Just once, I wish Mary Williams Walsh would write a story about public employee pensions that included key information that isn’t convenient to an agenda of doing away with or greatly reducing public employee pensions. Every story she writes, including her most recent, seems designed to scare the public, make public employees look bad, their unions look greedy, and government administrators seem weak or stupid.
In her most recent piece, Walsh lends great support to those claiming that public pension plans are erring (or even dissembling) in using assumptions about annual rates of return for their assets that are unrealistically high. The further claim is that using more “reasonable” rates of return (i.e., lower ones) will show the “true” crisis in public pensions.
Walsh writes: “The typical public pension plan assumes its investments will earn average annual returns of 8 percent over the long term, according to the Center for Retirement Research at Boston College. Actual experience since 2000 has been much less, 5.7 percent over the last 10 years, according to the National Association of State Retirement Administrators.”
This may seem like bloodless analysis, but it’s not—it’s giving great aid to a bogus argument forwarded by ideologues that are deeply hostile to public pension plans on principle. Because most plans look to be in decent shape based on current actuarial standards that justify assuming 8 percent rates of return, these ideologues have to claim that these assumptions are somehow wrong. But pointing to returns over the past 10 years as evidence of this is ridiculous because it completely ignores the fact that the U.S. and world economies experienced the biggest financial downturn in 80 years! How can Walsh be surprised that returns over a period that included two recessions have been subpar? This isn’t front-page news or news at all. It would be news if returns over that period had met expectations.
Even more serious is Walsh’s distortion of the National Association of State Retirement Administrators’ report, which was a very positive statement about the returns public employee plans have achieved:
Although public pension funds, along with most other investors, have experienced sub-par returns over the past decade, median public pension fund returns over longer periods exceed the assumed rates used by most plans. As shown in Figure 1, median annualized investment returns for the 20- and 25-year periods ended June 30, 2011, exceed the most-used investment return assumption of 8.0 percent. For example, for the 25-year period ended June 30, 2011, the median annualized return was 8.5 percent.
Walsh quotes the professed doubts of Edward McMahon, a fellow at the anti-government Empire Center for New York State Policy, that even a 7 percent return on investment can be safely assumed. But McMahon is not a neutral observer; he’s a right-wing, anti-union ideologue with an agenda to do away with public employee defined benefit pensions altogether. It is not news to me that the Empire Center has long wanted to cut public employee benefits and compensation, but Walsh would have done most readers a service by mentioning that to her readers.
Just once I wish Walsh would cite Dean Baker’s opposing analysis, which is based on the fact that the stock market is currently priced low enough, as measured by the ratio of prices to earnings, to justify expected returns of 8 percent or more. As Baker, the co-director of the Center for Economic and Policy Research, points out, individuals who sold Social Security privatization with visions of never-ending 8-10 percent stock market returns back when price-to-earnings ratios were at historic highs (hence making inflated returns hugely unlikely) now have the gall to attack pension plans that expect returns of 7.5 percent when price-to-earnings ratios have returned to historic norms (norms generally consistent with long-run returns of 8 percent).
What does this detour into what people claimed during fights over Social Security privatization have to do with the attack on public pensions? Earlier, I referred to ideologues like McMahon pushing the claim that projected returns of 8 percent for public pension plans are unrealistically high. How do I know this claim is ideology instead of professional judgment? Well, because in 2003 McMahon claimed that replacing public pensions with 401(k) plans would be fair for employees because they could expect returns of 9.75 percent.
In short, what at first seem like wonky debates over appropriate rates of return have actually degenerated into misinformation campaigns waged by committed opponents of public pensions. The rates these plans are assuming today are in line with actuarial practice and (much more importantly) economically reasonable. I’m sorry that this view doesn’t advance the much juicier story of a fiscal crisis coming, but it’s based on the facts.
A majority of Alabama’s politicians apparently believe that they can improve their state economy by chasing away the undocumented workers who live there. By making them criminals (turning them into illegal aliens), denying them basic services like water and electricity, and terrifying their families, they hope to rid the state of people they see as a burden on taxpayers and competitors for scarce jobs. Well, after a year’s application of this medicine (June marks the first anniversary of the passage of HB 56), how’s the experiment coming along? Has the economy been jump-started or even improved?
Let’s start with job creation. Has Alabama created more jobs than its neighbors over the last year? No; in fact, it’s both below the regional average and well below the national average. Alabama’s employment growth has been only one-seventh the national average (0.2 percent vs. 1.4 percent). The United States has regained about 43 percent of the jobs lost at the bottom of the recession; Alabama has only recovered about 9 percent of the jobs it lost.
Figure 1: Source: EPI analysis of Local Area Unemployment Statistics public data sets
Has it made the state or its workers richer or better off? No, apparently not. Even with fewer workers, personal income per worker fell in Alabama during the two quarters that followed enactment of HB 56, while in the neighboring states, it was unchanged.
Figure 2: Source: EPI analysis of Current Employment Statistics and Bureau of Economic Analysis National Income and Product Accounts public data
How about unemployment? Has chasing away all of those immigrants opened up tens of thousands of existing jobs for native Alabamans and cut the number of unemployed more than Alabama’s neighbors? No, not exactly. Compared to all four of its neighboring states (Tennessee, Georgia, Mississippi, and Florida), Alabama’s unemployment fell a little faster over the past year—2 percentage points vs 1.7 percentage points—but Alabama lost 52,000 workers from its labor force in less than a year while the labor force grew in the four neighboring states. Alabama doesn’t have a positive story to tell.
Figure 3: Source: EPI analysis Local Area Unemployment Statistics public data series
Far from being an economic panacea, the early returns suggest that HB 56 has not been good for Alabamans in terms of job creation or personal income. Immigrant-bashing isn’t the path to prosperity.
Conservatives say CEO compensation levels are fine now that it takes 10 hours to earn a typical worker’s annual compensation
There have been some interesting responses by conservatives to the new data Natalie Sabadish and I have released on the CEO-to-worker pay ratio. Apparently, our study reporting that CEO pay has fallen during the fiscal crisis and is far down from the dizzying heights of the tech bubble in 2000 is taken to mean that that any concern about the growth of top incomes is now out-of-date and inappropriate.
Conservative columnist Wynton Hall at Breitbart.com writes:
“A graph by the Economic Policy Institute shows that while the relative pay of CEOs shot up in the 1990s, it has since fallen by nearly half, a trajectory that hardly supports the class warfare rhetoric of Occupy Wall Street and the Obama Administration.”
And Greg Mankiw also touted our findings, writing, “The relative pay of CEOs skyrocketed during the 1990s and has since fallen by about half.”
The attention and the recognition of the accuracy of our empirical work are much appreciated. A few comments are in order. First, it seems that these folks are celebrating that a non-problem, at least in their view, has been solved. After all, I don’t recall conservatives being upset by the roughly $20 million CEO pay packages in 2000 or the $18 million CEO packages in 2007. So, it is hard to understand why they feel so gratified by CEO compensation packages averaging $11 or $12 million in 2011.
Second, while it is true that the CEO-to-worker compensation ratio fell from 411.3 in 2000 to 209.4 in 2011, that still means that CEO compensation is spectacularly high. For instance, that means that the average CEO earns in 10 hours what a typical worker earns in an entire year. Moreover, as we reported in our study (page 4):
“CEO compensation in 2011 is very high by any metric, except when compared with its own peak in 2000, after the 1990s stock bubble. From 1978–2011, CEO compensation grew more than 725 percent, substantially more than the stock market [which grew less than 400 percent] and remarkably more than worker compensation, at a meager 5.7 percent.”
The trend in CEO compensation since 1965 is in the figure. Two measures are presented, one where stock options granted are included and the other where stock options exercised are included. In either measure of CEO compensation, the growth between 1978 ($1.3 or 1.4 million), 1989 ($2.5 or 2.6 million), or 1995 ($5.6 or $6.2 million) and 2011 ($11.1 or $12.1 million) is pretty astounding and very hard to justify. Exactly how does one justify/explain that CEO compensation has doubled since 1995?
Figure 1: 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
I was on PBS’ NewsHour last night, talking austerity. I’m against it. Ken Rogoff from Harvard was also on, and he’s actually against it too. One point of disagreement came up, though, when I made the argument that public debt incurred when the economy is depressed causes no economic damage (in fact, it acts instead as a useful palliative).
Rogoff disagreed in principle and then said something kind of startling—that increases in deficits and debt could lead to incomes in the near-ish future (i.e., less than 30 years from now) that are “20 percent lower.”
I’m assuming this claim has some relation to a Congressional Budget Office estimate of the effect of one particular fiscal scenario (the “alternative fiscal scenario,” or AFS) that projects the effects of large increases in budget deficits in coming decades on economic growth (see table below from the CBO report (p. 28)). The mechanism is that rising deficits increase interest rates which lead to lower private investment and a stronger dollar, which leads in turn to higher trade deficits and rising foreign debt.
Set aside for a second whether or not there are some problems with these calculations—both in relying on the AFS to make predictions and in how to apportion the impact of higher interest rates between crowded-out domestic investment versus increased trade deficits. The more salient point is simply that there is nothing in the CBO analysis that rebuts my larger point: Potential damage from increased public debt does not materialize when this debt is taken on when the economy is depressed. Here’s the CBO on the issue (p. 21 in the linked report):
“… when the economy has substantial unemployment and unused factories, offices, and equipment, federal budget deficits—and thus additional debt—generally boost demand, thereby increasing output and employment relative to what would occur with a balanced budget. … CBO’s estimates in this chapter [ed: estimates about the output-depressing effects of budget deficits and extra public debt] do not take those short-run effects on demand into account. Indeed, the estimates reflect the assumption that over the long run, output is always at its potential level”
In short, the potential output-depressing effects stemming from budget deficits that the CBO is estimating only hold when “output is at its potential level.” Or to say it another way, the exact way I said it earlier, extra public debt incurred when the economy is depressed (i.e., output is not “at its potential level”) causes no economic damage.
And in fact, when extra public debt is incurred when the economy is depressed, the boost it gives (if spent wisely) to economic output can easily be large enough to actually reduce overall the overall debt/GDP ratio by boosting the denominator and by spurring enough additional tax collections to actually self-finance part of the extra debt. How are people so sure that the extra debt incurred in recent years hasn’t led to any of the downsides from crowding out or upward pressure on the value of the dollar? Simple—interest rates have not risen. And remember, the entire economic chain wherein incurring public debt leads to crowding-out and trade deficits is through upward pressure on interest rates. And, since the depressed economy is putting ferocious downward pressure on interest rates, there is no damage done.
Until the economy recovers and this downward pressure on interest rates relents, additional increments of public debt do not hurt, and scare-stories about the 20 percent income loss possible 25 years from now because of deficits do not change this calculus at all.
For the past few months, I (and others in favor of allowing the Bush-era tax cuts for the rich to expire) had worried that once we got into the lame duck session, congressional Democrats would let their position slip and start supporting extending tax cuts for couples with income above $250,000 (individuals above $200,000). But I thought at the very least it would happen in the last month or two, when the pressure was really being brought to bear.
Turns out, it happened a lot sooner than that. Yesterday, House Minority Leader Nancy Pelosi (D-Calif.) signaled support for allowing the Bush-era tax cuts under $1 million to expire. Pelosi explained, “It is unacceptable to hold tax cuts for the middle class hostage to extending multi-billion dollar tax breaks for millionaires, Big Oil, special interests, and corporations that ship jobs overseas.”
Yes, I understand that “tax breaks for millionaires” sounds better in a press release than “tax breaks for households with income over $200,000, or $250,000 for couples.” And perhaps she felt forced into this, worrying that she might not be able to hold her caucus at the $250,000 mark, opting instead to retreat to more defensible terrain before the battle royal later this year.
But this shift has a number of very disturbing consequences:
1) Slipping to the right.This will now be the left pole of the debate. The Democratic Party has moved from opposing the Bush-era tax cuts to supporting 80 percent of them, to now supporting nearly 90 percent of them. And yet these concessions have been given for free, without any countervailing progressive demands. This is just more evidence that the tax debate is shifting further to the right. Pelosi may have done this for short-term advantage, but in the long run, these shifts tend to be very difficult to reverse.
2) More spending cuts. Given that the Bush-era tax cuts cost $2.6 trillion over the last decade and will cost over $4 trillion in the next decade, this concession will put even greater pressure on the budgets of vital safety net and public investment programs.
3) The definition of “middle class” is losing relevance. The previous definition of the middle class as being anyone under the $250,000 threshold was already a severe stretch. After all, you’re talking about people who (1) are making five times that of the typical American household (which makes closer to $50,000 a year in combined income), and (2) whose incomes are higher than 98 percent of American households. To now extend the definition of middle class to people who make 20 times that of the average household and whose income is greater than over 99 percent of households is to define away the entire concept of the middle class.
4) Bigger tax cuts to the highest-income Americans. This shift isn’t just a huge boon to upper-income households making between $250,000 and $1 million in income. In fact, about half of these additional tax cuts would go toward households with over $1 million in income. This is because the cut-off—be it $250,000 or $1 million—represents the portion of a taxpayer’s income that is subject to the continued tax cut. So the previous Democratic position—which remains President Obama’s public position—is that if you make over $250,000, you still get to keep your tax cuts for all your income below that threshold and only have to pay higher rates on income above that threshold. Revising the threshold up to $1 million basically means that all income between $250,000 and $1 million also retains its tax cuts, and as it turns out, about half of those tax cuts will go to people with income over $1 million.
As Jared Bernstein said, we’ll let the game theorists argue over whether this helps or hurts the Democrats’ negotiating position. But even if this does give the Democrats the upper hand in negotiations, what then? The whole point is to enact a tax code that can adequately fund the social safety net and public investments that we need to create a stronger economy with equal opportunity for all. Retaining the tax cuts for most people making over $250,000 and reducing the tax increase that people making over a $1 million would be subject to, makes that job significantly more difficult, if not impossible.
With New Jersey joining several other states in considering raising its minimum wage, it is appropriate to do some myth-busting around the minimum wage, in particular addressing myths around who comprises the minimum-wage workforce, and what the employment impact of increasing the minimum wage would be.
EPI’s analysis of the New Jersey proposal shows that 307,000 workers will be directly helped by raising the New Jersey minimum wage from $7.25 an hour to $8.50 an hour (because their current wages fall between those points), with another 233,000 workers benefiting indirectly (those whose wages are slightly above the new minimum wage who would see their wages increased modestly). The prevailing misconception is that most minimum-wage workers are middle-class teenagers working part-time for extra spending money. The facts tell a different story. Of those workers benefiting from the proposed minimum wage increase, slightly over half (55 percent) are female, more than four in five (85 percent) are 20 years of age or older, and nearly four in five (79 percent) work more than part-time (29 percent work mid-time, between 20-35 hours a week, and 50 percent work full-time, 35-plus hours a week). More than 3 in 4 workers (76 percent) benefiting from an increase in the minimum wage have a high school diploma or more—and nearly half (46 percent) of workers affected are white non-Hispanic (as seen in Figure 1). Over 282,000 New Jersey children have a parent who would benefit from increasing the minimum wage.
Figure 1: Source: EPI Analysis of 2011 Current Population Survey, ORG data
GDP impact and job creation
The EPI analysis of the impact of the proposed minimum wage increase shows that those workers benefiting (both directly and indirectly) from increased wages, will see an additional $439 million in wages in the first year following the proposed minimum wage increase. For those benefiting, the average increase in their annual income would be $810.
In the first year following the increase in the minimum wage, we estimate that increased spending by workers who see a raise will boost GDP by $278 million. Wage increases resulting from indexing to inflation would result in further GDP boosts in future years. Economists widely recognize the relationship between GDP growth and employment growth. Our model shows that 2,420 full-time equivalent (FTE) jobs would be created in the first year as a result of the GDP boost resulting from New Jersey’s proposed minimum wage increase. These jobs would be concentrated within New Jersey, since lower-income workers disproportionately spend their wages locally to meet the immediate needs of their families.
The minimum wage as defense against further erosion of wages
As seen in Figure 2, New Jersey saw significant erosion of low wages (those at the 20th percentile) between 2009-2011. New Jersey’s $0.60 erosion of wages at the 20th percentile was the 11th greatest wage loss of all states, exceeding the national low-wage erosion by $0.14. With unemployment rates remaining high, employers do not have to provide wage increases to get and keep the workers they need. Since well over half (56 percent) of those receiving additional income as a result of the proposed minimum wage increase fall in the bottom two income quintiles, it is clear that slowing this wage erosion would significantly help lower-income workers.
Figure 2: Source: EPI analysis of Current Population Survey, ORG data. Note, “Low Wage” = wage at the 20th percentile. Figure shows change in the 20th percentile real wage between 2009 and 2011.
Increasing New Jersey’s minimum wage is the right thing to do for several reasons. It is smart economics, boosting a weak economic recovery that has New Jersey firmly in its grips, and it improves the well-being of working families still reeling from the effects of the Great Recession.
Does J.P. Morgan Chairman and Chief Executive Jamie Dimon belong on the board of the New York Federal Reserve? Of course not. And there’s actually a petition demanding his resignation or removal, being pushed by former IMF Chief Economist Simon Johnson.
But it’s also important to note that he didn’t belong on the board two months ago either—before the large trading loss J.P. Morgan suffered made news. And it’s not just Dimon, it’s the whole structure of Federal Reserve banks that needs reform.
The problem is that the boards of directors for regional Federal Reserve banks are composed of financial-sector executives—and these boards then get to choose five of the 12 voting members of the Federal Reserve’s Open Market Committee (FOMC), the body that makes monetary policy decisions. So, essentially 42 percent of the committee that controls the single most important lever of macroeconomic policy for the country is picked by banking executives. Oh, and the New York Fed, while technically a regional bank, occupies a permanent seat on the FOMC.
This is all made more ironic by the fact that any attempt by outsiders to criticize the Fed often leads to distressed hand-wringing by the Beltway elite about the sanctity of Fed “independence.” But of course, they are not talking about “independence” in any normal sense of the word, but rather independence from having to consider the views of those in the economy who might have different interests from finance.
So, sign the Dimon petition. But also, and much more importantly, support the efforts by legislators in Congress like Barney Frank and Bernie Sanders to undertake more comprehensive reform of the Fed. Because none of this is personal, it’s just business.
Given that Speaker of the House John Boehner (R-Ohio) essentially promised last week to engineer a replay of last summer’s debt ceiling fight at the first opportunity, people have been wondering if that previous fight could be tied directly to subsequent economic damage in the form of lost output or jobs.
The short answer: maybe.
Before going into this question, however, it is worth noting that there is absolutely zero economic reason to believe that current levels (and expansions in recent years) of public debt are damaging to the economy. We can say this with confidence for a couple of reasons, based in pretty boring textbook macroeconomics. First, interest rates remain historically low, meaning that lenders are not just willing, but intensely eager, to keep financing budget deficits. Second, these low interest rates are not based on capricious market sentiment that could turn on a dime; instead they’re based on economic fundamentals.
To put it quickly, the same thing that is keeping interest rates low is what is keeping the economy weak – an excess of desired savings from households and businesses over demand for new borrowing and investments. So there will be upward pressure on interest rates if and only if this fundamental economic weakness is resolved, and not before.
But while economic fundamentals regarding public debt pose no threat to the U.S. economy, political brinksmanship might. As the nation approached the (arbitrary, unuseful, and dangerous) statutory debt ceiling last summer, what had been historically a pro forma vote to keep the federal government from defaulting on its obligations became this time a chance for GOP members of Congress to extort passage of some of their own pet policies in exchange for not causing an economic crisis. Eventually, the debt ceiling was raised in a deal to cut more than $1 trillion in spending over the next decade.
Given Boehner’s threat/promise of last week, this brings us back to the main question: Did last summer’s political wrangling over the debt ceiling inflict tangible harm on the economy?
Circumstantial piece of evidence exhibit A is that economic growth decelerated markedly in the middle of the year (see figure below on year-over-year GDP growth), roughly as the debt ceiling debate came to a head.
Source: Author’s analysis of Bureau of Economic Analysis National Income and Product Accounts public data series
Further, a paper by Scott Baker, Nicholas Bloom, and Stephen Davis (2012) has attempted to construct an empirical measure of economic uncertainty and estimate the association of rising uncertainty with economic performance. While the paper has often been cited by critics of the Obama administration who think that it estimates the effect of regulatory uncertainty on growth, there is actually almost nothing in the paper to support this reading.
But the paper does show a very large increase in economic uncertainty associated with the debt ceiling fight (see the figure below, which is lifted directly from the paper, including the association of the last spike with the fight over the debt ceiling). In fact, the index of economic uncertainty rose more in the midst of last summer’s debt ceiling fight than it did during the financial meltdown of fall 2008 (when Lehman Brothers collapsed).
Lastly, Baker, Bloom and Davis (2012) estimate that the rise in economic uncertainty as large as the total rise that occurred between the index’s trough in 2006 and its peak in 2011 is associated with a contraction in GDP of more than two percentage points and a reduction in employment of more than 2 million jobs. Eyeballing their chart, the fight over the debt ceiling accounts for nearly half of this 2006 to 2011 rise. If one believes their estimates of the effect of a rise in uncertainty of roughly this size and one is willing to make very strong assumptions about causality (more on this below) this means that the fight over the debt ceiling could have cost the economy a percentage point of GDP and a million jobs (Baker, Bloom and Davis say that these effects manifest between nine and 24 months later).
How hard should we lean on an estimate like this? Not very—the causal relationship between measures of economic uncertainty and performance clearly runs both ways. As Baker, Bloom and Davis note, “So, for example, it could be that policy uncertainty causes recessions, or that policy uncertainty is a forward-looking variable that rises in advance of anticipated recessions.”
Does fighting about the statutory debt ceiling in and of itself damage the economy? Maybe—and it’s clear that the current economy needs no further drags on growth in the coming year.
What’s much clearer is that an actual financial crisis caused by debt ceiling brinksmanship would have real economic consequences, and would also be the first purely self-inflicted sovereign debt crisis in history. Even flirting with this is unspeakably stupid.
Many in the media have accepted the notion put forward by conservatives and business associations that unions make businesses uncompetitive by raising wages and benefits irresponsibly. The poster child for this view of the world is the auto industry, where the United Auto Workers supposedly drove the “Big Three” (Chrysler, Ford, and General Motors) into the ground while foreign competitors ate their lunch.
This is false history. As Case Western Reserve University manufacturing scholar Sue Helper has helped me understand, the auto industry’s problem stemmed from decades of mismanagement, and regardless of the UAW contracts, the Big Three made choices that doomed them to lose market share and the ability to compete.
The biggest element of mismanagement was designing and selling poor products. Anyone who lived in Michigan in the 1970s remembers when Detroit began building truly terrible cars, like the Chevy Vega, the AMC Gremlin, the Chrysler Imperial, and the Ford Pinto; it was the beginning of what became a slow-moving train wreck. As the Economist published in the May 2009 story, “A Giant Falls,” Detroit began making cars that were both dull and unreliable:
“Only in the 1970s, after the first oil shock, did faults start to become visible. The finned and chromed V8-powered monsters beloved of Americans were replaced by dumpy, front-wheel-drive boxes designed to meet new rules (known as CAFE standards) limiting the average fuel economy of carmakers’ fleets and to compete with Japanese imports. As well as being dull to look at, the new cars were less reliable than equivalent Japanese models.
By the early 1980s it had begun to dawn on GM that the Japanese could not only make better cars but also do so far more efficiently. A joint venture with Toyota to manufacture cars in California was an eye-opener. It convinced GM’s management that “lean” manufacturing was of the highest importance. Unfortunately, that meant still less attention being paid to the quality of the cars GM was turning out. Most were indistinguishable, badge-engineered nonentities.”1
Bad design and engineering were accompanied by disastrous pricing decisions, which further jeopardized quality:
“As the appeal of its products sank, so did the prices GM could ask. New ways had to be found to cut costs further, making the cars still less attractive to buyers.”
Autoworker wages didn’t make the Big Three uncompetitive by driving prices up; poor value drove prices down. As prices and quality fell together, consumers fled. The UAW’s contracts were almost irrelevant. One way to show this is to compare the pricing of the competitors’ vehicles with the size of the labor cost differential bargained by the UAW. Labor costs make up only 10 percent of the cost of a typical automobile. Before the auto rescue, the Big Three paid $55 an hour in compensation per auto worker while the Japanese paid only $46 an hour. (Company lobbyists and publicists inflated the total Big Three labor cost to $71 by attributing the unfunded pension and health benefit costs for decades of retired workers to the much smaller currently employed workforce2; the legacy costs for Japanese transplants were only $3 an hour.)3 But even if, for the sake of argument, we accept the unfairly inflated $71 figure, the difference in the cost of a vehicle attributable to the UAW (the UAW premium) would be 30 percent of the average 10 percent labor cost, or 3 percent of total cost.
In 2008, according to Edmunds, GM sold its average large car for $21,518. Assuming GM sold its cars at cost, the UAW premium would have been only $645 (3 percent of $21,518). Did the UAW premium raise the selling price so high as to make GM cars uncompetitive with Toyotas? Not exactly. Toyota sold its comparably equipped average large car for $31,753—$10,000 more than GM.4 It wasn’t price that made GM cars uncompetitive, it was the quality of the product and the customers’ perception of quality.5
For nearly 30 years, the Big Three’s market share fell steadily, from 77 percent in 1980 to 45 percent in 2009, almost entirely because the U.S. companies built cars that were noisier and less comfortable, had poorer fit and finish, poorer gas mileage, more defects, and a poorer repair record and resale value.6 Helper has documented the hostile relationships the Big Three developed with their suppliers,7 which led to the provision and assembly of parts that did not work well together, did not fit seamlessly, and whose inherent quality was sometimes substandard.8 In 2006, before the auto industry collapsed (and before gas prices skyrocketed), economists Kenneth Train and Clifford Winston did a careful econometric analysis of buyer preferences and concluded that:
“… the U.S. automakers’ loss in market share during the past decade can be explained almost entirely by the difference in the basic attributes that measure the quality and value of their vehicles. Recent efforts by U.S. firms to offset this disadvantage by offering much larger incentives than foreign automakers offer have not met with much success. In contrast to the numerous hypotheses that have been proffered to explain the industry’s problems, our findings lead to the conclusion that the only way for the U.S. industry to stop its decline is to improve the basic attributes of their vehicles as rapidly as foreign competitors have been able to improve the basic attributes of theirs.”
The authors conducted a simulation to determine “how much U.S. manufacturers would have to reduce their prices in 2000 to attain the same market share in 2000 that they had in 1990 and found that prices would have to fall more than 50 percent.” In other words, reducing the cars’ price by the UAW premium would have had no discernible effect on market share. The Big Three were building cars that most people simply didn’t want to buy, and only by cutting the price in half could they have retained their market share.
What happens to a corporation that sells its products at a low price while losing market share for 30 years? It goes bankrupt.
Fundamental mismanagement and building cars that customers didn’t want doomed the Big Three, not the UAW. Read more
This post originally appeared in the Huffington Post
If Latinos are to fully recover from the ravages of the Great Recession, they will need not simply jobs, but jobs that lead to increased earnings over time and that also have good benefits. In short, they will need what we call “good jobs.” Recent evidence from EPI research on state and local public sectors portends that getting good jobs will continue to be a major challenge for Hispanic workers.
From 2007 (the year the recession started) to 2011, Latinos workers’ wages in state and local public sectors declined more than the wages of whites and African Americans. The median wage of Hispanic employees declined 5.2 percent, compared with a decline of 1.9 percent for African Americans, and 0.7 percent for whites.
Since the 1970s, the rich have been getting richer as the rest of America has been suffering from a good jobs crisis. Wages have declined or stagnated and benefits have been cut. Just about everyone on Main Street has been hurt by the decline in the share of good jobs, but Hispanic men have been hit the hardest. From 1979 to 2008, the share of Hispanic men in good jobs declined 15.5 percent. For white and black men respectively, the declines were 12.8 percent and 9.3 percent.
Without a good job, it is very hard to keep one’s family out of poverty. A third of Hispanic children are living in poverty, nearly three times the rate for white children. Since the start of the recession, Latino child poverty has increased the most of the major racial and ethnic groups. To lower this high rate of poverty, we need to increase the wages of Hispanic workers. Unfortunately, Hispanics lead in the share of workers earning wages that cannot lift a family out of poverty.
In terms of benefits, Latinos are also in a dire situation. Hispanics have the lowest share of workers with employer-sponsored health insurance. Given that Latinos are underrepresented in good jobs that provide a retirement plan and overrepresented in jobs that do not provide enough for savings, it is not surprising that Latinos are very weak on measures of retirement security. The fact that Latinos have lost a significant amount of wealth over the recession does not improve the situation.
What can be done to produce more good jobs in the American economy and more good jobs for Latinos specifically? I discuss several policies in Getting Good Jobs to America’s People of Color, but here I will only address one: unions.
Recently, Knowledge@Wharton, the online business journal of the Wharton School of Business, published State of the Unions: What It Means for Workers — and Everyone Else (May 9, 2012). This article provided information about how a strong union movement helps provide good jobs.
Good jobs require good wages. Knowledge@Wharton cited recent research that has shown that the decline in union membership since the 1970s has played a significant role in the growth in income inequality. The journal quoted the sociologist Jake Rosenfeld, who observed, “It is hard to think of a way to tackle income inequality without a vibrant labor movement.”
Unions also help create good jobs by fighting for worker’s rights and for worker benefits. Wharton Professor Janice Bellace noted, “If you think of major pieces of legislation that have been very important to working persons, you will often see that the legislation was pushed by unions. The Employee Retirement Income Security Act of 1974 (ERISA) . . . was pushed by the unions and almost no one else. And the Pregnancy Discrimination Act of 1977 . . . was brought by the International Union of Electrical Radio and Machine Workers.” She added that unions are truly the “national voice for the average working person.”
Without a strong union movement, and without increasing Latino unionization, it will be difficult, if not impossible, to reverse the decline in good jobs in America. While all racial and ethnic groups are hurting from this decline, Latinos have been hurt the most.
House Speaker John Boehner’s (R-Ohio) high-profile speech at last week’s 2012 Fiscal Summit garnered much attention for its pledge to again hijack the debt ceiling; less noticed was his announcement that the House of Representatives will establish a fast-track process for expediting “tax reform.” Comprehensive tax reform could add much needed revenue and balance to a long-term deficit “grand bargain,” but that’s not what Boehner is talking about:
“If we do this right, we will never again have to deal with the uncertainty of expiring tax rates. We’ll have replaced the broken status quo with a tax code that maintains progressivity, taxes income once, and creates a fairer, simpler code. And if we do that right, we will see increased revenue from more economic growth.” (Full text here.)
Anything resembling the tax plan recommended by Ways and Means Committee Chairman Dave Camp (R-Mich.) and included in Budget Committee Chairman Paul Ryan’s (R-Wis.) fiscal 2013 budget resolution—Boehner’s chief fiscal policy deputies—is going to have a devilishly hard time meeting this laundry list of talking points. That’s because conservatives falsely equate a “simpler” tax code with cutting and consolidating tax brackets, which would confer big tax cuts to upper-income households in the top tax brackets. This is the bedrock of the Camp-Ryan tax plan: “Consolidate the current six individual income tax brackets into just two brackets of 10 and 25 percent.” Short of unspecified offsets, this would sap progressivity from the tax code and deprive the Treasury of $2.5 trillion over a decade—accounting for more than half of the $4.5 trillion of unfunded tax cuts proposed in the Ryan budget. Combined with the other major tenants—repealing the alternative minimum tax (AMT), cutting the corporate tax rate to 25 percent, exempting foreign profits from taxation, and repealing health care reform—the tax code would be markedly flattened at the top of the income distribution, as seen in the Tax Policy Center’s (TPC) analysis of the Ryan budget, again short of unspecified offsets:
The red bars show what regressive upper-income tax cuts and lower-income tax increases look like, not what tax reform looks like. The missing element is how the tax cuts would be financed—i.e., which unspecified tax expenditures would be eliminated in “broadening the tax base.” House Republicans object to eliminating or even scaling back the preferential tax rates on capital gains and dividends—the tax expenditures most disproportionately benefiting upper-income households—which would be the only feasible way to maintain progressivity at the top of the income distribution with a top rate of 25 percent and no AMT. Repealing exclusions—like that for employer-sponsored health insurance—would hit middle- and upper-middle class households a lot harder than upper-income households, and repealing refundable tax credits would wallop only lower- and middle-income households (see Table 2 of this TPC report). Itemized deductions are more regressive, but nowhere nearly as regressive as the preferential treatment of capital income. If substantial base broadening were added to the Camp-Ryan tax plan without raising rates on capital income, either substantial progressivity or revenue (likely both) would be lost relative to current policy. Many lower- and middle-income households would effectively foot the bill, subsidizing more upper-income tax cuts.
With respect to the budget, relying on “economic growth” for more revenue translates to, at best, revenue-neutral tax reform relative to the inadequate levels raised by current policy. Official scorekeepers—the Congressional Budget Office and Joint Committee on Taxation—rightfully reject the kind of “dynamic scoring” (i.e., changing economic projections and budget scoring based on potential macroeconomic effects of tax cuts) Boehner and others would cite to show more revenue. Economic growth is the only source of “increased revenue” that would not violate Grover Norquist’s Taxpayer Protection Pledge—signed by 236 members of Boehner’s caucus—because it’s a gimmick, not a revenue source, as my colleague Ethan Pollack recently explained.
Lastly, Boehner’s implied objectives of revenue and distributional neutrality—which guided the Tax Reform Act of 1986—are now wholly inappropriate benchmarks, as they would lock-in the past decade’s unaffordable and regressive Bush-era tax cuts and exacerbate Gilded-Age levels of income inequality. Much of our structural budget deficit and the ad hoc state of temporary tax cuts’ pending expiration stem from the 2001 and 2003 Bush-era tax cuts, which were, in a sense, “fast-tracked” with reconciliation (around the filibuster). Financing an extension of the Bush tax cuts with spending cuts (essentially maintaining revenue around 18 percent of GDP), as the Ryan budget effectively proposes, would require draconian spending cuts. Reducing revenue below current policy levels—the more likely outcome of the Camp-Ryan plan—would require implausibly deeper cuts and exacerbate the unsustainable long-run fiscal trajectory, grossly contradicting purported concern about budget deficits.
If Congress really is heading toward comprehensive tax reform in the next few years, policymakers need to be kept honest about what amounts to reform versus a tax cut. The United States simply can’t afford to let Congress fast-track another tax cut disguised as “tax reform.” And House Republicans are currently $4.5 trillion shy of proposing even revenue-neutral tax reform.
… but don’t lose any weight? You get unsightly bulges elsewhere and can’t breathe well enough to exercise.
That’s essentially the House Republican solution to the long-term budget challenge of escalating health care costs: Shift costs to individuals, and do it in a way that impedes measures that could actually help control costs in the long run.
Nevertheless, belt-tightening is the latest weight-loss fad to hit Washington, prompting Robert J. Shiller to ask in yesterday’s New York Times, “Why is there such strong political support for fiscal austerity, for government cuts and layoffs, at a time of widespread unemployment?”
Shiller thinks the reason austerity has caught on (at least inside the Beltway) is that the other side has better metaphors, like belt-tightening. His proposed alternative—”winter on the family farm“—may not resonate in a non-agrarian economy, but his point is a good one: When there’s no planting, fertilizing or harvesting being done, it’s time for infrastructure projects to make productive use of idle labor.
It’s not even necessary to increase the deficit, though this would be the quickest way back to full employment. Raising taxes to pay for infrastructure and education would still create jobs, because all the money would be spent, whereas some of the income that was taxed would have been saved. This is especially true if the taxes fall on higher-income households. These investments would also pay off in the form of a more productive economy in the long run.
Alas, Shiller notes that despite the fact that a balanced-budget stimulus was endorsed in the International Monetary Fund’s 2012 World Economic Outlook, politicians espousing such measures, such as France’s François Hollande, aren’t taken seriously. Meanwhile, extreme and counterproductive measures put forward by House Budget Chairman Paul Ryan (R-Wis.) have shifted the window of policies considered to be within the political mainstream in the United States, even though Ryan would actually reduce taxes on the wealthy and slash public investment. The House Republican budget may be a non-starter, but so too—for the time being—are balanced-budget measures to get the economy moving again.
At this week’s Peter G. Peterson Foundation 2012 Fiscal Summit, an event dedicated to avoiding the merest possibility that the United States could ever find itself in a sovereign debt crisis, Speaker of the House John Boehner (R-Ohio) was invited to address the assembled crowd, wherein he pledged … to try to maximize the possibility of a sovereign debt crisis.
Specifically, he pledged a repeat of last summer’s showdown over the statutory debt ceiling, when congressional Republicans concocted an artificial crisis of epic proportions, by refusing the historically pro forma task of raising the debt ceiling—done 73 times between 1940 and 2010—unless deep spending cuts were made. This time around, Boehner literally suggested that it would be more responsible to default on the full faith and credit of the United States than to increase the statutory debt ceiling without first hijacking the U.S. credit rating to extract spending cuts:
“Yes, allowing America to default would be irresponsible. But it would be more irresponsible to raise the debt ceiling without taking dramatic steps to reduce spending and reform the budget process… When the time comes, I will again insist on my simple principle of cuts and reforms greater than the debt limit increase.” (Full transcript here.)
Rather than indulge the revisionist histories of last summer invoked by Boehner and others at the Fiscal Summit, here’s a refresher on what happened with the last episode of economic and fiscal “responsibility.” First, Republican leaders demanded policy concessions before agreeing to raise the debt ceiling; after the Obama administration conceded to this, Republican leadership walked away from negotiations over a deficit reduction “grand bargain,” first with Vice President Biden, then from negotiations with President Obama. Republican leadership demanded a dollar in spending cuts for every dollar increase in the debt ceiling, refused any revenue increases accompanying spending reductions, and refused any compromise. Obama and Boehner formally negotiated a variation of these demands on July 31, two-and-a-half months after the Treasury Department declared a “debt issuance suspension period” of unconventional cash-management tools to avoid a sovereign default. The resulting Budget Control Act (BCA) cleared the Senate and was signed into law August 2, the last day Treasury could avoid defaulting.
Shortly thereafter, rating agency Standard & Poor’s exercised “responsibility” in the Boehner sense of the word—i.e., trying to leverage the political debate over debt ceiling into concrete economic damage—by downgrading the U.S. “AAA” credit rating for the first time in history based on a judgment about dysfunctional politics (their economic justification was dropped after the Treasury Department found a $2 trillion error in their budget math). As for the “compromise” that ended the standoff, the BCA solidified Congress’ pivot from prioritizing job creation to prioritizing austerity measures like those that have pushed much of Europe back into recession, even though near-term cuts are largely to entirely self-defeating while the Federal Reserve keeps short-term rates at zero. My colleague Ethan Pollack and I estimated that the first phase of spending cuts would shave 0.3 percentage points from real GDP growth in 2012 and lower employment by 323,000 jobs; the second phase of front-loaded, automatic “sequestration” cuts scheduled for fiscal 2013 and beyond pose graver risks to growth and joblessness.
There are only two theoretical ways in which long-term deficit reduction can accelerate economic recovery. First (and actually plausible), a long-term deficit reduction “grand bargain” could include substantial near-term fiscal stimulus and gradually phase-in deficit reduction after some macroeconomic trigger is met (e.g., EPI proposed a “6-for-6” trigger: unemployment at or below 6 percent for six consecutive months). Second, deficit reduction could lower the premium on government borrowing, and thus private interest rates. This second channel actually has no hope of actually working today, as longer-term Treasury yields are already at historically low levels. Making all future increases in the debt ceiling completely uncertain and chaotic, however, will almost certainly impede both channels in the future.
And this strategy of promising to hold the full faith and credit of the United States hostage in exchange for spending cuts seems entrenched as the GOP strategy. This should not be mistaken simply for excessive zeal for cutting deficits; this is playing chicken with a self-induced sovereign debt crisis. Informed deficit hawks (and they exist—they just put vastly insufficient weight on solving the actually existing jobs crisis, in our view) endorse long-term deficit reduction as a means to avoid a sovereign debt crisis, not cause one.
The statutory debt ceiling has devolved from a pro forma vote into a global economic liability that Congress should put to rest. It seems clear that anybody interested in a sane economic policy regime should be looking for ways to repeal the debt ceiling, either in law or in practice. Time to bring on the $1 trillion coin?
Last night’s memorial service for Bernard Rapoport at the St. Regis Hotel in Washington brought together hundreds of his family members, friends, and colleagues. Everyone in attendance treasured his enthusiasm, generosity, and thirst for economic justice and fairness. “B,” as he was affectionately known, founded American Income Life Insurance and was one of EPI’s longest-serving board members. I was privileged to attend a service that mixed politics, religion, and humor in a celebration of a life well lived.
President Bill Clinton topped a list of past and current Democratic politicians who spoke of B’s loyalty, persistence, and progressive values. As Sen. Tom Harkin (Iowa) remarked, B was the rare political donor who pushed politicians and the government to demand more from the rich, rather than to cater to them. B was born poor (unlike most rich people), yet he never deluded himself into thinking that he was a self-made man. He knew that the government and our system of laws, the education he received, and his employees were all critical to his success.
Despite being a millionaire and a CEO, B never bought into the notion that as a “job creator” he was entitled to a lower tax rate than the folks who worked for him. He never thought that the government owed him anything. He also vehemently rejected the belief that the nation would be better off if the rich got continually richer at the expense of the many. As President Clinton said, B never tuned in to the message of greed and egotism that has characterized the last 35 years of politics in Washington.
Instead, B learned and subsequently taught a very different lesson: “As I grew up I realized when too few have too much and too many have too little, we do not have a sustainable society.”
I regularly encounter, as I travel around the country, teachers who are dispirited by what they feel is an unrestrained contempt for their calling and career. These teachers feel that this contempt, initially expressed by politicians and “experts” with no classroom experience, has been repeated so frequently that it has spread to the public at large. They feel they are being blamed for all the inequities in American society, and are expected to rescue children from impoverished families and communities with no support from others in society. They feel abused by demands that they discard curriculum it has taken them years to develop, curriculum they are convinced has inspired children who had little prior interest in school, to love learning and inquiry. They do not believe that requirements that they focus on preparing students for standardized tests is respectful of the educational process or their own expertise, because such tests reflect only a tiny part of the knowledge and skills children need. These teachers are embittered and feeling put upon by those who claim to represent the interests of poor children but express this interest by trying to destroy the public education system that is the only institution attempting to serve these children. The teachers I meet all consider some colleagues to be inadequate and would like to see them leave. But the teachers I meet insist that poor performers are a small minority in their schools, and resent the now-popular and, they feel, indiscriminate witch hunt to cleanse schools of incompetents.
Last week, I addressed the 2012 graduates of the School of Education of Loyola University–Chicago. Anticipating (correctly, as it turned out) that these young people shared many of the feelings of the experienced teachers I have described, I urged these students to have the confidence to resist the now-conventional attack on public education and their teachers. Here is what I said to them:
Thank you, Dr. Fine, President Garanzini, Dean Prasse, faculty, parents, and guests.
Congratulations to the graduates.
Good luck as you embark on new responsibilities in one of the most important enterprises with which our society can entrust you – the preparation of the next generation.
Yet you leave here in a national climate of mistrust for all government, including public education. You are entering a highly politicized field where facts are too easily ignored.
In medicine, and in all fields, we know you can’t design proper treatment if your diagnosis is factually flawed.
Yet in education, conventional and widely shared diagnoses are based on fantasy, with little relation to facts.
Understanding these fantasies requires you not only to be good educators, but sophisticated citizens, capable of questioning data and penetrating the relationships between schools and the society that they reflect.
Politicians of both parties, leading educators, and philanthropists like Bill Gates who increasingly influence education policy, repeat incessantly that our schools are failing, especially for disadvantaged children. Past efforts at improvement, and vast increases in spending, have accomplished little or nothing, they say. Achievement gaps between disadvantaged and middle class students have narrowed little, so as the proportion of white children declines, this failure of our schools weakens our nation, rendering it unable to compete internationally.
In truth, this conventional view relies upon imaginary facts.
You may be surprised to learn that African-American elementary school student achievement, in Illinois and nationwide, has been improving so spectacularly that in math, the average black student now performs better than about 90% of all black students performed less than a generation ago.
What’s more, black elementary school math performance is now better than white performance was in the previous generation.
Let me repeat: black elementary school students today have better math skills than white students did only twenty years ago.
These data come from the National Assessment of Educational Progress, a federal sample that is the only reliable source on student achievement over time in this country.
The gains have been almost as great for middle-schoolers in math, and for elementary school students in reading,
Most gains were posted in the 1990s, before the test-obsessed accountability system called “No Child Left Behind,” a law whose flawed premise was that it was necessary to force educators to pay attention to minority students. Read more
The Cambridge Forum hosted a videotaped mini-conference on the impact of global engagement on the U.S. and world economies on April 16. Speakers and topics included University of Massachusetts Amherst economic professor Robert Pollin on the “Globalization of Labor: Is a Race To the Bottom Inevitable?”; Economic Policy Institute Director of Trade and Manufacturing Policy Research, Robert Scott, on the “Globalization of Capital: The Rise of the Multinationals”; editor-at-large of The American Prospect and Washington Post columnist Harold Meyerson on the “Globalization of Markets: Do Corporations Need American Consumers?”; and Harvard Kennedy School of Government Professor of International Political Economy Dani Rodrik, who delivered the keynote address on his book, The Globalization Paradox (New York: W.W. Norton & Company, Inc.).
Each participant delivered brief remarks and engaged in wide-ranging question-and-answer sessions with the audience that were moderated by Robert Kuttner, co-founder of The American Prospect (Note: Kuttner is an EPI co-founder and board member). You can watch videos of all four speakers below:
Sometimes it all seems to come together in a perfect storm of bewildering congressional myopia. This seems like one of those times.
This weekend, as many as 236,300 Americans without work will lose their unemployment insurance as a consequence of the “compromise” that Congress passed in February to save the payroll tax cut and UI extension. This is on top of the estimated 173,000 of the jobless who already lost their benefits this year. Some will inevitably argue that this is a good thing because extending benefits keeps people from taking available jobs. This is a wildly deceptive claim. The research shows that in some cases, the availability of unemployment insurance allows people greater flexibility to find jobs that better match their skills, but it’s not causing anyone to give up work entirely. In fact, unemployment insurance keeps discouraged job seekers from giving up their search for work, and adds a meager source of income to those individuals who are the most likely to spend their income and bolster overall aggregate demand.
The real problem is that there simply are not enough available jobs. Yet, instead of strengthening programs that help these and other people still struggling in the wake of the Great Recession, the Republican-controlled House voted yesterday to slash $310 billion in funding for such programs to avoid the previously agreed-upon cuts to the defense budget. What’s perhaps most shocking about this vote is that it comes despite the fact that an overwhelming majority of Americans—both Democrats and Republicans—favors reductions in defense spending over cuts to other domestic programs.
Cutting important social protections and reducing assistance to people in need is only going to push more Americans into poverty. But in the cruelest of ironies, some members of Congress were not content with shooting America in the foot; they voted to blind her as well. On Wednesday night, House Republicans voted to defund the Census Bureau’s American Community Survey, an incredibly powerful source of data for examining state and local economic trends, and one of the primary tools that the government uses to track poverty!
Some might argue that all of this constitutes the House’s attempt to commit the crime and then hide the evidence. I’ll give them the benefit of the doubt that it is just plain short-sightedness.
Last week, economists Martin Feldstein and Larry Summers sparred over tax reform on a panel discussion hosted by the Brookings Institution’s Hamilton Project. It is widely agreed that Washington is overdue for and likely headed toward comprehensive tax reform in the next few years. Any compromise on a long-term deficit reduction package will necessitate more revenue and a quarter-century has passed since the last major scrubbing of the tax code (though the Tax Reform Act of 1986’s revenue- and distributional-neutrality makes it an inappropriate benchmark for reform). Most of the reform proposals have focused on broadening the tax base—i.e., eliminating or curbing tax expenditures—rather than raising marginal tax rates to increase revenue. Tax reform is also typically couched in the objectives of simplifying the tax code, reducing economic distortions, and creating a “pro-growth” tax code.
Summers raised an excellent point about the tax reform discourse, particularly the way tax simplification is spun by many advocates. Simplifying the tax code is often falsely equated with reducing the number and scale of marginal tax rates. The House Republican budget, for instance, proposed consolidating the income tax to two brackets—of just 10 and 25 percent—as the cornerstone of “simplifying the tax code and promoting job creation and economic growth.” But in the age of tax return software, Summers argued that tax rates don’t add to complexity; the complicating factor is calculating taxable income. Even before TurboTax, citizens managed to navigate a much longer schedule of marginal tax rates; the tax code had at any time between 24 and 26 marginal tax rates between World War II and 1978. The tax code was also much more progressive, particularly at the top of the income distribution, and income growth was evenly shared over this period. At present, compressing the number of marginal tax rates (currently at six) would only further decouple the contours of the tax code from the increasingly uneven distribution of income gains.
Reform is often framed in terms of broadening the tax base and simplifying the code in tandem, but Summers noted the two are often contradictory objectives. Base broadening inherently increases the amount of taxable economic activity, which in some circumstances can actually make the tax code more complex. Summers gave the example of repealing the exclusion on owner-occupied home sales from capital gains taxation, which would broaden the tax base and raise revenue but unquestionably increase complexity for many filers. Summers downplayed the need for simplification—at least as it’s often thought of—in this tradeoff, and instead endorsed base broadening in ways that increase revenue and the perception of tax fairness.
The complex nature of the tax code favors—both in effect and appearance—those with numerous financial planners and accountants, including dozens of Fortune 500 companies paying nothing in taxes. The tax code needs to be cleaned in ways that inhibit tax gaming and avoidance—best accomplished by reducing tax loopholes that allow for income shifting, such as the preferential rates on capital gains and dividends or the tax deferral for U.S.-multinationals’ foreign source income. That largely amounts to base broadening. Flattening the schedule of marginal income tax rates, on the other hand, would not improve tax compliance or simplify the tax code but would markedly reduce both tax fairness and revenue. When push comes to shove, much of what is peddled as “tax simplification” is nothing but an attempt to further undermine tax progressivity and reduce effective tax rates for upper-income households; doing so would amount to a tax cut, not tax reform.
As my colleague, Ross Eisenbrey, pointed out earlier, the Senate Committee on Health, Education, Labor and Pensions held a very important hearing today (in honor of the upcoming Mother’s Day holiday this weekend) looking at the balance between work and family. This work/family balance has become one of the most ubiquitous sources of economic stress for millions of American families.
One of the important policy proposals covered at the hearing was providing a minimum number of paid sick days to all workers. As Judith Lichtman of the National Partnership for Women and Families noted during the hearing, 40 million workers have no paid sick time to care for themselves or family members when they get sick. Most of the evidence presented at the hearing in favor of providing this important policy was compelling, and it should be clear by now that paid sick time is essential for working families’ economic security. The personal testimony of Kimberley Ortiz about her lack of job security and the penalties she faced at work when she needed to take care of her sick son was particularly compelling and powerful.
In the Senate hearing, Juanita Phillips, Director of Human Resources of Intuitive Research and Technology, spoke about the flexibility her company provides to her workers. She attributes these characteristics—e.g. flexible work hours, paid time off, parental benefits (including short term disability)—to why her company is rated the country’s No. 2 best small business to work for by the Great Place to Work Institute.
Given this, it’s surprising that she argues against the Health Families Act. She claims her company will be punished for already doing the right thing. As an economist, that argument simply makes no sense. To her company, the law is what we economists call a “nonbinding constraint.” They currently provide 15 days of paid time off to new employees for use immediately, and 20 days of paid time off at three years of service. The bill proposes only 7 days.
It doesn’t add up. The one thing Phillips said that could explain her company’s position, is their concern about losing their competitive edge to recruit and retain the best talent. So, she admits the policy is a good one, but doesn’t want to encourage others to engage in it as well. Let’s just say that keeping millions of American families stressed so that a couple of high-road companies get a better pool of resumes when they offer job openings seems like a bad trade-off to me.
This issue is too important to our working families—particularly those at the middle and low end of the wage scale. Furthermore, in the context of similar legislation that was passed in Connecticut, the bill would be of very little cost to businesses, even including those businesses that are not already in compliance with the law.
The Senate Committee on Health, Education, Labor, and Pensions is holding its Mother’s Day hearing today, and the main subject is paid sick leave, something every working mother needs. Sen. Tom Harkin (D-Iowa) and Rep. Rosa DeLauro (D-Conn.) have introduced a bill, the Healthy Families Act (S. 984/H.R. 1876), to mandate that every employee receive at least seven days of paid time off for illness each year. Everywhere in the civilized world, employees have the right to at least some minimum amount of paid leave when they or their children are sick or when they have to see a doctor—everywhere except in the United States.
The organized U.S. business community—represented by the Washington lobbyists and dozens of giant trade associations—fiercely opposes giving American workers this right.
Why? Because business owners don’t want to be told what to do by anybody, least of all by the government. They consider themselves entitled to force employees to choose between working while sick, taking leave without pay (if the employees are lucky enough to have the right to take unpaid leave), or being fired.
At this morning’s hearing, the business community was represented by the Society for Human Resources Management, which reflexively takes the position that workers should not have legal rights; they should not, for example, have the legal right not to be fired without just cause, they should not have the right to a minimum wage, they should not have the right to unpaid leave to care for family members, they should not have the legal right to advance notice that their office, store or factory will be shut down, etc. The SHRM position is that wages, benefits, and protections should be left to the whim of the employer, or in fancier terms, to market forces.
As usual, the SHRM witness is testifying this morning that her business treats its employees well, giving its employees with three years or more of service 20 days of paid leave. The implication is that left alone, businesses will treat employees as well as they can afford to, and everything will be for the best.
But this benign view is not true. Absent legislation, businesses will treat employees only as well as they want to, even if they can afford to do much more. Even businesses whose CEOs are paid millions of dollars a year can deny all or most of their workers any paid sick leave at all. This problem is so widespread that about 40 percent of the private-sector workforce has no right to even a single day of paid sick leave. That’s 40 million people—mostly low-wage workers who are barely scraping by—who go unpaid if they get sick or if they have to take time off to care for a sick family member.
The SHRM witness argues that a mandate is “inflexible,” and that’s true. It should be inflexible; the whole point is to guarantee a basic, minimum right to workers—most of whom are women—that they need very badly. Nothing would prevent a business from doing more, as the SHRM witness’ business already does.
SHRM’s alternative arguments against the paid sick leave legislation are altogether astonishing. SHRM’s witness argues that providing generous benefits is a competitive advantage to her company that would be lost if every business were compelled by law to provide them, ignoring that the bill’s mandate is for only seven days of paid leave, rather than the 20 days her business provides, leaving plenty of competitive advantage.
“We provide generous paid leave so that we can continue to be an employer of choice for employees and applicants in our area. What we do not want is a government-imposed paid leave mandate to take away our competitive edge over other employers.”
And finally, she argues that it is somehow degrading to be told what to do by the government:
“Organizations such as ours that are already extremely successful with flexible workplace outcomes should not be brought down to the mediocre level that regulatory approaches would be trying to get not-so-well-run companies up to achieving.”
The silliness of these arguments is pretty good evidence that the business community has no good reason (no economic reason) to oppose the Healthy Families Act. Their opposition is ideological: They own the businesses, and no one has the right to tell them (the 1 percent) how to treat their workers—not even a government of the people, by the people, and for the people.
The Commerce Department released another depressing report on the U.S. trade deficit this morning, our monthly reminder of the huge gap between globalization’s economic reality and American economic policymaking.
In March, we bought about $52 billion (28 percent) more from the rest of the world than we sold. From first quarter 2011 to first quarter 2012, the deficit on goods and services rose almost 8 percent, with China representing almost two-thirds of our non-oil deficit with the rest of the world.
Yet, over the past year or so, a drumbeat of analysis in the establishment business press has been telling us to stop worrying; our chronic trade imbalance with China will soon disappear. New York Times columnist Eduardo Porter last week summed up the happy scenario: Chinese wages and transpacific transportation costs are rising and the Chinese are allowing their currency to appreciate. The implication is that rather than exerting unpleasant political pressure on China, we should trust in the natural workings of the market and the good common sense of the Chinese leaders who “appear to understand the need for change.”
Don’t hold your breath.
Porter is correct that wages are rising in China faster than they are in the United States. But to get a perspective, check out the Bureau of Labor Statistics’ numbers on international labor costs in manufacturing, where the latest data—for 2008—is that Chinese manufacturing costs are a little over 4 percent of U.S. levels. Yes, they probably have risen since then, but the gap is still immense and will clearly not be closed anytime soon.
Moreover, the narrowing of the gap may have as much to do with U.S. workers getting less as Chinese workers getting more. The corporate poster boy for looking at the bright side is General Electric, which has moved some production of a few heavy appliances back to the U.S. from China. What the poster leaves out is that GE workers who used to make $22 an hour are now making $13.
It is also true that rising fuel costs are making it more expensive to import large, heavy products from across the Pacific. But that hardly means that production will move back to the U.S. Thanks to the North American Free Trade Agreement, multinational producers of big appliances and autos and parts who find importing from China too expensive, are moving to Mexico where labor costs are 18 percent of what they’d pay in the U.S.
Finally, Porter writes that the Chinese strategy of manipulating their currency to keep their exports cheap and imports expensive “may be turning the corner.” He notes that the Chinese, while they don’t want to appear caving to American pressure, have quietly allowed the renminbi to appreciate 40 percent against the dollar since 2005.
Just so. And over that time our trade deficit with China has grown by over 45 percent, suggesting how large China’s comparative advantage in trade has become. Moreover, despite the endless parade of American officials to Beijing pleading for more currency appreciation, the Chinese apparently think they’ve already done enough. Porter himself quotes China’s premier Wen Jiabao to the effect that the dollar-renminbi now may “have reached equilibrium level.”
Thus, there is little evidence that either the market or the Chinese leadership intend to rescue the U.S. from its trade quagmire.
Unfortunately, neither is there evidence that American leaders—from either party—intend to take responsibility for doing it themselves. Not only do they have no strategy to deal with the trade deficit, but President Obama and congressional Republicans are busily preparing for yet another of the so-called free trade agreements—this one to a group of countries around the Pacific rim—that have allowed our multinationals to off-shore production for the American consumer for over three-and-a-half decades.
But the market will not be denied; eventually we will balance our trading account. So, in the absence of a proactive policy, GE will be the model—the relentless lowering of American wages and living standards until the gap with workers in China and Mexico is closed.
There was a great article in Monday’s Wall Street Journal that discussed the tough job market the Class of 2012 is facing. Many of these new graduates will be competing with the graduating classes of 2011 and 2010 just to get on the bottom rungs of the career ladder. While it’s well-documented that graduating into a depressed labor market lowers lifetime earnings potential on average, today’s young graduates have additional hurdles to worry about: rising higher education costs and crippling student debt.
At EPI, we, with economist Heidi Shierholz, recently released an analysis of the labor market for recent high school and college graduates. The results are predictably grim, with unemployment rates for both sets of graduates spiking at the beginning of the Great Recession and falling very slowly in the recovery.
The report also highlighted the rising cost of obtaining a college degree. The figure below shows that the cost of higher education has been rising faster than family incomes for decades, making it harder for families to pay for college. From the 1981–82 enrollment year to the 2010–11 enrollment year, the cost of a four-year education increased 145 percent for private school and 137 percent for public school. Median family income only increased 17.3 percent from 1981–2010, far below the increases in the cost of education, leaving families and students unable to pay for most colleges and universities in full.
Unsurprisingly, a large majority of students and recent graduates take on debt to pay for college. Two-thirds of recent college graduates have student loans, and trends indicate that the number of student loans is increasing. Between 1993 and 2008, average student debt for graduating seniors increased 68 percent, from $14,410 to $24,238. Average debt for graduating seniors at public universities was $21,105 in 2008, and average debt for graduating seniors at private non-profit universities was $28,888 (authors’ analysis of Project on Student Debt 2010). In taking on these loans, students are taking a risk and hoping that they will be able to quickly secure work to begin paying them off after graduation. In recent years, and through no fault of their own, a growing number of graduates have been on the wrong side of this risk, with harsh consequences. Although most student loans have a grace period of six months before repayment begins, recent graduates who do not find a stable source of income may be forced to postpone payment though deferment or forbearance, miss a payment, or worst of all, default altogether on their loans. Deferment and forbearance are short-term fixes, however, and ultimately increase the amount borrowers owe once each period ends. Missed payments and default can ruin young workers’ credit scores and set them back years when it comes to saving for a house or a car.
Even worse, these young workers do not have a strong safety net on which to rely during the volatile job-seeking process.
Young workers are often ineligible for unemployment insurance, for example, because they must first meet state wage and work minimums during an established reference period—a reference period during which they are often in school and not working. Many new graduates are likely turn to their families for assistance. In 2011, 54.6 percent of 18- to 24-year-olds were living with their parents, an increase of 3.4 percentage points since 2007. This option is not, obviously, available to all young graduates. In short, young workers are being squeezed from multiple angles and their plight constitutes yet another instance of how damaging our tolerance of an underperforming economy truly is.
Additional findings and more analysis on the labor market facing young high school and college graduates can be found in our report, The Class of 2012: Labor market for young graduates remains grim.
The Pew Fiscal Analysis Initiative has released an addendum to its 2010 report A Year or More: The High Cost of Long-Term Unemployment, and the update isn’t pretty. Using data from the Bureau of Labor Statistics’ Current Population Survey, Pew’s addendum finds that 29.5 percent of unemployed Americans in the first quarter of 2012 have been jobless for a year or more. That means 3.9 million working-age Americans haven’t been able to find a job in 12-plus months.
In 2008, during the first quarter of the Great Recession, 9.5 percent of the unemployed had been jobless for at least a year. While this percentage of the long-term unemployed peaked at 31.8 percent in the third quarter of 2011, it’s still very high and remains more than three times greater than at this point four years ago. Note also that BLS defines long-term unemployment as someone who has been unemployed for more than half a year (27 weeks or more). By this measure, 41.3 percent of the jobless still qualify as long-term unemployed.
Some other findings from the Pew analysis:
- Age: Older workers are less likely to lose their jobs, but much more likely to be jobless for a year or more once they do (see Figure 3 in the addendum).
- Education: Workers with higher levels of education are less likely to lose their jobs, but they’re no better off once they do as long-term joblessness is fairly even across all education levels (see Figure 5).
- Industry: No industry or occupation has gone unscathed due to long-term unemployment (see Table 3).
Continued high levels of long-term unemployment have a damaging impact on the economic situations of both individuals and families, and more broadly, on the economy as a whole. As EPI has documented before, the outcome of such long-term joblessness is “scarring,” which carries severe and long-lasting consequences for our economy and society.
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.
Adjusted share of workers earning poverty wages by state, 2010
|State||0-100% poverty wages||Adjusted poverty wage|
|District of Columbia||13.1%||$10.61|
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
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.
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.