assumption that we do have a problem. And even if—as CRFB states—both baselines are equally valid, it’s clear from the administration’s rhetoric that it is using the latter.

So, how can it be that a dollar can both be used to reduce the deficit and extend the trust fund? Well remember that under the baseline we’re using, program outlays aren’t constricted by the trust fund. Outlays have nothing to do with the trust fund. So therefore, extending the trust fund doesn’t cost anything, because it’s an accounting identity with no programmatic relevance.

Now, you might say that the Obama administration is being misleading, talking about extending the life of a trust fund, when under its own assumptions, the trust fund doesn’t matter. But while it may not have any impact on spending levels, it does matter for other reasons. While the size of the trust fund doesn’t determine how much spending can be done, it does potentially impact how the spending is financed. In the case of Social Security, for example, the trust fund commits income taxes (a more progressive revenue stream) in the future to redeem past surpluses financed by payroll taxes (a less progressive revenue stream); so declaring the trust fund meaningless in this case would profoundly affect the distribution of Social Security’s costs.

Trust funds also have political relevance. Even if you assume that Medicare outlays will be unaffected by the trust fund, having an insolvent trust fund opens a program up to political attacks. We’re seeing that right now with Social Security. So even if the trust fund doesn’t matter to the program’s operation, it still matters to shore of the program’s political strength. That’s something that seniors—and really anyone fond of Medicare—should care about.

A rising tide for increasing minimum wage rates

On Monday, the New York Times reported on the growing groundswell to raise wages for the lowest-paid workers by increasing minimum wage rates. Legislators in New York, New Jersey, Massachusetts, Connecticut, and Illinois are all looking toward raising their state minimums. At the same time, Iowa Sen. Tom Harkin has introduced a bill that—among making other critical investments, strengthening worker protections, increasing tax fairness, and reducing the federal deficit—would raise the federal minimum wage to $9.80 per hour over three years and then index it to inflation.

As Table 1 shows, increasing the federal minimum wage in three steps to $9.80 per hour, as described in the Harkin bill, would raise the wages of 28 million Americans. About 19.5 million workers whose wages are between the current minimum and the proposed $9.80 rate would be directly affected. Another 8.9 million whose wages are just above the proposed minimum would also see a pay increase through “spillover” effects as employers adjust their overall pay scales.

Table 1

Workers affected by proposed federal minimum wage increase

Federal minimum increased to $9.80 per hour in three increases of 85 cents, modeled for July 2012, 2013, and 2014
Total estimated workers in third year*  127,361,000
Directly affected**  19,485,000
Indirectly affected***  8,869,000
Total (directly & indirectly) affected  28,354,000

*Total estimated workers is estimated from the CPS respondents for whom either a valid hourly wage is reported or one can be imputed from weekly earnings and average weekly hours. Consequently, this estimate tends to understate the size of the full workforce.

**Directly Affected workers will see their wages rise as the new minimum wage rate will exceed their current hourly pay.

***Indirectly affected workers currently have a wage rate just above the new minimum wage (between the new minimum wage and the new minimum wage plus the dollar amount of the increase). They will receive a raise as employer pay scales are adjusted upward to reflect the new minimum wage.

Source: EPI Analysis of 2011 Current Population Survey, Outgoing Rotation Group

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Table 2 highlights some demographic characteristics of the affected workers. Fifty-four percent are women and 54 percent work full-time. The overwhelming majority (87.9 percent) are at least 20 years old. This may come as a surprise to some, as minimum-wage workers are often portrayed as teenagers working part-time. The reality is that only 12 percent of those who would be affected by the raise are teenagers and only 15 percent work fewer than 20 hours per week.

Table 2

Demographic characteristics of affected workers

Directly affected* Indirectly affected** Total affected % of total affected
Total  19,485,262  8,868,654  28,353,916 100.0%
Female  10,924,035  4,527,632  15,451,666 54.5%
Male  8,561,228  4,341,022  12,902,250 45.5%
Part-time (<20hrs/week)  3,327,498  918,690  4,246,187 15.0%
Mid-time (20-34hrs/week)  6,599,616  2,167,363  8,766,979 30.9%
Full-time (35+ hrs/week)  9,558,149  5,782,601  15,340,750 54.1%
Age 20 +  16,509,188  8,421,003  24,930,191 87.9%
Under 20  2,976,074  447,651  3,423,725 12.1%
White  10,959,722  4,960,138  15,919,860 56.1%
African American  2,741,079  1,285,583  4,026,662 14.2%
Hispanic  4,654,719  2,035,908  6,690,626 23.6%
Asian  1,129,742  587,025  1,716,767 6.1%

*Directly Affected workers will see their wages rise as the new minimum wage rate will exceed their current hourly pay.

**Indirectly affected workers currently have a wage rate just above the new minimum wage (between the new minimum wage and the new minimum wage plus the dollar amount of the increase). They will receive a raise as employer pay scales are adjusted upward to reflect the new minimum wage.

Source: EPI Analysis of 2011 Current Population Survey, Outgoing Rotation Group

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Furthermore, low-wage workers tend to spend rather than save an additional dollar earned, often because they have little other choice. The additional  household consumption generated by this boost to low-wage workers’ paychecks would benefit the labor market as a whole, because  the resulting economic activity translates into job growth. After controlling for a reduction in corporate profits resulting from the minimum wage increase, and assuming some of the business expense of paying higher wages is passed on to consumers, the net effect of the proposed minimum wage increase is an increase in economic activity of over $25 billion over the next three years, which would generate roughly 100,000 new jobs.

Table 3

Economic effects of proposed federal minimum wage increase

Federal minimum increased to $9.80 per hour in three increases of 85 cents, modeled for July 2012, 2013, and 2014
Increased wages for directly & indirectly affected* $39,677,170,000
GDP Impact** $25,115,648,697
Jobs Impact*** 103,000

*Increased wages: Total amount of increased wages for directly and indirectly affected workers.

**GDP and job stimulus figures utilize a national model to estimate the GDP impact of workers' increased earnings, after controlling for reductions to corporate profits.

***The jobs impact total represents full-time equivalent employment.The increased economic activity from additional wages adds not just jobs but also hours for people who already have jobs. Full-time employment takes that into account, by essentially taking the number of total hours added (including both hours from new jobs and more hours for people who already have jobs) and dividing by 40, to get full-time-equivalent jobs added. Jobs numbers assume full-time employment requires $115,000 in additional GDP.

Source: EPI Analysis of 2011 Current Population Survey, Outgoing Rotation Group. Job impact estimation methods can be found in: Hall, Doug and Gable, Mary. 2012. The benefits of raising Illinois' minimum wage. Washington, D.C.: Economic Policy Insitutute; and Bivens, Josh L. 2011. Method memo on estimating the jobs impact of various policy changes. Washington, D.C.: Economic Policy Institute.

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In a historical context, the increase proposed by the Harkin bill is long overdue. As John Schmitt and Janelle Jones at the Center for Economic and Policy Research explain, the real value of the minimum wage is far below its historical levels, despite the fact that the low-wage workforce is older and better educated than ever before. Congress has had to raise the minimum wage 17 times since its peak value in 1968 in order to combat inflation. Indexing the minimum wage, as 10 states have already done, would fix this problem once and for all.

The lingering effects of the recession make this an even more critical time to raise the wage floor. Even as employment has slowly picked up in the recovery, wage growth is still painfully weak. Moreover, recent reports show that low-wage work has been driving much of the recent job growth. (This also means that the figures here may actually understate the number of people who would be affected by an increase in the federal minimum.)  The Harkin bill, and similar state proposals, would give much-needed help to these workers and provide additional stimulus to the U.S. economy – all without costing anything to taxpayers.

Since when does each and every budget policy proposal have to singlehandedly eliminate the deficit?

In all seriousness, when did singlehandedly “fixing the deficit” become a necessary criterion for each and every tax and budget policy proposal? David Fahrenthold and David Nakamura invoke this strange new rule in an article in today’s Washington Post.

“Neither [the Paul Ryan budget nor the Buffett Rule] will fix the deficit problem anytime soon: The GOP’s proposal wouldn’t balance the budget until 2040. By itself, the Buffett Rule wouldn’t do it ever.”

There is a lot wrong in this sentence.

First, comparing a comprehensive budget proposal to a single tax reform is an apples-to-oranges (or apple-to-bushel-of-apples) comparison. Second, the Ryan budget doesn’t actually balance the budget until … well ever. The too-often cited Congressional Budget Office’s long-term analysis evoked here is based on the false premise that revenue will magically hold at 19 percent of GDP, ignoring the trillions of dollars of budget-busting, gimmicky tax cuts (Ryan assures that this money and more can be made up by “broadening the base” of taxation but offers no specifics). Lastly, nobody invokes the Buffett Rule as the single instrument for balancing the budget—very few fiscal policies have that reach. Take an extreme example: Immediately abolishing the Department of Defense would not balance the budget within a decade, relative to current policies. That’s besides the point–cutting more than $7 trillion in non-interest spending over a decade would produce a sustainable fiscal trajectory (ignoring sizable second-order cyclical budget effects from the massive hit to aggregate demand). The trajectory for debt held by the public is the relevant metric of fiscal sustainability, not a binary for budget deficit/budget surplus.

Fahrenthold and Nakamura double-down on brushing off non-trivial budgetary savings, also missing the broader fiscal implications of the Buffett Rule: “Even if it passed, the [Buffett Rule] would not likely make a serious dent in the country’s deficit. It might add up to $162 billion over 10 years. The national debt grows fast enough to wipe that out within two months.”

So $162 billion in budgetary savings is something to laugh at? I’ll remember that next time conservatives propose to reduce the deficit by drug-testing unemployment insurance recipients, eliminating the National Endowment for the Arts, or defunding Planned Parenthood. To be more concrete, these savings would more than supplant the draconian $134 billion 10-year cut to the Supplemental Nutrition Assistance Program (SNAP, formerly food stamps) proposed in the Ryan budget.

Further, the criticism that $162 billion is dwarfed by this year’s budget deficit is doubly misleading. For one, budget deficits have swelled in recent years because the economy is so weak. Comparing a 10-year cost-estimate of just about anything to the sizable but cyclical budget deficits spurred by the worst economic downturn since the Great Depression is unhelpful. Further, policymakers shouldn’t be concerned at all with reducing this year’s budget deficit; serious concerns about budget imbalance are about stabilizing debt in the medium and long-term, after the economy has recovered. Revenue from implementing the Buffett Rule would be weighted toward the out years, where savings will be larger relative to projected budget deficits than today, and that’s exactly how it should be.

Senator Orrin Hatch (R-Utah) echoed this very same misguided sentiment in a statement on the Buffett Rule: “The President’s so-called Buffett Rule is a dog that just won’t hunt. It was designed for no other reason than politics – there is no economic rationale for it. It would do little to bring down the debt…” This specious “if it doesn’t fix the entire problem, it’s not worth doing,” objection to raising more revenue and increasing tax progressivity was similarly trotted out in defense of the upper-income Bush-era tax cuts, the expiration of which would raise $849 billion over a decade. Luckily, Jon Stewart decided to smack at this bad argument. He probably won’t have time to go after this latest Washington Post article, which is a shame because it’s about as silly.

It’s true, the Buffett Rule won’t lower unemployment by itself (but it’s still worth doing)

The National Journal’s Jim Tankersley correctly points out that the Buffett Rule will not, by itself, solve the most pressing economic problem in front of us: the still far too high unemployment rate. Then, bizarrely for Beltway writers talking about the unemployment rate, he also correctly points out what would help lower this rate: increased aggregate demand.

But it doesn’t follow from here that the Buffett Rule is bad policy. In fact, for those who think that we should aggressively target a lower unemployment rate in the near-term while also simultaneously locking in commitments to reduce longer-run budget deficits, the Buffett Rule should be seen as a huge win. However, this is if (and only if) it is accompanied in the next couple of years with aggressive fiscal job-creation measures such as infrastructure spending, aid to states and local governments, and making sure that existing fiscal support (unemployment insurance, food stamps, targeted tax cuts) does not fade away.

Of course, I’m not one of those who think we must only pair near-term measures to lower unemployment with longer-term measures to close the deficit. I’d be happy to take the near-term measures, well, in the near-term and deal with longer-run issues when we can.

And, in fact, it would be optimal from a pure economics perspective to finance aggressive near-term fiscal support with debt in the short-term, rather than (even Buffett Rule-rule style) tax increases. But given the near-universally misplaced D.C. obsession with closing budget deficits, always and everywhere, financing job-creation efforts with the Buffett Rule and other high-income tax cuts makes plenty of sense to me.

Permanent tax increases on upper-income households provide very little drag on near-term recovery, whereas the intelligently-directed fiscal supports noted above have quite large effects. Moody’s Analytics chief economist Mark Zandi pegs the fiscal multiplier (i.e., the increase in GDP stemming from a dollar of spending increases or tax cuts) for infrastructure spending at $1.44, versus $0.35 for permanently extending all the Bush-era tax cuts. This implies that a dollar of infrastructure investment financed by a dollar of permanent tax increases would generate on net $1.09 in economic activity (a balanced-budget-multiplier).

Tankersley  concludes his piece, “If the Buffett Rule was a serious pitch to help the jobless, it would deal with one of those main drivers of unemployment. It would boost persistently weak aggregate demand or incentivize business investment.”

Nobody agrees with this general sentiment more than us at EPI – really. But given the mad rush to cut deficits, throwing the Buffett Rule on the table seems awfully smart. It minimizes short-run damage to jobs and growth from reducing the deficit, it can be paired with effective fiscal support to yield extra economic activity and jobs without increasing the deficit, and it locks in a policy that will make our tax system fairer, more efficient, and capable of generating the revenue needed to fund government in the long-run.

Panel on tax fairness and reform helps address common misperceptions

I had the opportunity to participate in an Americans for Democratic Action panel discussion yesterday on tax fairness. The panel, called “Tax Equity: Paying Fair,” was moderated by John Nichols of The Nation and included panelists Bob McIntyre of Citizens for Tax Justice, Mike Lapham of United for a Fair Economy, Dean Baker of the Center for Economic and Policy Research, Elspeth Gilmore of Resource Generation, and Chuck Marr of the Center on Budget and Policy Priorities. It was an honor to participate alongside them.

The panel covered a number of topics, including the Buffett Rule, the Paul Ryan budget, the George W. Bush-era tax cuts, the equalization of tax rates for capital and labor income, corporate tax dodging, and a financial transactions tax. But beyond the wonkier side of tax policy, Baker raised an important point that merits highlighting. He talked about people’s misperceptions regarding how much federal income tax they actually pay—in other words, confusion of marginal tax rates for (lower) effective rates. For example, the second highest tax bracket (33 percent) is assessed for single filers on taxable income between $174,400 and $379,150 (for the tax year 2011 returns due April 17). If you are a single filer with $180,000 in annual taxable income, you do not pay 33 percent on all of your income—as is widely  misperceived. You would pay 33 percent only on your total income (less the personal exemption, deductions, and exclusions) exceeding $174,400. In this case, only $5,600 of your total income would be subject to the 33 percent rate.

I was really glad to see Dean Baker bring up the point of marginal versus effective tax rate confusion, because I think widespread misperception unduly adds to public fears of returning to Clinton-era tax rates. Raising the top tax bracket from 35 percent to 39.6 percent will only very marginally impact what high earners pay. Most Americans simply do not make enough to be subject to top income tax rates; President Obama’s proposal to extend the Bush tax cuts for households with less than $200,000 ($250,000 for joint filers) in adjusted gross income—letting only the top two rates expire—would result in a tax increase for only 2.1 percent of households. I was hoping to make a similar point to Baker’s, had there been more time for that in our conversation. I was recently struck by a portrayal of tax rate perceptions and reality in Bruce Bartlett’s new book on tax reform, The Benefit and the Burden. Bartlett draws from a CBS News/New York Times poll from April 14, 2010, that asks the following:

On average, about what percentage of their household incomes would you guess most Americans pay in federal income taxes each year: less than 10 percent, between 10 and 20 percent, between 20 and 30 percent, between 30 and 40 percent, between 40 and 50 percent, or more than 50 percent, or don’t you know enough to say?

The results are depicted below. The respondents indicated they believed 5 percent of Americans pay less than 10 percent of their income in federal income taxes. The reality is 86.5 percent of Americans actually did, in 2010. Additionally, respondents indicated they believed 38 percent of Americans pay over 20 percent of their income in federal income taxes. The reality: Only 0.6 percent of Americans pay over 20 percent of their income in federal income taxes.

Tax percentage/income Perception Reality
Less than 10%













More than 50%


Don’t know



Source: The Benefit and the Burden, 2012

Thank God for trial lawyers

For many years, Corporate America has been waging a campaign to vilify the lawyers who bring suits against them. After decades of knowingly exposing workers and consumers to potentially fatal asbestos, the companies that had profited tried to kill asbestos litigation when lawsuits began to bankrupt them. When tort suits helped workers get real compensation for disabling injuries from unsafe machinery, the corporations moved to bar the suits. When class-action lawsuits proved to be an effective way to bring claims against giant corporate wrongdoers, Congress passed new laws to make such suits more difficult. And when doctors and hospitals began to pay heavily for medical malpractice, they started campaigns in every state and in Congress to limit the damages that could be awarded against them.

All of the harm that corporations and other actors have done to the public—the subjects of so much litigation—could have been better controlled by regulation with real teeth and effective enforcement. Asbestos could have been banned decades ago, as it was in most of Europe. Machines could have been required to have better lock-out mechanisms and better guarding as they were manufactured, to ensure that employees would never be maimed or killed. Drug tests could have been required to be conducted with more independence and transparency, with conflicts of interest prevented. And hospitals could be regulated to prevent unnecessary infections, misadministration of medicines, and surgery on the wrong patient or wrong limb.

But our political culture resists regulation, and even when we have regulation, the government does not always enforce it energetically. Thus, we do have a law and regulations that forbid for-profit employers from employing workers without paying them the minimum wage. And those regulations forbid the employment of students or anyone else as interns (except in very limited circumstances) without paying the minimum wage. The Department of Labor, however, does almost nothing to enforce the law in this area. Moreover, the token penalties in this and most areas of labor law lead companies to treat them as a cost of doing business.

So I was delighted to see the trial bar take this issue on, with a highly respected New York law firm suing Fox Searchlight and Hearst Corporation for failing to pay various employees the corporations called “interns,” including college graduates and even a CPA.

The effect of these suits has been salutary! Already, the media report that other employers have taken notice and law firms are now advising clients not to break the law. One USA Today headline read, “Fewer Unpaid Internships to Be Offered.”

I hope the headline is accurate, and if it is, it will be due to the efforts of Outen and Golden, LLP. The New York law firm is doing the work our government ought to be doing.

Thank God for trial lawyers.