As the deadline looms for the supercommittee to report back to Congress, some have raised the specter that “failure” would lead to a collapse in financial markets. For example, Massachusetts Sen. John Kerry has expressed concerns that a failure to reach an agreement would send a dangerous signal to markets, and the Committee for a Responsible Federal Budget has said that a “go big” agreement is needed to “reassure markets about our ability to repay our creditors.”
These concerns are misplaced.
First, even if the supercommittee fails to find an agreement, there would still be a $1.2 trillion 10-year spending reduction put onto the books via a process called sequestration that would limit annual appropriations by Congress. From a pure deficit-reduction perspective, a $1.2 trillion agreement would be no different than a so-called failure. Congress can of course revisit those cuts, but they could also revisit any other kind of spending agreement too.
Second, remember that financial markets are forward looking and respond primarily to unexpected news. Does the market believe that Democrats and Republicans will come together in a Kumbaya moment to pass $3 trillion in tax increases and/or cuts to spending? I wouldn’t bet on it. Goldman Sachs noted in a recent Q&A on the supercommittee that, “a ‘grand bargain’ to resolve this imbalance appears to be a low probability this year. Instead, the politically realistic outcomes range from no agreement to a deal reaching $1.2 trillion in deficit reduction over 10 years.” They also note that just “32% of economists polled in the November Blue Chip financial survey expected a super committee agreement to become law.” Thus a failure would merely confirm market expectations, and there should be little reaction in the markets.
Third, as I noted in an earlier post, real interest rates on federal debt are negative for some maturities, and very low for longer term bonds. There is no indication that markets are worried about U.S. debt and need to be reassured. For example, Moody’s rating agency recently stated that, “failure by the committee to reach agreement would not by itself lead to a rating change.”
Finally, the main worry for businesses is the lack of demand for their goods and services and the main worry for individuals is the lack of jobs. The markets would react if Congress fails to continue a payroll tax holiday or fails to continue unemployment insurance payments. The real, immediate crisis is jobs and economic growth – Congress needs to focus on getting people back to work. A jobs-first focus would, more than anything else, reassure markets that the U.S. economy is poised for growth, and not slipping into premature, job-killing austerity.
Today’s interesting story on the front page of The Washington Post presents a nuanced view of the reaction of companies to new environmental regulations, quoting, for instance, several utility industry representatives on the ways jobs are created during the compliance process. The main channel of job creation occurs through the construction and installation of pollution-abatement equipment, or less-polluting facilities.
The piece is a good overview of the impact of regulatory change on employment in general, but there is an important angle that it did not touch on: the positive job-impacts of regulatory changes are likely to be much more potent in today’s economic context of high unemployment and low rate of capacity utilization. In particular, the construction industry, where many jobs would be created, is in particularly dire shape, with its overall level still nearly a half million short of its level at the start of the recession.
As Josh has blogged previously, when there are large amounts of unused capital and unemployed workers, as there are today, government regulations can effectively move this capital into action in the form of investments to comply with important environmental rules. Partially because of this, Josh’s analysis of the air toxics rule found that it would be a net job producer; in essence, in 2014 the jobs generated by investments in less-polluting technologies would outweigh any jobs lost due to higher prices or plant closings by about 90,000 workers.
Plenty has been written on this by smarter people than me – but since the troubles of Greece (and now increasingly Italy) are routinely invoked by those arguing that the U.S. needs to move to rapid deficit-reduction, it can’t hurt to emphasize the salient points again.
The cautionary tale one should take from the Eurozone crisis is not the dangers of large deficits. Yes, Greece and Italy do have large public debts – but nowhere near as large as Japan. Yet nobody is talking about a yen crisis. And Spain – often fingered as a likely candidate for a run by the bond-market vigilantes – has a public debt about half as large as that of the UK. And nobody is talking about a pound crisis.
Instead, the cautionary tale one should take from the Eurozone is that the tools of macroeconomic stabilization – fiscal, monetary, and exchange rate policies – need to be taken much more seriously than they have been for decades. Since 1980 a consensus (obviously wrong in retrospect – and not adhered to in real-time by plenty of admirable skeptics) developed among macroeconomic policymakers that fiscal policy should simply aim for balanced budgets (or even surpluses) and should not be used discretionarily to fight recessions; that monetary policy should simply target very low rates of inflation; and that capital markets (including international capital markets) should be left to govern themselves and capital should flow freely across international borders. The underpinning of this consensus was the belief that capitalist economies could and would generally heal themselves quite quickly following recessions, so macroeconomic stabilization policy (the tools used to fight recessions) were mostly unnecessary and would often just impede, not aid, speedy recoveries.
This flawed consensus informed the adoption of the Euro – countries surrendered independent monetary and exchange rate policies because they were sure they weren’t really all that important.
By adopting the Euro and entering a monetary union, member countries lost the ability to print their own currency and to regulate capital flows. So, when borrowing on international markets, they were now borrowing in a currency that they no longer had the capacity to print themselves. This inability to run the printing presses to pay off debt means that they can be forced into default if financial markets players ever decide to stop lending them money on reasonable terms.
Further, the common currency means that important stabilizing forces that kick in when financial markets stop demanding a country’s assets – increased exports and reduced debt obligations driven by the now-weaker national currency – are not operating for individual members of the Euro zone. This exchange rate channel is hugely important for countries trying to recover from financial crises – as the experience of Argentina and Iceland have shown. Further, this abandonment of monetary and exchange-rate policies was not accompanied by a beefing-up of a continent-wide fiscal policy that could be used to buffer downturns. Michigan or Nevada, for example, do not have their own monetary or exchange-rate policies, but they do get lots of federal transfers (like unemployment insurance) when their economies do more poorly than the national average.
To put this simply – the Eurozone was essentially a ship constructed for the fairest weather possible – a world without recessions. Now that the weather has turned foul, the consequences of not taking macroeconomics seriously is coming clear.
Worse, the too-limited scope that Eurozone countries have for macroeconomic policy stabilization resides solely in the actions of the European Central Bank (ECB) – which is barely even trying to mute the broader economic crisis. As John Quiggin notes, the ECB has actually raised rates within the past year – raising interest rates in the midst of the worst economic downturn in a generation! Recently, the new ECB head has cut these rates – but they remain a full percentage point higher than those in the United States or Japan.
So, what do we really have to learn from the Euro crisis? That the tools of macroeconomic management matter a lot – and they should not be given up casually. Failing to heed this lesson is already hurting the U.S. economy.
The Emergency Unemployment Compensation (EUC) program, part of the American Recovery and Reinvestment Act, is a federally-funded program that provides unemployment insurance (UI) benefits to the millions of Americans who lost their jobs in the Great Recession and who have exhausted or no longer qualify for unemployment benefits through existing state programs. With the anemic pace of job growth since the recession’s end, millions of unemployed Americans are still relying on these benefits to support themselves and their families. As the country is painfully aware, the job market is not recovering quickly enough to put these people back into jobs, and the EUC program is set to expire at the end of this year.
According to the Congressional Budget Office, extending UI benefits through 2012 would cost about $45 billion. But as EPI’s Larry Mishel and Heidi Shierholz explain, this $45 billion in federal spending would translate into an additional $72 billion in U.S. economic activity, or a 0.5 percent increase in GDP, due to standard economic “multiplier” effects and the fact that the long-term unemployed—often the most desperate for resources to meet their basic needs—are apt to immediately spend any benefits received.
From a jobs standpoint, this additional $72 billion in economic activity will save or create about 560,000 jobs across the country. How would your state be affected? The table below estimates the share of these 560,000 jobs saved or created in each state based upon the size of the state’s economy and its share of previous federal EUC spending. Not surprisingly, California has the most at stake – about 80,000 jobs. New York, Texas, Florida, and Pennsylvania will each save over 27,000 jobs.
One other way to look at these jobs numbers is as a share of each state’s payroll employment to control for the differences in the size of each state’s workforce. As the highlighted cells show, New Jersey, Connecticut, Nevada, Colorado, and Massachusetts will see the largest job loss as a proportion of state payroll employment if the EUC program is not extended.
The deadline for the supercommittee is approaching, and so we welcome budget ideas from our friend and former board member, Andy Stern. But he and Reagan OMB Director David Stockman are advising the supercommittee to “go big” on deficit reduction, based on the false premise that “our debt crisis is so severe, so obvious,” in this CNN opinion piece. In Washington parlance, that means $4 trillion plus in deficit reduction, heavily weighted toward spending cuts. The economic crisis we face today is not a debt crisis at all. We have a jobs crisis, and that is why we currently have large fiscal deficits. In today’s economic context, the most compelling case for long-term deficit reduction is to finance greater efforts to create jobs in the short term. Invoking a debt crisis that is not happening, however, can only lead to a rush for changes that need not be addressed in the short, nontransparent process of the supercommittee and are likely to do needless damage to our retirement and health programs, if not the economic recovery altogether.
Our “debt crisis”: 2.05% 10-year sovereign bond yields, independent central bank
Italy’s emerging debt crisis: 7.26% 10-year sovereign bond yields, no independent central bank
Greece’s very real debt crisis: 27.33% 10-year sovereign bond yields, no access to capital markets
We didn’t have a debt problem until conservatives in Congress concocted a debt ceiling crisis this summer, “ceiling” being the operative word. We’re struggling through a huge economic shock, and bigger budget deficits have ensued as a result. And it’s still the economy that Congress should be paying attention to: well over half of this year’s budget deficit can be chalked up to the weak economy and policies to boost employment.
Our economic crisis is so severe, so obvious, that it is visible in just about every U.S. data release. Unemployment has been stuck at or above 8.8% for over two and a half years. The economy and employment are growing too slowly to lower the unemployment rate. Poverty is rising, and real median incomes are falling. The economy is running $895 billion (-5.6%) below potential, which singlehandedly accounts for roughly a third of the budget deficit.
Yet Congress ignores these data in favor of the imaginary. There is no talk of a jobs program coming out of the supercommittee, even though fiscal policy is poised to shave one to two percentage points off of real GDP growth next year. The filibuster is repeatedly used to obstruct meaningful jobs legislation in the Senate.
We do face real long-term fiscal challenges that must be addressed. Along with Demos and The Century Foundation, EPI drafted a long-term budget for economic recovery and fiscal responsibility. We should address the health cost escalation but having just witnessed a yearlong process to achieve health care reform (at the time, the biggest piece of deficit-reduction legislation in over a decade), one wonders why this supercommittee should revise our health care system again—likely undermining reform—even before we see the results of reform. Social Security is not in any crisis and there is no need for its long-term fiscal challenge to be addressed in this process, either. We must restore revenue adequacy, but the prospects of the supercommittee doing so are zilch. Stern’s piece with Stockman does contribute to that effort by getting a prominent Republican on the record for substantial revenue increases (which is presumably what the point was, at least for Stern). But if long-term fiscal challenges misguidedly produce premature withdrawal of fiscal support and near-term spending cuts, as looks all too likely, both economic recovery and fiscal sustainability will remain elusive. Those genuinely concerned with long-term fiscal sustainability should pay attention to the economic crisis at hand, the jobs crisis, since we will never have a sustainable fiscal situation with the persistent high unemployment we are facing.
Economic benefits from two fuel standard rules alone offset much of modest compliance cost of all Obama EPA rules
As Republicans in Congress intensify their attacks on EPA rules, largely on the grounds they disrupt the economy, it is important to keep in mind that in terms of the overall economy, these rules are essentially inconsequential. Previously I’ve blogged on how the total compliance costs of all the major rules proposed or finalized by EPA so far during the Obama administration amount to only about one-tenth of one percent of the U.S. economy. What I failed to quantify is how the 0.1 percent figure itself, as small as it is, significantly overstates the potential economic effect of the rules.
This can be demonstrated by looking at the economic benefits of just two of the rules finalized so far by EPA. These are joint rules with the Department of Transportation that regulate greenhouse gas emissions from, and establish fuel standards for, various-size vehicles for model years 2012-2016. The economic benefits from these two rules are particularly sizable, as they produce large savings to drivers in the form of reduced expenditures on gasoline.
In 2010 dollars, a conservative estimate (see explanation below) of the economic benefits from these two rules amounts to $6 billion to $20.6 billion a year. This range is above the range of estimated compliance costs for all 11 major rules finalized so far by the Obama EPA; that range is $5.9 billion to $12 billion a year. Even if the four major proposed rules are also taken into account, the economic benefits from the fuel standard rules alone offset much of the combined costs of the final and proposed rules ($19.7 billion to $27 billion a year).
Stated simply, the economic benefits of just two of the major Obama EPA rules offset much of the economic compliance costs of all the rules. It also bears noting that companies have several years or more to comply with the rules, diminishing immediate costs and facilitating transitions. Further, an array of economic benefits is not considered here, including the economic benefits from the other nine final rules and the four proposed rules; these economic benefits range from workers spending more time at their jobs because they or their children are healthier to reduced expenditures on health care. The modest employment gains from the largest rule, the air toxics rule, are also not considered; these gains reflect the fact that compliance expenditures generate jobs when the economy has substantial unused capacity.
So especially once offsetting economic benefits are considered, it is hard to conceive how the EPA rules advanced so far during the Obama administration could drag down the overall economy.
What is conceivable, and indisputable, is that the health benefits from these rules are large. Every year, the cleaner air and other environmental benefits from the rules will save tens of thousands of lives, prevent tens of thousands of heart attacks, and mean hundreds of thousands fewer people will contract respiratory illnesses, thereby diminishing hospital stays. When all benefits, including health benefits, are considered, the benefits from the rules dwarf any compliance costs.
Note: Explanation of calculation. For the two rules that raise fuel standards for, and reduce greenhouse gas emissions from, various-sized vehicles, this blog considers the following benefits as economic: reductions in fuel expenditures, the value of time savings from needing to refuel less often, and the value of the decreased chance of economic disruption due to reduced dependence on foreign oil. The costs of time lost due to increased congestion (due to more driving since fuel costs less) and the costs of increased crashes (also reflecting more driving) are considered economic losses. The additional value drivers attach to driving more are not considered economic, nor are the costs assigned to increased traffic noise (reflecting more driving). The method is conservative because due to technical obstacles, no economic benefits are attached to reducing carbon dioxide or other emissions. Additionally, the health benefits from these rules, which EPA calculated for 2030 and did not annualize, are not included in the calculation.
From this week’s economic snapshot:
One of the arguments marshaled by the Occupy Wall Street movement is that corporate executives have seen pay increases far in excess of those enjoyed by typical workers. To be clear, CEOs have always earned much higher salaries than the workers they manage, but the gap between CEO and worker pay has soared in recent decades.
The figure below shows the ratio of average CEO compensation to compensation of the average worker from 1965–2010. In 1978, compensation of CEOs was 35 times greater than compensation of average workers. Since then, this ratio has skyrocketed, peaking at 299-to-1 in 2000. During the Great Recession, CEO pay fell relative to pay of typical workers because much of CEO compensation is directly linked to the stock market, which fell sharply in 2008 and 2009. However, the ratio bounced back during the recovery and stood at 243-to-1 in 2010. At this rate, it likely will not take long for the gap to reach its prior peak.
Click to enlarge
—With research assistance from Hilary Wething and Natalie Sabadish
There was a lot of good news last night and some great headlines this morning. But here’s one of my favorites, via Fox News Latino, and not just because it references one of (immigrant former governor) Arnold Schwarzenegger’s best films:
Conservative voters in Arizona may have had enough of their immigrant-bashing elected officials, it seems. Arizonans confirmed that Arizona Senate President Russell Pearce had gone too far by sponsoring and pushing hard for the passage and implementation of SB 1070, an insanely draconian (and likely unconstitutional) anti-immigrant, anti-Latino law that facilitates racial profiling.
Arizona is also home to controversial, attention-loving Sheriff Joe Arpaio (pictured above on the right), an ardent supporter of Russell Pearce and vocal proponent of SB 1070. Arpaio has personified the extremist elements in the state that support SB 1070, and his questionable enforcement tactics have earned him criticism from Amnesty International for the harsh treatment of prisoners. His actions, which recently included forcing an immigrant detainee to give birth while handcuffed and shackled, are the subject of two federal investigations, one by the Department of Justice over civil rights violations and another by a federal grand jury for abuse of power.
The recall vote, the first ever recall of an Arizona state legislator, is being heralded as a rejection of the policies and tactics embodied in SB 1070.
Pearce lost the election last night in his conservative suburban Phoenix district to a political newcomer, fellow Republican Jerry Lewis. Pearce lost by a substantial margin of seven percent, despite having outspent Lewis by a 3-to-1 ratio, thanks to a flood of campaign funds donated by corporate lobbyists, 90 percent of which came from outside the district.
Legislators in other states – most notably Alabama, Georgia, South Carolina, and Indiana – who have targeted immigrant workers and their families for political gain or because of intense lobbying from corporate interests, including and especially from the private prison industry – are now officially on notice. If you strive to terrorize law-abiding immigrants and Latinos who simply wish to work to provide food and shelter for their families, responsible voters will not allow you to remain in power, no matter how much money you get from the special interests you champion.
On Monday, the Census Bureau released a report on the new Research Supplemental Poverty Measure (SPM), a metric designed to address longstanding criticisms of the official federal poverty threshold. The official “poverty line” is a set pre-tax income level, established in 1969 at essentially three times what was considered necessary to afford a “minimal, but adequate” amount of food. The measure has been adjusted for family size and inflation, but has otherwise remained unchanged for more than 50 years.
What’s different about the SPM?
The SPM attempts a more holistic appraisal of family expenses. It takes the average between the 30th and 36th percentiles of spending by a family of three on food, clothing, shelter, and utilities, and adjusts this amount to reflect other necessary expenses, such as child care, federal income taxes, FICA payroll taxes, out-of-pocket medical expenses, and work-related expenses such as commuting costs, uniforms, and tools. At the same time, the SPM also accounts for resources available to low-income families through government programs, like the EITC, SNAP (food stamps), housing subsidies, school lunch programs, heating assistance, and WIC (food assistance for women, infants, and children). Finally, unlike the existing official poverty rate, the SPM does adjust for regional differences in prices and costs.
How do poverty levels under the SPM compare to those under the official poverty threshold?
According to the SPM, more than 49 million Americans—or 16 percent of the population—are living in poverty as of 2010, compared to 46.6 million—or 15.2 percent—under the official poverty line.
Moreover, the figure below highlights changes in the distribution of people by the ratio of their income to the poverty line. Note the enormous growth in the number of people with incomes 1.0 to 1.99 times the poverty threshold. This means that the number of Americans with incomes at or below 200 percent of the poverty line—a level often thought of as an adequate, but modest standard of living – rises from 34 percent under the official measure to 47.5 percent under the SPM. That’s nearly half of all Americans.
One clear reason is that the official poverty line’s method of pegging the poverty threshold to three times a minimum food bundle assumes that the growth in all expenses other than food will remain proportionate to the growth in food costs. But we know this is not true: case in point, healthcare. In fact, the SPM report shows that when you factor in individuals’ out-of-pocket medical expenses, it increases the poverty rate by 3.3 percentage points – in other words, the poverty rate would be 12.7 percent instead of 16 percent if individuals faced no medical costs. This contrast is even starker for seniors. Without accounting for out-of-pocket medical expenses, the poverty rate for seniors would be 8.6 percent; once you factor in medical costs, the poverty rate among seniors jumps to 15.9 percent! (Let this be a big warning to policymakers advocating benefit cuts to seniors, under the illusion that the current indexing of benefits has been too generous.)
There’s another interesting point to be made when you look at the effect that the additional necessary expenses (childcare, payroll taxes, etc.) and government-provided resources (EITC, SNAP, etc.) has upon the estimated poverty rate. The sum of the effects of the additional government-provided resources is to lower the SPM rate by 5.2 percentage points. However, the sum of the effects of all the additional expenses is to increase the SPM rate by 6.7 percentage points. So on net, the additional expenses that families face are overshadowing the benefits that government programs provide at a level sufficient to raise the poverty rate by 1.5 percentage points. At a time when so much of the political discourse is on reducing and eliminating federal programs, this finding at least suggests that the question should not be which programs to cut, but whether the programs we currently have to combat poverty are actually doing enough.
The Census Bureau acknowledges that the new measure is a “work in progress” and there are certainly some glaring concerns about the SPM that other researchers have dutifully pointed out. On a more fundamental level, there will always be questions around measures that define poverty in quasi-absolute terms. Simply because a family is spending on healthcare (childcare, food, shelter) at a level commensurate with the 33rd percentile of spending does not mean that they are receiving adequate healthcare. For these reasons, the SPM may be one step towards better ways of identifying poverty, but it cannot and should not be the end of the conversation.
Ohio’s landslide rejection of SB 5, a law that attacked the right of employees to engage in collective bargaining, a core human right, shows that conservatives there and elsewhere have gone too far. Americans know that unions, which have been crushed by big business, conservative courts, and right-wing politicians, are not the cause of the nation’s economic woes. Rather, unions are a hope for the 99 percent to hang on to what they have and preserve the middle class that they helped build.
House Republicans, who are attacking collective bargaining and the NLRB, the agency that protects the right to join unions and bargain collectively, should take heed. They are going down the same dead-end road as Gov. John Kasich in Ohio, and Americans won’t follow them.
I’ve generally been a fan of Planet Money – and still refer people to ‘another frightening show about the economy’ for a good summary of what led people to get so panicky in Sept. 2008. So, I’m afraid I find Adam Davidson’s first New York Times Magazine column – titled “It’s the economy” and labeled an exercise in “[trying] to demystify complicated economic issues…” – to be pretty disappointing.
He covers a lot of ground, so my list of disagreements is going to be scattershot, but here’s a quick taxonomy. First, I don’t buy his characterizations about what is generally agreed upon and what is seriously contested among economists. Second, he really undersells how well studied the concept of providing Keynesian-style fiscal support to ailing economies is. Finally, he doesn’t help readers in their attempt to make an evidence-based decision on what is easily the most important economics question today: Should Congress and the Administration be spending more to help lower today’s 9 percent unemployment rate?
Let’s start with the general – Davidson portrays economists as hopelessly divided and unsure about whether or not debt-financed spending and tax cuts (i.e., something like another Recovery Act, which I’ll just call “fiscal support” from now on) could lower today’s unemployment rate, but relatively united when it comes to how to reform taxes and education and health care systems.
This is the reverse of the truth – there is wide agreement that debt-financed fiscal support in a depressed economy will lower unemployment. Now, it’s true that there are holdouts from this position. And others who think the benefits of lower unemployment are swamped by the downsides of higher public debt (they’re wrong, by the way). But, the agreement* is much more widespread – ask literally any economic forecaster, in the public or private sector, that a casual reader of the Financial Times has heard of if, say, the Recovery Act boosted economic growth. They will all tell you “yes.”
You won’t find anywhere near such a consensus on long-run tax or education or health care policy. In fact, public finance economists can’t get unanimous agreement on if, in the long run, income accruing to holders of wealth should be taxed at all (it should, by the way). In short, anybody waiting for the current unpleasantness to pass and for economists to unite in harmony in future policy debates shouldn’t hold their breath.
Davidson also claims that there is wide agreement that “many Americans don’t know how to do anything that the world is willing to pay them a living wage for.” I’m not quite sure what this means. I guess it’s true in the strictly tautological sense that there are a lot of involuntarily unemployed workers out there, but if it is meant to be an indictment of American workers’ skills (and it’s hard for me not to read it that way) – then there’s no serious basis for this indictment.
Most distressingly, Davidson doesn’t rise above the “opinions on the shape of the world differ” review of the argument about the virtues of debt-financed fiscal support as the answer to today’s unemployment crisis. He writes as if this argument has lain completely unstudied since the Great Depression and that advocates for fiscal support in the last three years have taken a huge leap of faith in pushing it as the answer to today’s troubles. This is, again, so at odds with what has actually gone on in the profession that it’s hard to figure out his basis for claiming it. If nothing else, the experience of Japan’s Lost Decade alone has inspired thousands of pages on recessions (and jobless recoveries) driven by deficient demand. And no, a Google or Lexis search on “job creation” won’t actually capture all academic work relevant to this.
He also writes that the point of large-scale fiscal support was to “goad consumers into spending again.” Not really. A good chunk of the Recovery Act was indeed aimed at households, but it didn’t rely on some esoteric trick to bamboozle people into spending – instead it gave them money (or its near equivalent). And much of the most-effective parts of the Recovery Act actually recognized that consumers were unlikely to begin spending again and had the government spend the money directly. The recession was largely caused by consumer retrenchment, but this doesn’t mean that recovery has to come through consumer spending – instead we can provide the spending power through other sectors.
Lastly, Davidson notes that there is a rump of economists (he calls them, reasonably enough, the Chicago School) that argue that debt-financed fiscal support cannot help economies recover from recessions. But, it’s important to note that there is pretty simple evidence that can be brought to bear on this Keynesian versus Chicago debate. Nobody denies, for example, that the government could borrow money and just hire lots of people – hence creating jobs. What the Chicago school argues is that this borrowing will raise interest rates (new demand for loans will increase their “price,” or interest rates) and this increase in interest rates will dampen private-sector demand. But interest rates have not risen at all since the Recovery Act was passed and private investment has risen, a lot.
Those in the demystifying business really should point lots of this stuff out.
*Note: The Kaufmann survey describes the results wrong – any multiplier greater than zero means that debt-financed fiscal support has boosted the economy.
The Senate appears poised to pass two components of President Obama’s American Jobs Act, having found the first area of bipartisan agreement. These two components, however, fall woefully short of what is needed to address the jobs crisis.
The first provision would provide tax credits for hiring veterans, with bigger credits for hiring veterans who have been out of work for more than six months and those with service-related disabilities. It would also expand education and training opportunities for up to 100,000 older veterans. Helping veterans find employment or vocational training is a laudable goal. The problem is that this hiring credit is a rounding error in terms of national economic activity and will not visibly budge the dial on the national unemployment rate.
As Larry Mishel recently pointed out, scale is critical to evaluating any jobs plan. The president proposed a $447 billion jobs bill that would boost employment by 1.9 million jobs and reduce the unemployment rate a percentage point, according to Mark Zandi. The $1.6 billion cost of the Senate’s bill for veterans, on the other hand, represents only one-hundredth of one percent of GDP.
Worse, a second provision would repeal a requirement that, starting in 2013, will withhold 3 percent of payments to government contractors, in the form of a credit against contractors’ tax liability they already owe. Essentially, the cost of helping veterans is simultaneously helping government contractors avoid taxes. Of course, the increased tax avoidance would cost money – but the Senate provided a “pay-for” in the form of decreasing eligibility for Medicaid and subsidies for those seeking to buy health insurance under the Affordable Care Act (i.e., the health reform bill passed at the beginning of 2010).
So, to recap, the big “jobs-plan” coming out of the Senate today would help veterans (good), but would not move the dial on overall joblessness (bad), would facilitate tax avoidance by government contractors (bad), and would pay for this loss in tax revenue by eroding some of the benefits of health reform (bad). Will this pass? Probably—so much for the alleged benefits of bipartisanship. The likely success of this legislation owes first and foremost to the fact that it would not be paid for with a millionaires’ surtax. Over the last month, Senate Republicans have filibustered all of the following measures, which would have been paid for with varying surtaxes on incomes of more than $1 million:
- $447 billion for the entire American Jobs Act (10/11/2011)
- $35 billion to put teachers and first responders back to work (10/20/2011)
- $56 billion to build roads, repair bridges, and create an infrastructure bank (11/3/2011)
Helping some of the 240,000 unemployed veterans of the wars in Iraq and Afghanistan is merited, but so is helping the broader pool of 25 million un- and underemployed Americans. As we have pointed out over and over again, boosting GDP growth in a $15.2 trillion economy and seriously tackling persistent underemployment requires hundreds of billions of dollars in additional fiscal support. Republicans in the 112th Congress, however, have filibustered (or blocked through other procedural means) all job creation proposals that would provide any meaningful help ameliorating the jobs crisis.
The Washington Post‘s Ezra Klein with a useful observation…
Just a reminder: The market will literally pay us to borrow money from them for 5, 7 or 10 years. Pretty good deal for a country that has, say, trillions of dollars in infrastructure repairs it needs to make, or millions of workers who are unnecessarily unemployed. More here.
Here are the real interest rates on Treasury’s TIPS (click to enlarge):
On Friday, the Bureau of Labor Statistics released its monthly report with the most recent data on jobs and employment in the United States, a bleak reminder that things aren’t getting much better for the unemployed in this country. Sadly, as the International Labor Organization’s annual World of Work report reveals, the world economy is no better, and the risk of social unrest has increased dramatically in rich countries as a result (see figure below). The ILO’s calculations are based on “levels of discontent over the lack of jobs and anger over perceptions that the burden of the crisis is not being shared fairly.”
Just in the past year, we’ve seen violent clashes erupt between protestors and police in London, New York, Rome, and Oakland as a direct result of citizens protesting budget austerity, joblessness and a sputtering economic recovery. And in encampments literally all over the world people are peacefully protesting income inequality and widespread joblessness as part of the Occupy Wall Street movement. Thanks to a 17 percent youth unemployment rate in the U.S., young people in New York, Tulsa, Sacramento, Philadelphia, Minneapolis and elsewhere have plenty of time on their hands to protest and make their voices heard. Even recent college graduates have an unemployment rate that’s almost double what it was before the recession.
But just because they’re peaceful does not mean the OWS protestors are not seething with anger about the way that high level executives in the financial services industry – who are some of the wealthiest people in the world (better known as “part of the 1 percent”), have escaped prosecution or serving any jail time after bringing our economy to the brink of collapse, while the industry as a whole somehow managed to escape serious reform by Congress.
One of the other principal gripes of the peaceful OWS protestors is that Congress has failed to do almost anything to invest in the economy or create jobs since the stimulus package was passed in 2009, despite persistent joblessness and underemployment. Foreign governments in other developed countries have failed at this as well – and the discontent is palpable. Just look at the scale of protests in Spain, spurred in part by the country’s eye-popping 46 percent youth unemployment rate.
From most reports, it appears that the OWS protestors are committed to remaining peaceful – for now. Let’s hope it stays that way, despite this new evidence that things may deteriorate if economic conditions fail to improve.
My colleagues at EPI recently outlined how the grievances of the Occupy Wall Streeters are fact-based and supported by ample evidence. The ILO’s 2011 World of Work report offers a new estimate that should motivate 99 percent of the global population to join together into one massive movement that challenges the financial and political elite to enact policies that will put people back to work around the world. The table below is the ILO’s estimate that by 2013, there will be a global shortage of 40 million jobs – that’s a lot of desperate, hungry people with way too much time on their hands.
In a blog post yesterday, Paul Krugman again noted that the growth in income inequality is not all about education.
He pointed to two different charts to illustrate: one showing the growth of the top 1 percent relative to other income groups and a second with wage growth by education levels. Since the two charts had different scales, it was hard to see just how out of whack the education-explains-inequality story really is.
Below is a chart that combines the two series in one chart, showing that the top 1 percent has outpaced, by a very wide margin, not just those with less formal education, but college grads as well. And this gap between the growth of the top 1 percent and the rest is much larger than the growth gap between education levels.
This is not to say that education is not important. The chart also shows that those with a college (or post-secondary) degree have outpaced others. But it’s also clear that this trend only explains a small part of the broader inequality story.
(Note: The top 1 percent line shows the growth in average after-tax incomes for this group, via the CBO, data from Figure 2. The education lines show the growth in wages for all workers, via EPI’s State of Working America data on wage and compensation trends by education. Both are inflation adjusted.)
As Americans wrap their heads around the meaning of the growing “Occupy” movements in cities throughout the nation, trying to determine whether or not the 99 percent vs 1 percent breakdown of Americans constitutes “class warfare,” there are a great many irrefutable facts that need to inform such discussions. Many have been clearly articulated recently, (including this great collection by my EPI colleagues). In this blog post, I begin a renewed examination of how the decline of manufacturing employment has contributed to the erosion of the American middle class, and in the process, left many state economies in shambles.
Employment in the manufacturing sector has long provided a foundation for the American middle class. In 1999, former EPI economists noted key features of manufacturing employment:
Manufacturing provides middle-class jobs and a channel of upward mobility for non-college-educated workers (especially men). Compensation is higher and fringe benefits (such as health insurance and pension coverage) are more common than in other industries that, like manufacturing, employ non-college graduates. Blue-collar workers in manufacturing are also more likely to be union members, and thus they have more bargaining power than do comparable workers in services.
In 1999, there were troubling signs that all was not well in the American manufacturing sector, with the “Asian crisis” identified as a growing threat; a threat which my colleague Rob Scott has repeatedly shown to have continued to erode American employment (see, for example, Growing U.S. trade deficit with China cost 2.8 million jobs between 2001 and 2010). The alarming decline of the American manufacturing sector has of course only gotten worse over the intervening decade, leaving in its wake many state economies that have yet to recover. Since Jan. 2000, the American manufacturing sector has lost 5.5 million jobs, nearly a third (32.1 percent) of the Jan. 2000 total. Six states – Michigan, North Carolina, Rhode Island, Mississippi, New Jersey, and New York – have lost over 40 percent of their manufacturing workforce, while another five states have lost more than 37 percent of their manufacturing employment (collectively, the dark red states in the figure below). Indeed, only Alaska has seen growth in its manufacturing sector since 2000, though numbering less than 2,000 workers.
In future posts, I’ll examine the impact the erosion of manufacturing employment has had on wage trends in those states that have been hardest hit by the decimation of manufacturing employment. Lest readers despair, here are some concrete suggestions for what can be done to breathe new life into American manufacturing:
- The Alliance for American Manufacturing has a comprehensive plan for job creation based on the following five strategies: expanding American production, hiring, and capital expenditures; investing in America’s infrastructure; enhancing our workforce; making trade work for America; and rebuilding America’s innovation base.
- AAM’s Executive Director Scott Paul appeared Tuesday night on The Ed Show, noting how different the American economy would be if 5.5 million manufacturing jobs had not been lost over the past decade.
I apologize for continuing to harp on this Rick Perry study, but I just can’t help myself. As I mentioned in an earlier post, the first thing that really jumps out at you is the breathtaking intellectual dishonesty. But beyond its complete inconsistency with Perry’s ideology and professed objectives, the analysis simply doesn’t make sense. Here are a few examples:
1) GDP growth is impossibly high: Remember that Heritage Foundation analysis of the House Republican 2012 Budget, the one that predicted economic growth and unemployment at levels most economists considered impossible? Well, John Dunham and Associates’ (JDA) projections underpinning the analysis of Perry’s tax plan are even more impossibly higher! The Heritage analysis found that the average annual real growth rate from 2014-2020 would be about 3.1 percent. JDA is predicting that under Perry’s plan, it would be 5.3 percent. Reality’s overrated anyway, right?
2) Double counting: The analysis claims that “overall income is based on growth in nominal GDP and population (pg. 4).” See the problem here? Yeah, that’s right, nominal GDP already takes into account population growth. We checked their numbers, and it does appear they grew income by both GDP and population, so it doesn’t seem to be just a typo.
3) Other weird stuff: Check out the qualified dividends forecast from Table 2 of the analysis. From 2016-2019 dividends grow at an average 12.6 percent, including 13.2 percent in 2017, 14.0 percent in 2018, and 8.2 percent in 2019. And then 2020? Whoops. According to this forecast, qualified dividends in 2020 will be exactly the same as in 2019, to the dollar. Same thing with 2011 and 2012. The chance that that’s not a mistake is about zero.
4) Optional or mandatory?: It is unclear whether JDA modeled an optional flat tax or a mandatory flat tax as a replacement for the current income tax. The campaign maintains that JDA did model optionality. But their stated methodology does not mention how they modeled which taxpayers would choose which system, and their description of the proposal—”a 20 percent flat rate for both personal income taxes and corporate income taxes”—also makes no mention of having a choice between the current system and the new system.
We contacted the Perry campaign in regards to these numerous errors and omissions, but have yet to hear back. These aren’t minor problems – the entire analysis is suspect and the Perry campaign should retract these numbers.
At EPI’s 25th anniversary celebration last night, we presented an award to Paul Krugman. (You know, because he’s short on credentials and really could use some professional validation.) Harry Hanbury produced a very candid video about him for us, and it’s well worth seeing – it’s not just a hymn of praise, it actually has a great narrative arc.
MORE: Multimedia on EPI at 25
I think the only thing I’d add that the video didn’t emphasize (because it was made for people, not economists) is just how inspiring Krugman’s work is for economists who are actually trying to make sense of the real world. Nobody else so consistently reaches back for the tools that we’re all taught in grad schools (many of which he built, it bears saying) – tools like graphs and equations and models that often seem dry and abstract – and holds them up against developments in the real world to see what they actually can and can’t explain. He runs with the things that are useful and (often pretty brutally) discards the things that aren’t. For those of us who got into the economics business to understand the world around us, his work is an inspiration.
Krugman’s acceptance speech
[pro-player width=’540′ height=’304′ type=’video’ image=’http://www.epi.org/files/2011/Krugman_Award.png’]http://www.youtube.com/watch?v=-pKRBLdG1eA[/pro-player]
A clear trend is developing among the economic plans of the GOP presidential hopefuls: shift the burden of taxation from upper-income to lower-income households. Yesterday, the Tax Policy Center released an analysis concluding that Texas Gov. Rick Perry’s plan would cut taxes on high-income households, raise taxes on low- and middle-income households, and produce bigger deficits. The gist of Perry’s plan is to add an optional federal income tax to the current code: a flat 20 percent tax on (almost all) income less personal exemptions, charitable giving, home mortgage interest, state and local taxes, and all capital gains and dividends income (aptly dubbed an “Alternative Maximum Tax” by Howard Gleckman).
Those earning more than $1 million would see their average tax bill fall by more than half, a tax break of $496,000 in 2015 alone, relative to current policy. The highest income 0.1 percent of households (with income above $2.8 million) would see a tax break of over $1.5 million—even more egregious than the mammoth tax cut they would receive under Herman Cain’s “999” plan.
Meanwhile, Perry’s plan appears to let the Bush-era tax cuts expire in 2013, meaning that lower-income households would lose their expanded earned income tax credit, child tax credit, and the 10 percent bracket. (The John Dunham and Associates analysis for the Perry campaign uses a current law baseline and TPC also concluded that the Bush-era tax cuts would expire on schedule.) The Bush-era tax cuts were regressive and disproportionately benefited upper-income households, but a fraction of these tax cuts have gone to lower- and middle-class households; Perry would effectively do away with these tax cuts while giving higher-income households an even bigger tax cut. This would mean an average tax increase of over $400 for households earning between $20,000 and $40,000. Although this may appear at odds with Perry’s anti-tax ideology, higher taxes for the poor and middle class is in fact entirely consistent with his misleading rhetoric lambasting the “injustice” that nearly half of households don’t pay federal income taxes.
The chart below depicts TPC’s analysis of effective tax rates by cash income level under Perry’s plan versus current policy. On average, households with income under $50,000 see a tax hike. Above this level, tax cuts balloon as income rises. Millionaires would be left paying a lower effective tax rate than a middle class family earning between $50,000 and $75,000. This completely violates the idea of a progressive tax code and the Buffett Rule.
The natural result of modestly raising taxes on working families while slashing taxes for upper-income households is hemorrhaging revenue: this is not about “shared sacrifice” or the budget deficit. As my colleague Ethan Pollack points out, the Perry campaign relies on highly dishonest dynamic scoring to claim their tax code produces more revenue. Official budget scorekeepers incorporate behavioral responses but not dynamic growth effects into tax policy analysis, because research shows growth effects are generally small and can break either way depending on how tax cuts are financed (see this CBPP overview of dynamic scoring). TPC’s static model shows Perry’s plan losing $995 billion relative to current law, a decrease of 27 percent, in calendar year 2015 alone ($570 billion relative to the inadequate levels projected under current policy).
Working households would get hammered again when that additional revenue loss is financed with draconian spending cuts, as required by the balanced budget amendment and spending cap component of Perry’s economic plan. This is merely a plan to dismantle government and refund all the savings, plus some of working families’ disposable income, to upper-income households.
I’ve been reading through Rick Perry’s official analysis of his tax plan (scored by John Dunham and Associates), and hoo boy, it’s a doozy. Difficult to know where to begin.
The intellectual dishonesty is breath-taking. The basic conservative argument that tax cuts increase economic growth goes like this: tax cuts for the rich results in more capital formation, which fuels greater productivity and higher economic growth. In other words, supply-side growth with demand catching up. It’s a pretty ridiculous model in the face of huge demand shortages, but hey, at least it’s a model.
But as Matt Rognlie points out, the model that Rick Perry used is very different, and in fact has a lot more in common with traditional Keynesian demand-side economic models than conservative supply-side models. In fact, this economic model (called IMPLAN) is usually used to justify government public works projects, such as sports stadiums, because this model shows that the economy can be significantly improved through government spending.
Wait, what? Rick Perry’s using an economic model that shows that government spending helps the economy? That’s right, partner. In fact, the IMPLAN model (which we’re decently familiar with at EPI) will actually show that spending cuts reduce demand more than tax cuts boost it (because a portion of the tax cuts are saved), so the net effect is likely negative. And to be clear, JDA did assume that the plan would cut spending by the same amount as the revenue loss (page 7, footnote 7).
So how did the analysis show a positive economic impact? Simple: they assumed the spending cuts, but didn’t model them, despite the fact that it’s logically inconsistent to claim that tax cuts have an effect on demand but spending cuts don’t. The only reason they got a positive economic impact was because they did not model the entire plan. Had they, it’s pretty clear that the analysis would have shown that Perry’s overall budget plan—tax cuts paired with offsetting spending cuts—would, on net, hurt jobs and economic growth.
Former Secretary of Labor Ray Marshall released his new book, Value-Added Immigration: Lessons for the United States from Canada, Australia, and the United Kingdom, at a forum at EPI this morning. The book examines the employment-based immigration policies of the principal immigration-receiving countries and contrasts their data and evidence-based policy development with our own very partisan policy making, which has been governed by ideology and interest group advantage rather than a rational examination of the national interest.
Marshall made clear at this morning’s forum that a realistic hope for progress depends on putting one federal agency in charge, gathering data for informed decision-making, and committing ourselves to pursuit of a high value-added immigration policy, rather than simply a pursuit of cheap labor. Unlike Australia and Canada, which track the experience of immigrants in longitudinal studies and adjust their policies to improve outcomes, the United States does not even know how many “temporary” non-immigrant workers are legally in the U.S., let alone how they are faring.
Marshall was joined on a panel by three distinguished researchers: Philip Martin of the University of California, Davis, one of the nation’s foremost experts on agricultural economics and labor migration; Michael S. Teitelbaum of the Alfred P. Sloan Foundation and Harvard Law School, a demographer and expert on STEM education and immigration; and Ron Hira, of the Rochester Institute of Technology, an expert on the offshoring of IT work and the relationship between our non-immigrant visa programs and the health of the domestic engineering and computer science workforces.
Martin and Teitelbaum, like Secretary Marshall, praised the flexibility of the Australian and Canadian systems and their use of rational, objective point systems to determine the admission of skilled immigrants. Each also praised the U.K.’s Migration Advisory Committee for its collection and use of very extensive labor shortage statistics, its use of “bottoms up” information from local businesses, unions and government sources, and its non-partisan method of researching, reporting, and analyzing whether importing workers is the sensible way to solve particular problems. All three commenters agreed with Marshall that the current state of immigration and labor market data in the U.S. is far inferior to that in the countries studied and inadequate to the task of informing the policy debate.
Value Added Immigration: Lessons for the United States from Canada, Australia, and the United Kingdom, is available from EPI for $15.95.
GDP grew at 2.5 percent in the third quarter – and that seems to be about the growth rate to expect for the next year (which will be an improvement from the 1.6 percent growth that has characterized the most recent 12 months). This is, as we’ve noted, insufficient to drive down the 9.1 percent unemployment rate.
It is, however, worth remembering just why there are so many unemployed workers in the country: the depth and length of the Great Recession, caused by the bursting housing bubble (and perhaps amplified by the corresponding financial crisis). The unemployment rate is slightly down and employment growth since the recession ended in the middle of 2009 is actually roughly in-line with the recoveries we’ve seen in the past two decades (following the 1990 and 2001 recessions). Further, to the degree that the current recovery is slightly under-performing these previous two, it’s in the hemorrhaging of public sector jobs.
So why is unemployment so much higher today compared to nine quarters after these two other recessions ended? Because the output losses (and hence corresponding job-losses) suffered during the Great Recession were so much larger – meaning that we have a much larger overhang of economic slack (both unemployed workers and idle factories) to put back to work.
The figure below shows GDP declines during the Great Recession compared to these previous two recessions, as well as GDP gains nine quarters into recovery for the Great Recession and the previous recessions.
As we’ve also observed before, recoveries from recessions happened much more quickly in the years prior to 1990, reflecting in part that monetary policy was much more effective in driving recoveries pre-1990 (since it was generally monetary policy tightness that caused these recessions, monetary loosening could hence lead to rapid recovery).
So, focusing for a second on just those recessions that have happened in the two decades (give or take a year), we see something clear – this recovery lags the average by 1.1 percent of GDP, but the hole left by the recession was larger by an average of 4.5 percent of GDP, meaning roughly that it was the difference in the losses caused by the recession that explain 80 percent of why unemployment is so high relative to its pre-recession level.
So while it’s true that we slightly lag the pace of post-1990s’ recoveries, it is clear that what really explains why so many more workers and so much more capital remains idle today compared to recoveries past is just how ferocious the preceding recession was.
Does this leave today’s policymakers off the hook? No – they should do more. The past is the past and just because a problem is inherited doesn’t mean it shouldn’t or can’t be solved. Clearly in retrospect not enough was done to boost the economy following the 1990 and 2001 recessions (some speculative reasons why are here). And clearly there is more we can do now to boost the sluggish demand growth that is the main cause of today’s economy operating below potential.
But, it is worth remembering where the problem came from. As we get further and further from the Great Recession, the temptation is great to act as if citing it as the root cause of today’s problems is just unseemly dwelling on the past and dodging blame. But, really, it does matter how it all started.
Rick Perry’s out with his tax plan, and while he might be winning the “who can pander to their base the most” award—beating out strong efforts by Mitt Romney and Herman Cain—his proposal proves to be an utter disaster for the economy and the middle class.
On the tax side, the plan would do the following:
- Replace the graduated income tax with an optional 20 percent flat rate with a slightly broader base
- Slash the corporate tax by almost half
- Abolish the estate tax
- Enact a temporary repatriation holiday
- Eliminate taxes on capital gains and dividends
- Raise the personal exemption for households to $12,500 per person
Perry makes two basic claims about his plan. First, he says that the “net benefit will be more money in Americans’ pockets.” For corporations and high-income households, that’s certainly true, even though their tax rates are already at historic lows. But it does that by shifting the tax burden onto middle- and low-income households, whose incomes have actually fallen over the last decade.
Second, he claims that his plan will simplify the tax code, so simple that you can “file your taxes on a postcard.” Yet his tax code is optional, meaning that millions of households will have to do their taxes twice to see under which code they should file (and if they think they might be subject to the Alternative Minimum Tax, they’ll have to do their taxes three times!). Layering another tax code over the current one makes filing taxes more complicated, not less.
Now, it’s certainly the case that the tax code is too complex. But it’s telling that his proposal doesn’t even attempt to tackle the issue of unfairness, which has sparked protests across the country. Most people hear that Warren Buffet pays a lower tax rate than his secretary and conclude that he should be taxed at a higher rate, one more comparable to middle-class workers. Rick Perry, however, thinks his taxes should be cut even further.
And how does he pay for these tax cuts? No surprise here: massive cuts to the social safety net and public investments. He’d raise the Social Security retirement age, potentially raise the Medicare eligibility age, eliminate all the expanded health insurance coverage in the Affordable Care Act, and take an axe to non-defense discretionary spending, which has already been slashed by the Budget Control Act.
It’s the basic conservative approach to budget and tax policy: (1) pretend that you care about deficits, (2) give huge tax cuts to corporations and the top 1 percent, and (3) slash the very programs that people depend on because now we “can’t afford them.” The rich get richer, and even more risk and cost is pushed onto the middle- and low-income households that can least bear the burden. Perry may call this tax plan “fair.” but I don’t think that word means what he thinks it means.
So this Halloween season, the middle class might want to skip Perry’s house, because for them he’s got no treats, only cruel, cruel tricks.
Nonresidential investment has been growing rapidly for quite some time – seven straight quarters averaging 10.5 percent growth. We have noted before that this provides powerful evidence that business fear of future regulatory uncertainty seems to be an odd explanation of sluggish economic growth – businesses are, in fact, actually spending pretty quickly during the recovery.
Is it a puzzle that nonresidential investment is coming on two years of rapid growth, yet employment growth remains sluggish? After all, if businesses seem fine in taking on new machines, why aren’t they fine in taking on new staff?
I’d argue the answer to these questions are ‘not really’ and ‘read on.’
First, it’s worth remembering that nonresidential investment just isn’t that big a part of the overall economy – it has averaged 11.1 percent of GDP since 1995 and sits at 10.3 percent today. While it’s nice that it’s performing well, it just doesn’t have enough heft by itself to drive overall trends in either output or employment growth. Contrast this with consumer spending sitting at about 70 percent or more of total GDP.
Second, nonresidential investment is hugely cyclical – from the last quarter of 2007 to its trough in the second quarter of 2009, it fell by 22.4 percent – or about 2.5 times farther than the drop in employment. Today, despite its good growth for nearly two years, it remains well below trend. In fact, Thursday’s report on third quarter GDP shows that the simple level of nonresidential investment remains nearly 8 percent below its pre-recession peak. So, it’s been growing very well for a while now, but it fell extraordinarily far during the recession.
Third, it’s important to remember that, like job-growth, investment has to grow just to keep overall economic slack stable. So, we need roughly 100,000 jobs each month just to keep the unemployment rate stable while absorbing new labor market entrants. And, we need 8 percent of GDP to be invested each year just to keep the overall capital stock from shrinking through depreciation that occurs in the private business sector.
Lastly, it’s worth asking whether investment is now so high after seven straight quarters of growth that it is threatening to change the economy’s capital/labor ratio in an appreciable way. That is, firms invest so that each worker has a useful bundle of capital to work with – one that hopefully grows over time and makes each worker more productive. If investment per worker begins rising well above trend, this could mean that output is just becoming more capital-intensive for some unspecified reason or that firms will have to start soon hiring to stabilize this ratio.
Neither seems particularly likely – investment per worker remains below its 2007 level even as employment shrank over that period. And this means that it remains well below what a simple extrapolation of the pre-recession trend would argue.
In short, the trend in nonresidential investment is nice, but it won’t by itself bring about a robust recovery. More importantly, it mostly represents simply an ongoing climb out of a steep, recession-induced hole (which should sound familiar) combined with an attempt to run ahead of simple depreciation. And this trend certainly presents no puzzle in that it’s not being accompanied by more rapid hiring.
In Dec. 2008, the U.S. auto industry stood on the brink of collapse. The Obama administration negotiated a restructuring plan for the industry that took General Motors and Chrysler through quick bankruptcies, helped get them back on their feet again, and provided bridge financing for auto parts makers and auto finance companies. This plan was widely criticized at the time but restructuring has paid big dividends for the nation, autoworkers and the domestic auto industry.
If the auto industry had been allowed to collapse, between 1.1 and 3.3 million jobs would have been lost between 2009 and 2011. After restructuring, more than 78,000 jobs have been added in U.S. motor vehicle production. All three U.S. auto companies returned to profitability in 2011 and they earned combined profits of nearly $6 billion in the first quarter of this year. Total sales and market share of the Big Three are all up sharply since 2009.
GM, Ford and Chrysler have bargained new labor agreements with the UAW, recently approved by workers at each company, which will ensure increased employment and investments in the United States by all three firms. The completion of these agreements and the strong improvement in the performance of U.S. automakers shows that the Obama administration made a wise decision to invest in the auto industry restructuring package. If the industry had been allowed to fail, costs to federal, state and local governments in the form of reduced tax payments and increased unemployment compensation would have totaled between $83 billion and $249 billion in 2009 alone.
The auto industry restructuring plan has yielded a huge return on taxpayer investment and put the industry and its workers on a solid path to recovery. I estimate the federal, state and local governments saved between $10 and $78 for every net dollar invested in auto industry restructuring—a very savvy investment at a time when failure to intervene would have been catastrophic for the domestic economy.