How High Should Top Income Tax Rates Be? Getting the Fight Right

A version of this post originally appeared at the Fiscal Times.

Over at Forbes, Tim Worstall didn’t take kindly to an op-ed I authored for The Fiscal Times pointing out that research by two economists, Peter Diamond and Emmanuel Saez, indicates that individual income tax rates are currently well below their revenue-maximizing rates. He accuses me of misrepresenting their work … by completely misrepresenting their work, as well as mine. The crux of his ire with my “propaganda” is this paragraph in my piece:

“Most importantly, recent economic research has shown that productive economic activity is relatively unresponsive to increases in the top income tax rate, and the top income tax rate is well below the levels where it maximizes revenue. Economists Peter Diamond and Emmanuel Saez estimate that the revenue maximizing income tax rate is 73 percent (combing federal, state and local taxes).”

Worstall: “No, that is not what that paper says. What it does say is that in a tax system with no allowances then that peak of the Laffer Curve, that revenue [maximizing] rate, is 73 percent. What it also says is that the peak in a system with allowances is more like 54 percent.”

Nope, that’s totally wrong. What the paper says — it’s on page 7 — is that in today’s system the best estimate of the revenue-maximizing rate is 73 percent. Period.

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Dark Age budgeting: Social Security back on the table

There was once a time in the mid-2000s—a golden era, if you will—when it finally seemed widely recognized that long-run federal spending trends were driven near-entirely by rising health care costs. An equally important corollary recognition was that these health care costs were driven in turn near-entirely by rising per beneficiary cost-growth, a function of our dysfunctional health system and not a function of demographics. Lots of people deserve credit for getting this truth out, and Peter Orszag’s tenure at the Congressional Budget Office was especially useful in drumming this truth home to the Very Serious People™. Figures and bullet-points like this one seemed to help…

health care

Recognizing that demographics alone do not constitute a coming budget crisis was hugely important, because it was (a) correct and (b) focused attention on where it belonged in budget issues: reforming health care. It also relieved pressure stemming from efforts to cut Social Security. This is crucially important because Social Security is the only leg of our retirement system that is not a frank disaster, so defanging efforts to chip away at it was a huge policy win.

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Will the birthday bump prevent an increase in senior poverty from the chained CPI?

The president has proposed cutting the cost-of-living adjustment for Social Security by tying it to a “chained” consumer price index that rises more slowly than the current one, but with a partially offsetting benefit enhancement intended to protect vulnerable beneficiaries. In a fact sheet about the chained CPI belatedly released by the Office of Management and Budget, the White House claims: “Because of the benefit enhancement for the very elderly, the Budget proposal would not increase the poverty rate for Social Security beneficiaries, and would slightly reduce poverty among the very elderly according to SSA [Social Security Administration] estimates.”

This claim deserves scrutiny, since the SSA estimates aren’t shown and the description of the “benefit enhancement” was slow to be released and remains sketchy. While we await further information, a quick look at the benefit enhancement casts some doubt on this claim, since retirees with average benefits would see a benefit cut until their late 90s, and few retirees live that long.1

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The Obama budget’s misguidedly lower revenue target

President Barack Obama’s fiscal year 2014 budget request, released Wednesday, is a more centrist blueprint than his fiscal 2013 request—which was the most progressive and ambitious with regards to job creation and taxation to date. As I argued in a U.S. News debate club series, the contrast is most conspicuous and consequential on three fronts: proposing less ambitious revenue targets, largely abandoning the American Jobs Acts, and identifying benefit cuts (not just efficiency savings) in social insurance programs that the president would exchange for the more modest revenue increases.

Of these, the pre-compromise on Republicans’ third rail—raising new revenue—is perhaps the most perplexing, because unlike scaling back stimulus or cutting Social Security benefits it works directly against the administration’s prioritization of deficit reduction (a priority regrettably at odds with ensuring faster economic recovery). Remember that the “ten dollars in spending cuts for a dollar in revenue” formulation—an empirical policy slam-dunk for the GOP and twice as conservative as the five-to-one ratio for deficit-reduction measures enacted in the 112th Congress—was heretical during the GOP presidential primary campaign. The political hurdle on taxes is getting Republicans to accept the first penny of revenue and buck Grover Norquist’s Taxpayer Protection Pledge. Given this, scaling back revenue proposals accomplishes nothing.

At first blush, the president’s budget doesn’t appear to have given away much on the revenue front. The OMB Summary tables show revenue averaging 19.1 percent of GDP over FY2014-2023, seemingly roughly in line with revenues at 19.2 percent of GDP over FY2013-2022 in his previous budget request (and revised to 19.1 percent in the Mid-Session Review). But it’s important to dig deeper and figure out what’s going on here.

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President’s budget “compromises” on job-growth too

Yesterday the president released his FY2014 budget request. While there is a lot to be commended in the budget (canceling sequestration cuts, calling for an (admittedly insufficient) increase in the minimum wage, infrastructure investment, creating a “Buffett rule”) there is also plenty to dislike. Perhaps the most controversial measure is the inclusion of the chained CPI to measure the cost of living adjustment for Social Security (and to index tax brackets and other programs). This is a not a policy favorite of EPI’s (see here and here for why).

Less commented on is the dramatic scaling back of stimulus efforts in this year’s budget relative to previous versions. In last year’s FY2013 budget request, the president included a section within his proposals dedicated to “temporary tax relief and investments to create jobs and jumpstart growth.” While perhaps not as robust and exhaustive as we would like to see in an effort to insure a full economic recovery, last year’s budget was not too shabby on stimulus. It included $178 billion in stimulus proposals for FY2012, and $355 billion over FY2012-2022. Examples of stimulus in the FY2013 request included a two-year payroll tax holiday, an extension of unemployment insurance benefits, some business and energy tax credits, investment in surface transportation priorities, and a number of different policies aimed on hiring and supporting teachers and first responders and rehabilitating and rebuilding neighborhoods and schools (many of these policies were seen in his September 2011 American Jobs Act proposal).

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Leaked ESPN memo asks employees to take one for the team

Sports website Deadspin just published a leaked internal memo circulated by ESPN that gives us a small window into the sports entertainment giant’s questionable (at best) labor practices.

ESPN staffers are currently preparing to put on a new international X Games competition in Foz do Iguaçu, Brazil. In advance of their trip, ESPN operations manager Severn Sandt sent out a memo outlining ESPN’s expectations of its staff.

Citing extreme budget constraints, ESPN is asking its employees to take one for the team on their time sheets. Singling out hourly employees, the memo encourages,

“…Don’t push OT. If it’s 9:10, take the 9:00 out – don’t push for 9:30.”

The legality of this admonition aside, let’s put it into a broader business context. ESPN is owned mostly by The Walt Disney Company, and accounts for almost half of the entire value of the Disney empire. With a valuation of $40 billion, according to Wunderlich, ESPN is by no means suffering from prohibitive financial constraints.

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How to stomp on promising developments in the economy: Austerity

Luckily people seem to be taking the correct lesson from Friday’s job report: the economic recovery is (yet again) assuredly not on track. The first three months of 2013 saw average job gains of 168,000, down from the 183,000 monthly average for 2012.

This is a real shame, because there are some real reasons to think that 2013 could have turned out better than 2012 in the economy. Housing has stopped dragging on growth, and the state and local sector has gone from utter freefall to almost-stabilization.

Take the improvement from 2011 to  2012 in both of these—this combined boost was roughly 0.5% of GDP. Imagine for a second that this rate of improvement characterized 2013 as well—we’re a full half-point of GDP ahead of the game, right?

                           The Good News: Housing and SL Spending Improve
2010 2011 2012 2011-2012 swing
Residential investment -0.14 0.09 0.34 0.25
State and local spending -0.47 -0.33 -0.13 0.20
Source: BEA NIPA table 1.1.2

Sadly, we have DC policymakers who have decided to stomp on any improvement with steep cuts and the repeal of the payroll tax cut without any useful replacement. As we estimated here, the combined effect of the payroll tax cut ending and the sequester (and spending cuts baked into the cake even before the sequester kicked in) are likely to subtract more than 1.5% off of GDP growth for the year.1

Frustrated about the slow pace of recovery? Blame those in Congress insisting on damaging cuts.

1 Note that the number for the sequester in that table is slightly high—the 2-month deferral negotiated in December will slightly reduce its drag in 2013).



These days, Republicans in Congress jostle for the right flank like crazed jockeys determined to race as fast as possible even if showboating by the outer rail costs them the prize. They often appear to be paying more attention to upcoming horse auctions (Republican primaries) than winning the purse.

If Republicans’ mix of grit and speed at the expense of strategy has its opportunity costs, the Democrats’ habit of playing follow-the-leader has them tripping over themselves while failing to notice how far they drifted rightward as they try to cajole Republicans to join them in what they still believe to be the center of the track.

Hasn’t anyone noticed that the shortest route is by the inner rail, which is wide open? Especially when it comes to popular social insurance programs, good progressive policy also happens to be good politics. Well, Bernie Sanders has figured this out, but he can’t be everywhere.

Now that the president’s plan to offer up Social Security cuts in his budget has been officially “leaked,” it’s too late to get him to change his mind and time to revolt. There’s not much new to say on the topic of a chained CPI, since even supporters have all but conceded that it’s a benefit cut rather than a technical fix, as Larry Mishel recently noted. But if progressives need a prod to break their habit of loyalty to a misguided but beleaguered president, Dean Baker at CEPR has pointed out that a COLA cut would have a bigger impact on low-income beneficiaries than the recent tax increases in the American Taxpayer Relief Act had on the wealthy. If Democrats go along with this, progressives need to break with the party and follow Senator Sanders’ independent lead.

No, New Tax Cuts Will Not Pay for Themselves

If the Laffer curve hypothesis is the first commandment of the modern conservative movement, then its economist namesake, Arthur Laffer, is its chief apostle. Laffer argued that it is theoretically possible to raise more government revenue by lowering tax rates, thereby offering a “free lunch” for legislators. The understandable political allure of Laffer’s suggestion is directly responsible for a three-decade experiment with “supply-side” economics, an experiment whose failure has eroded inflation-adjusted incomes and living standards of the vast majority.

But the Laffer curve is merely an economic model, one originally sketched out on a napkin. The model has zero scope for informing good public policy without rigorous, accompanying empirical research on behavioral responses to tax changes.

And modern economic research isn’t on Laffer’s side.

Laffer’s proposition is based on the simple observation that the government will collect zero revenue if the tax rate is at either zero or at 100 percent. A revenue maximizing rate must lie between these bounds, and the Laffer curve is typically depicted as a symmetrical, concave function between these revenueless rates (implying a revenue maximizing rate of 50 percent).Read more


What we read today

Why the 400,000 new ‘low-skilled’ work visas business wants is a ridiculously high number

As I wrote earlier, one of the great things about the Chamber of Commerce and AFL-CIO agreement on a new W-visa program is that it doesn’t open up a large flow of indentured workers as other programs do. Those brought in work under the same laws and have the same rights as other workers, and they are able to obtain legal status and a path to citizenship. They can also switch jobs so they’re not indentured to one employer. Now the comments are coming in that the caps on the number of visas are too low. There will be 20,000 in the first year rising to 75,000 in the fourth year, and thereafter determined by a commission staffed by labor market experts but capped at 200,000.

Rick Newman, Chief Business Correspondent at U.S. News & World Report, writes that these limits are too strict and cites an American Enterprise Institute expert saying, 200,000 is “a really, really low number.” Newman explains:

“Some context explains why. There are roughly 135 million working Americans, so 200,000 immigrants per year would amount to a tiny fraction of the total labor force. Construction alone employs about 5.8 million people, with peak employment hitting 7.7 million in 2007.”

It is easy to see why this analysis is wrong. The comparison should not be to the total workforce but to those who are similarly skilled and working in the same occupations as the W-visa workers. Even more important, the flow of new workers each year should be compared to the newly available jobs for such workers each year.Read more

New hope for workers in immigration deal between AFL-CIO and Chamber of Commerce

A number of reports this weekend revealed that the AFL-CIO and the U.S. Chamber of Commerce have come to an agreement on a new foreign worker program to be included in comprehensive immigration legislation being drafted in the Senate. I applaud the months of hard work by business and labor, who managed to negotiate a deal that will, on balance, be fair to both foreign workers recruited to work in the United States as well as workers already in the country.

If the agreement becomes law, a new foreign worker program—the “W” visa program—will be created for lesser-skilled, non-seasonal occupations that don’t require a college degree. But unlike current U.S. temporary foreign worker (“guestworker”) programs, it will include many new and necessary worker protections. Also, a new Bureau of Immigration and Labor Market Research will be established to inform Congress about the impact of immigration on the labor market. As Matt Yglesias pointed out yesterday, many aspects of the agreement are exactly what the Economic Policy Institute has been proposing for years.

Here are some of the key components of the proposed program:Read more

Why the W-Visa agreement should be welcomed

There are reports that the AFL-CIO, representing all unions, and the Chamber of Commerce have reached an agreement on a new temporary foreign worker visa program to be included in the comprehensive immigration package being negotiated in the Senate. The new W-Visa will be created for employers to petition for foreign workers in lesser-skilled, non-seasonal non-agricultural occupations. This is a good thing, and not simply because the framework for the program draws heavily on the policies developed by former Secretary of Labor Ray Marshall working with my EPI colleague Ross Eisenbrey and others at EPI.

There was always a danger that business groups would be successful in their efforts to vastly expand programs that exploit temporary guestworkers and depress wages and labor standards for all workers. In fact, that’s the way current programs work. Another danger was that disputes in this arena would derail the broader immigration reform effort, particularly when it comes to regularizing the undocumented workforce.

Many details are not available or will have to be developed. Nevertheless, what we do know suggests that this will be a modestly scaled program that protects the workers involved and does not undercut wages. Indeed, the program is not for “temporary” workers or for “guests” at all: rather, workers (not their employers!) will be able to petition for permanent status after one year. This is a huge improvement, since current procedures for green cards give a key role to the employer, which obviously gives them great power over a worker seeking permanent resident status. Providing a path to permanent status—and eventually citizenship—makes sense to me because I always wondered why, if there’s a shortage, we need a “guest” rather than a worker?Read more

What we read today

Kerry drinks the trade Kool-Aid, but trade agreements do NOT create jobs

Secretary of State John Kerry bought into the hype around trade in a speech this week in Paris when he claimed that the proposed U.S.–EU trade and investment agreement could help Europe emerge from the economic crisis. Kerry claimed that the proposed U.S.–EU trade agreement “may be one of the best ways of helping Europe to break out of this cycle [and] have growth.” As I’ve explained before, trade agreements do not create jobs. This is not some proprietary EPI view on trade – it is a standard view straight out of economics text books.

The issue is simple: it is trade balances—the net of exports and imports—that can affect jobs. Unless trade agreements promise to reduce our too-high trade deficit, they will have no positive effect on jobs. Even worse, past trade agreements have actually been associated with larger trade deficits in their aftermath.

This is mainstream (neo-classical) trade theory, as explained by Paul Krugman in “Trade Does Not Equal Jobs.” Responding (in 2010) specifically to claims that the Korea–U.S. trade agreement could be a driver of recovery, he pointed out that in macroeconomic terms, the United Sates had too little spending on domestically-produced goods and services, with spending defined by:

Y = C + I + G + X –M

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The sequester, the Ryan budget and practically all other spending cuts actually make the debt situation worse

It’s clear that the sequester will do plenty of damage to domestic priorities like education, R&D, national parks, regulatory agencies, etc by bringing non-defense discretionary spending down to historic lows. But at least it will begin reducing the debt right away and help put the federal government on a more sustainable fiscal path, right?

Unfortunately, no. It turns out that the sequester will likely cause the debt ratio (public debt as a share of GDP) to rise rather than fall in the next couple of years. This is because there is a strong interaction between fiscal policy and the economy when the economy is weak and underperforming (i.e. operating below potential output), which the Congressional Budget Office projects it will be until mid-2017. A weak economy means a higher deficit: a high level of unemployment both depresses tax revenue and forces more people to rely on the social safety net (e.g. unemployment insurance, Medicaid, food assistance, etc). As the economy expands closer to potential output, the deficit falls because people move from the social safety net back into employment, resulting in lower spending and higher revenues.

This relationship also works in reverse: fiscal policy choices have a significant impact on the economy when it is operating below potential. Expansionary fiscal policy (i.e. spending increases or tax cuts) injects demand into the economy, causing a boost of economic activity and job creation. Contractionary fiscal policy, such as spending cuts or tax increases, drains demand from the economy and creates a drag on growth.Read more

Working as designed: high profits and stagnant wages

Newly released data on corporate profitability for 2012 show the continuation of historic levels of profitability despite excessive unemployment and stagnant wages for most workers. Specifically, the share of capital income (such as profits and interest, which are hereafter referred to as ‘profits’) in the corporate sector increased to 25.6 percent in 2012, the highest in any year since 1950-51 and far higher than the 19.9 percent share prevailing over 1969-2007, the five business cycles preceding the financial crisis.

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Time to end the reign of terror of scary upward-sloping graphs

Once a year, the Congressional Budget Office (CBO) publishes long-run debt projections under their assumptions about budget policy under future Congresses, known as the alternative fiscal scenario (AFS). It is used extensively by many—including House Budget Committee Chairman Paul Ryan (R-Wis.)—to argue that we face a catastrophe that can only be solved by effectively dismantling the social safety net and retirement systems that we have in place. But it’s also misleading.

Michael Linden at the Center for American Progress recently released a great analysis showing that this scary long-run debt projection is only scary because CBO assumes that future policymakers will make policy decisions that will make the deficit much worse. If you remove those assumptions to arrive at a more honest baseline, then the problem of an unsustainable rising debt mostly disappears.


But let’s back up a bit and marvel at the absurdity of long-term debt projections. Remember, these projected deficits are largely the product of CBO’s economic and demographic projections, coupled with assumptions about decisions made by future policymakers and long-term health costs. Moreover, economic, demographic, and other budgetary projections are most reliable in the near-term, and their margin of error compounds with time.
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What we read today

The Murray budget falls short on funding domestic programs

In a previous blog post, my colleague Andrew noted the encouraging revenue targets in Senate Budget Committee Chairman Patty Murray’s (D-WA) Senate Democratic FY2014 budget resolution—revenue that would partially replace sequestration and minimize the per dollar drag of total deficit reduction. But unfortunately the budget, like many others before it, strives to hit stringent deficit reduction targets and in the process ends up having an adverse impact on the economy and job growth by 2014 relative to current policy. This focus on deficit reduction targets likely led to another unfortunate aspect of the Murray budget: its surprisingly large cuts to non-defense discretionary (NDD) programs.

The NDD budget is vitally important to the country, and includes security funding for areas like homeland security, veterans’ affairs, nuclear weapons and foreign operations; safety net programs including housing vouchers and nutrition assistance for women and infants; most funding for the enforcement of consumer protection, environmental protection and financial regulation; and practically all of the federal government’s civilian public investments, such as infrastructure, education, training, and research and development.Read more

Senate Democratic budget overly focused on deficit reduction

Senate Budget Committee Chairman Patty Murray (D-WA) introduced, and the Senate passed, a Senate Democratic FY2014 budget resolution, which would purportedly place the public debt ratio on a more-than-sustainable trajectory down to 70.4 percent of GDP by fiscal 2023. The Murray budget deserves credit for mitigating the macroeconomic drags posed by sequestration, modestly increasing infrastructure investment and proposing substantial revenue increases. But in the end, the budget’s fixation with ten-year deficit reduction targets would result in premature near-term austerity.

The Murray budget proposes to raise an additional $923 billion in revenue over the next decade relative to current law. It also assumes that temporary tax provisions that would cost $954 billion to continue over the decade will either expire or be paid for—so against a current policy baseline in which these “tax extenders” are continued, the budget would raise $1.9 trillion.1 Revenue increases exert an economic drag, particularly while the economy remains weak, but are much less damaging per dollar than spending cuts. The Murray budget would use these revenue increases to partially replace the front-loaded, poorly designed sequester; in that context, the tax increases would help avert near-term austerity that is much more damaging. The budget would also slightly increase government spending in 2013 and 2014 relative to current policy—which assumes the sequester is repealed—and raise tax revenues in 2014.2Read more

Striking J-1 students want justice from McDonald’s and U.S. State Department

The student workers who recently went on strike at McDonald’s in Harrisburg, Pennsylvania took a big chance. They could have been fired and then deported from the country. Instead, they got their boss fired and got a meeting with the head of the State Department program that brought them to the U.S. But they aren’t finished: they want to make sure that what happened to them never happens to foreign students again.

My colleagues and I met with four of the young workers last week, who came from Peru, Paraguay, Chile and Argentina. All had been recruited into the State Department’s J-1 summer work travel visa program by GeoVisions, a State Department-approved sponsor, which promised them three months of steady wages for slinging Big Macs, decent housing and a cultural experience, followed by a month of travel wherever they wanted to go.

What they and 14 other students got was an unpredictable mix of work hours—as little as four hours in a week for some and 25 hours in a row for others. They were required to live in the basements of homes owned by their boss, Andy Cheung, who packed six into one house and eight into another, jammed together with little privacy—only a curtain to separate the beds of four young men from four women. They were cheated on wages they earned, overcharged for their housing and forced to walk to work on highways instead of riding in free transportation they’d been promised. At least one was actually in debt to Cheung after almost 3 months of work.Read more

Manufacturing employment: Nothing to see here, move along…

Dylan Matthews at Wonkblog posts a graph from Robert Lawrence and Lawrence Edwards that purports to show manufacturing employment declines are simply a capitalist inevitability. It’s essentially this graph:


So, if manufacturing employment is always shrinking as a share of overall employment, the implicit argument is that nothing– say very large trade deficits that characterized the past decade and a half in the American economy – can really affect this trend one way or the other.Read more

Aggressively targeting a full recovery is the least risky thing you can do: Back to Work Budget edition

A common theme has emerged in recent punditry and economic analysis: policymakers should begin withdrawing support for growth and jobs because the economy is rapidly improving. In recent months one can find several examples of commentators urging the Federal Reserve to abandon its efforts to boost activity and jobs and begin tightening to forestall (so far completely hypothetical) inflation. And any call for fiscal support for job creation on a real scale is greeted with hand-wringing about its riskiness—as can be seen in much reaction to the  Congressional Progressive Caucus’s “Back to Work” fiscal 2014 budget alternative (BTWB, henceforth), which would invest $2.1 trillion in job creation measures over 2013-2015.

For example, David Brooks criticized the BTWB on the (incorrect) grounds that the economy “is finally beginning to take off…[as there is no longer] a large and growing gap between the economy’s current output and what it is capable of producing.” And a recent column by Ezra Klein contained concerns from Moody’s Analytics chief economist Mark Zandi that the BTWB  targets job growth too aggressively, meaning that: (a) the overall economy has recovered enough (or surely will) that it doesn’t need this boost; and (b) that recovery has been and will be sufficiently fast that even the estimates of how much fiscal support will boost jobs and growth are overstated.

We strongly disagree. The economy remains deeply depressed, and the coming year will see a significant drag on already inadequate growth from further fiscal contraction (sequestration on top of deepening discretionary spending cuts and expiration of the payroll tax cut). Given this, there’s no reason at all to think that fiscal expansion would be less effective than in the past 3-4 years, and there is certainly no reason to gamble on a robust recovery without policy help.Read more

David Brooks is wrong on the CPC’s Back to Work budget

David Brooks recently wrote a misguided column criticizing the Congressional Progressive Caucus’ Back to Work fiscal 2014 budget, which the House voted on yesterday. I am proud that EPI budget analysts and I worked closely with the CPC on the proposal’s development and analysis, so I want to clarify where Brooks went wrong.

Brooks and I disagree in two major areas: differing evaluations of the state of economic recovery and prospects for growth, and the role of rich people and the government in generating growth.

Brooks sees an economy that “is finally beginning to take off” and no longer has “a large and growing gap between the economy’s current output and what it is capable of producing.” In contrast, I see an economy with 7.7 percent unemployment, and unemployment projected by the Congressional Budget Office to be roughly 7 percent by the end of 2015. Current unemployment is comparable to that of the worst month of the early 1990s recession and substantially higher than that of the worst month of the early 2000s recession.

Furthermore, the U.S. economy in late 2012 was running $985 billion (5.9 percent) below potential output for the year—which is equivalent to each person losing $3,100 (annually). I will grant Brooks that this “output gap” is not currently growing larger. Nevertheless, the gap has not changed much in two years (it was 6.1 percent in the second half of 2010) and is now much higher than the worst quarters of the recessions in the 1970s, 1990s, and early 2000s (5.0, 3.6, and 2.1 percent respectively). In short, the gap is no longer “large and growing”; it is just “large and not shrinking” and looks relatively stable. The depressed economy is suppressing wage growth (there have been no improvements in wages and benefits for the large majority of American workers for more than ten years!) and we are scarring a generation of young people—both those in school as well as those searching for the bottom rungs of a career ladder. This state of affairs is unacceptable and, therefore, government policy should not accept it.Read more

To chain or not to chain

In an effort to obtain a Grand Bargain on deficit reduction, the Obama administration has offered to accept a Republican proposal for a new inflation index—a chained CPI—in setting the annual cost of living adjustment (COLA) for Social Security benefits. This new inflation index would also apply to the indexation of income tax brackets. Since a chained CPI is expected to show lower inflation, the change in indexation will mean lower COLAs and greater revenues over time. This is the first of two posts articulating why accepting a chained CPI for calculating the Social Security COLA is a bad policy choice. The other post will address the chained CPI proposal in the context of Social Security policy. This post addresses whether a chained CPI is simply a “technical fix,” as some maintain, to obtain an accurate measure of inflation. I pay particular attention to my disagreements with my friends at the Center on Budget and Policy Priorities (CBPP).

A better measure of inflation?

Let’s be straight, a chained CPI is not a more accurate measure of inflation for setting the COLA for Social Security beneficiaries. There is a good argument to be made for any given reference population that a chained CPI index is more accurate than an unchained index. However, this “any given reference population” is an important caveat: applying a chained CPI for average consumers to calculate price increases faced by Social Security beneficiaries is not an improvement in accuracy since the expenditures of Social Security beneficiaries, especially the elderly, are very different than the average consumer. As experts have pointed out, indices based on the spending patterns of workers or the general population likely understate the impact of cost increases faced by Social Security beneficiaries because seniors and disabled people spend a greater share of their incomes on out-of-pocket medical expenses than do other consumers, and health costs have risen faster than overall inflation in recent decades. This has been documented in the Bureau of Labor Statistics’ (BLS) CPI-E inflation measure which uses consumption weights specific to the elderly and had 0.2 percent faster inflation from 1982 to 2007 than the measure currently used to index Social Security benefits.

So, what this means is that there are two known biases to current Social Security COLA indexation, the failure to chain expenditures (which overstates inflation) and the failure to adopt weighting particular to Social Security beneficiaries (which understates inflation). Yet too many inside the Beltway only seem interested in correcting the first. And why this narrow focus? The only rationale for imposing a new inflation measure on the elderly that only addresses the chaining bias is to reduce benefits.Read more

What we read today

What we read today (and yesterday):

House Democratic budget would also boost employment

House Budget Committee Ranking Member Chris Van Hollen (D-MD) has introduced the House Democratic FY2014 budget alternative, which would lessen the near-term economic drags left in place by the lame-duck budget deal. While understandably less ambitious in terms of job creation than the Congressional Progressive Caucus’s “Back to Work” budget, the Van Hollen budget deserves credit both for financing some renewed fiscal expansion to boost growth and for fully averting the macroeconomic drags posed by sequestration.

The Van Hollen budget adopts job creation proposals from the president’s jobs package (in his fiscal 2013 budget request), financing $174 billion in stimulus spending over fiscal 2013—2015.1 These stimulus provisions include $55 billion for rehiring teachers and modernizing K-12 schools, $37 billion in infrastructure investments, and $19 billion for a targeted tax credit for businesses that increase payroll, among other policies. Relative to current budget policy (which assumes the sequester is repealed), the Van Hollen budget would increase government spending in fiscal 2013 and 2014, as well as cut taxes in 2013.2

On net, we estimate that the Van Hollen budget would boost GDP growth by 0.4 percent and increase employment by roughly 450,000 jobs in 2013, relative to current policy. A smaller economic boost of 0.1 percent of GDP and roughly 110,000 jobs would be expected in 2014. Note that CBO’s baseline forecast shows employment rising by 1.5 million jobs between the fourth quarter of 2013 and the fourth quarter of 2014; these estimates do not suggest that 340,000 jobs would be lost between 2013 and 2014, simply that employment would rise faster and higher than otherwise projected over the next two years.

The Van Hollen budget also replaces sequestration, whereas the current policy baseline presupposes the repeal of sequestration—in keeping with budgetary scorekeeping conventions of the past two years—but which is by no means certain. We previously estimated that sequestration would reduce growth by 0.6 percent and employment by 660,000 jobs in 2013, with the drag growing to 0.8 percent and 910,000 fewer jobs in 2014. So relative to a world in which sequestration remains in effect, the Van Hollen budget would boost employment by more than 1.1 million jobs in 2013 and just over 1.0 million jobs in 2014.Read more

CEOs explain how H-1B visa hurts U.S. competitiveness

As the “Gang of Eight” senators reportedly continue to work diligently on drafting bipartisan legislation to comprehensively reform U.S. immigration laws, one of the key issues they will try to resolve is how to manage future flows of educated temporary and permanent immigrants who will work in the science, technology, engineering, and math (STEM) fields. A key topic of contention will be the H-1B visa, the principal guest worker program for educated workers in STEM fields. That’s why on March 14 a briefing was held on Capitol Hill to inform Senate staffers about the H-1B program’s impacts on the labor market and job opportunities for U.S. workers in STEM fields. The briefing offered facts and perspectives about the H-1B that are usually ignored or overlooked by the media; including from CEOs who use the program.

Yesterday Politico reported how the briefing would provide balance to the heavy lobbying by the tech industry in favor of the H-1B program. The industry is looking to triple or quadruple the number of guest worker visas available, using the proposed “I-Squared Act” as the model, and without any regard to the reality that unemployment for college-educated STEM workers is still double what it was before the recession. While (if enacted) the I-Squared Act would vastly expand the H-1B program, it does nothing to remedy the loopholes in the program that permit employers to hire a guest worker without first having to recruit qualified and available U.S. workers, and allow the majority of H-1B workers to be vastly underpaid relative to U.S. workers in the same occupation and local area.

Computerworld reported today on two other key messages that came out of the briefing: American students are being discouraged from pursuing STEM careers and many U.S. companies are at a competitive disadvantage thanks to guest worker programs. This absurd result occurs in part because nearly half of the available visas are granted to offshore outsourcing companies with a business model that transfers high tech American jobs overseas. Although globalization is a reality and here to stay – which means some jobs will inevitably relocate from country to country as economic and market conditions shift – the H-1B program is unnecessarily facilitating an exodus of STEM jobs that could just as easily remain in the United States.

The tech industry isn’t lobbying to remedy any of these alarming flaws in the H-1B program, because companies benefit directly from the status quo in the form of the artificially low salaries they are allowed to pay H-1B workers, as well as from an expanded labor pool that keeps wages from increasing for all STEM workers. Yesterday’s briefing offered a range of perspectives on the H-1B program to help explain this: it was moderated by Rochester Institute of Technology professor and engineer Ron Hira, and included the president of the International Federation of Professional and Technical Engineers, an H-1B worker from the Philippines, and two tech company CEOs—Brian Keane of Ameritas Technologies and Neeraj Gupta of Systems in Motion—both of whom have used the H-1B program in the past to hire guest workers (and in the case of Gupta, to send jobs offshore).

Before the briefing took place, Politico wrote that Keane and Gupta would “present a contrast to the defense [of the H-1B program] echoed by most tech industry representatives at a recent House Judiciary subcommittee hearing.” This was correct, and Keane and Gupta’s opening statements are worth reading because they offer unique insight into how the H-1B program is abused and exploited by employers of STEM workers, and they offer compelling reasons why the program should undergo major reforms. Also, they provide smart recommendations on how to fix the H-1B program, and suggest it could be valuable to the American economy and contribute to innovation in STEM fields if it were operating as intended. Both statements are available for download below.

READ: Opening statement of Brian Keane, CEO, Ameritas Technologies

READ: Opening Statement of Neeraj Gupta, CEO, Systems in Motion

Path to Prosperity? How about Path of Austerity

Paul Ryan’s FY2014 budget alternative was released earlier this week, and though titled Path to Prosperity, a more appropriate title would be “Path of Austerity.” Ryan’s budget alternative dwarfs the austerity already hitting the economy, such as the expiration of the payroll tax cut, the Budget Control Act spending caps, and the sequestration cuts that just went into effect. His plan would slash spending by $5.7 trillion relative to CBO’s current law baseline and $4.6 trillion relative to his current policy baseline (which removes CBO’s unrealistic extrapolations of war and emergency spending). As my colleague Andrew Fieldhouse detailed in an analysis earlier this week, cuts of this magnitude would have negative impacts on both economic growth and employment. But Ryan’s budget would also have huge impacts on the actual programs themselves, and by extension the people who rely on those programs.

Ryan’s budget doesn’t stretch all to far from his FY2013 budget alternative last year in terms of tone or policy prescriptions, though this year he does propose fully eliminating the projected deficit in ten years. He does this almost exclusively by targeting spending (and to the chagrin of some of his conservative allies, he does not repeal some recent changes to revenue under current law—namely revenue raised under the American Taxpayers Relief Act and some revenue raisers included in the Affordable Care Act).Read more