Speaking of rising hours, it’s also interesting to note that the atypically large rise in average hours since the recession’s trough happened to coincide with the period during which the American Recovery and Reinvestment Act (ARRA) was providing its peak boost to economic activity (see the figure below).
Between the first half of 2009 and first half of 2011, ARRA boosted GDP by roughly 1.3 percent. All else equal, this should have been associated with employment in the first quarter of 2011 that was roughly 1.5 million higher and unemployment that was a full percentage point lower by the first quarter of 2011 than would’ve happened without ARRA.*
But, over this same period, average hours worked rose by 1.4 percent. All else equal this implies that about 1.5 million new workers were not needed to absorb rising demand for labor.
To be clear, everybody who tries to translate additional economic activity spurred by ARRA (or anything else) into an increase in employment makes an adjustment for average hours increasing as the economy exits a recession and begins growing again – it’s a pretty typical pattern. But, as pointed out before, the rise in hours in the recovery following the Great Recession was atypically large and the GDP-to-employment translations may have been off because of it.
Of course, the most common criticism levied against ARRA by its critics was some version of the argument that “you guys saying it’s boosting the economy, but job-growth is really slow and unemployment is rising.”
So does the fact that rising hours may have crowded out potential new hires while ARRA was creating new demand then mean that the critics are right about the Recovery Act’s ineffectiveness?
Nope. ARRA created new demand for labor by boosting economic activity. Period. American workers as a group worked more and earned more money because of ARRA.
But it does tell us that we might not be so sure about how this new labor demand was allocated – and in fact it seems like more of it went to increasing the hours of incumbent workers and less went to increasing new hires than we may have thought.
One metric does not change, however: the estimate of full-time equivalent jobs created by ARRA. This measure holds hours constant by design. In short, this seems like the safest bet for having a solid assessment of what ARRA did. And for the record, at its peak during the last half of 2010, full-time employment was between 1 to 6 million higher because of ARRA, regardless of what was happening to hours.
The possibility that lots of the new employment opportunities created by ARRA were filled by increasing hours of incumbent workers rather than new hires may, of course, have meant that that ARRA was less effective from a political perspective. Had more of its boost to economic activity shown up in top-line labor market indicators like new hires and lower unemployment, its proponents (like me) might have had an easier job demonstrating just how important it was.
*All numbers on ARRA’s effectiveness in this post come from the CBO
The Washington Post published a story earlier this week by Jia Lynn Yang that had all the information needed to conclude that the 401(k) isn’t working out. She reports that the 401(k) has caused serious stress for working Americans and cites some scary financial data from the Center for Retirement Research. Since Congress created the 401(k) about 30 years ago, financial unpreparedness has gotten much worse: In 1983, researchers found that 31 percent of working age households were “at risk” of losing their standard of living when they retired; by 2009, it was 51 percent. The average worker who retires should have more than $300,000 in their 401(k) account, but in 2007 – even before the markets crashed and wiped out trillions in savings – the average person about to retire had only $78,000. The story didn’t mention that the cumulative underfunding of retirement accounts is nearly $7 trillion.
But instead of fingering the 401(k) as the cause of the stress and retirement insecurity most of us are facing, or even blaming Congress or the employers replacing pensions with a cheaper, badly designed personal account, Yang and her editors conclude that the fault lies with the many employees who are just too “clueless,” as Ms. Lang puts it, to deal with financial responsibility.
This lets the real villians off way too easily. Essentially, the big retirement-policy experiment of the past three decades has been replacing guaranteed pensions with … a tax cut, called 401(k)s. Since the 401(k) is failing so badly to achieve the most important goal our retirement system should have – the achievement of retirement security for most Americans – it should be replaced with something better, and we can put the money gained by closing the 401(k) tax expenditure to better uses. I also disagree with Yang’s statement that “even the program’s biggest critics concede that the system … is here to stay.” Not necessarily. The 401(k) is essentially a tax loophole that over-rewards the well-off for saving money they would have saved anyway. More than 70 percent of the tax deductions are taken by people in the top 20 percent by income. Every member of Congress claims we need to close tax loopholes and non-performing subsidies, and if tax reform ever happens, the 401(k) should be a fat target.
The article suggests that the 401(k)’s failures are really our own: ignorance, irresponsibility, making mistakes. It never mentions the effect on these accounts of the fees charged by plan administrators, investment advisors, and mutual funds, which can shave 25 percent off an account over a lifetime of work and investing. Yang never mentions that employers tend to put far less money into 401(k) plans than they do into pensions, that employers often reduce their contributions or freeze them altogether when times get tough, and that some employers make their contributions in company stock – often a poor choice and one that can lead to insufficiently diversified investments.
Yang does mention that it isn’t easy for individuals “to manage your investments intelligently through stock market highs and lows.” But I’m not sure she understands just how difficult it is, even for a former Assistant Secretary of the Treasury like Alicia Munnell, whom Yang quotes as saying “managing your own money is just horrible.” Market risk is out of one’s control, to a certain extent. To illustrate, Gary Burtless of the Brookings Institution estimated that a 401(k) participant retiring in 1974 would have a retirement income 64 percent lower than that of a worker who retired in 1999 if both workers contributed the same amounts over 40 years to a portfolio split equally between long-term government bonds and stocks (Burtless 2008). In short, two workers pursuing the exact same (and generally sensible) strategy achieve wildly different retirement income possibilities simply because of good or bad timing.
The tens of billions of dollars taxpayers are wasting to subsidize 401(k) savings each year would be much better spent on the more egalitarian, safer, and more nearly universal Social Security retirement system.
The L-1 visa, a guest worker category relatively unknown to the general public, has received a lot of attention in the past couple of weeks from businesses that use it, news outlets that cover the technology sector, and now, from organized labor. U.S. Citizenship and Immigration Services (USCIS) is currently developing new interpretive guidance which has the potential to make this dysfunctional temporary work visa category dramatically better or dramatically worse.
The L-1 allows a multinational company to transfer personnel stationed abroad into the United States if it has a parent, subsidiary, or affiliate company located on U.S. soil. Such a company can petition to hire either a manager or an executive at its U.S. office (known as the L-1A subcategory), or a worker with “specialized knowledge” (L-1B). In 2010, nearly 75,000 L-1 visas were approved, and although they are available to companies in all industries, according to the Department of Homeland Security’s (DHS) Office of Inspector General, “the positions L-1 applicants are filling are most often related to computers and IT.”
But there are a number of serious and systemic problems that have been identified with this visa category.
For example, the L-1 visa has no prevailing or minimum wage requirement, and no requirement that companies first check to see if there is an unemployed U.S. worker available for the job the L-1 worker will fill. There have also been documented cases of companies hiring an L-1 worker, forcing a U.S. worker to train the L-1 worker on how to do their job, and then firing and replacing the U.S. worker with the L-1 temporary worker. The fired worker is then prohibited from speaking a word of this to anyone as a condition of receiving a severance package. The employer is even allowed to pay home country wages to the foreign L-1 worker, which is likely to be tens of thousands of dollars less than what is paid to a similarly skilled U.S. worker. L-1 workers are also unlikely to complain about these low wages or any employer abuse that may occur, because if they speak up and get fired as a result, they are not allowed to take a job with another employer and become instantly deportable. This gives employers access to a lower-paid foreign workforce that has no bargaining power in the workplace.
The huge financial savings and unequal power relationship that employers enjoy when hiring L-1 workers – but especially L-1B workers who are not in executive or managerial positions – is the reason that the U.S. Chamber of Commerce and dozens of multinational companies are lobbying USCIS heavily, urging the agency to make it easier to hire L-1B workers. But that’s also exactly why Professor Ron Hira and I have harshly criticized the negative impact the visa has on the wages and employment opportunities of U.S. workers, and asked USCIS director Alejandro Mayorkas to refrain from expanding the L-1B category at the expense of decent-paying high-tech jobs in the United States.
On Tuesday, as reported in Computerworld, 20 unions that represent workers in high-tech occupations sent a letter to President Obama urging him to do the same. In addition, the IEEE-USA, the largest engineering professional society in the world (representing 210,000 engineers in the U.S.), sent a letter to Mayorkas expressing their concern about how the “L-1 visa program continues to be used in ways that exploit L-1B workers and adversely affect employment opportunities, wages and working conditions for U.S. citizen and permanent resident workers.” The IEEE-USA letter also reminds Mayorkas that the program should “exclude … outsourcing companies whose business models are based on workers acquiring skills, knowledge and contacts in the United States for the purpose of moving American jobs overseas.” Unfortunately, the data reveal that it does not.
The crux of what USCIS is considering has to do with better defining what constitutes a potential employee’s “specialized knowledge” – the legal requirement for the L-1B category. This definition has been problematic for a number of years. Multiple interpretations and guidance from the executive branch and judicial decisions have muddled and expanded the meaning, making it so broad “that adjudicators believe they have little choice but to approve almost all petitions.” This broadening of the legal standard makes it difficult for government officials to reject applications even when they believe them to be fraudulent.
No one disputes that multinational companies should have the right to bring in their brightest, best, most essential and talented personnel to help manage and run their offices in the U.S. But first, they have to show that the workers they bring to the U.S. are indeed highly skilled, and the government must implement basic protections that would prevent adverse effects on the wages and employment of U.S. workers. Since these requirements and protections are not yet part of the L-1 visa program, the L-1B category should not be allowed to grow or expand until they are in place. Instead, it should be curtailed drastically. The new USCIS guidance on L-1B specialized knowledge could help keep good jobs from being sent abroad and protect skilled high-tech workers in the United States – but only if Mayorkas and the Obama administration side with workers instead of the Chamber of Commerce and the high-tech offshoring industry.
Unemployment rising too fast, then falling too fast … going forward, it should (unfortunately) be just right
Has the unemployment rate fallen “too fast” given underlying output growth over the past 18 months? Applying a simple Okun-type relationship between changes in unemployment and the difference between growth rates of actual and potential GDP (or, changes in the output gap) would indicate so. Between the fourth quarter of 2009 and fourth quarter of 2011, the output gap shrank by less than 0.8 percent per year – which historically would only have been associated with a 0.4 percentage-point decline in the unemployment rate. Instead, the unemployment rate fell by 1.2 percentage points – or three times as much as our Okun regression might suggest should’ve happened.
Federal Reserve Chairman Ben Bernanke noted this “too low” unemployment last week (so have Tim Duy and others). While there’s definitely some interesting stuff to examine here, we should first point out the one thing that nobody disagrees about. Going forward from now, the best estimate for what another 24 months of 0.8 percent average output gap reduction will buy us is the one provided by the classic Okun-style relationship: A very slight fall – about 0.4 percentage points – in the unemployment rate.
This cautionary tale about what to expect going forward is sometimes lost as people point out that the too rapid fall in unemployment recently is the mirror image of the too-rapid rise in unemployment in late 2009 and 2010. The graph below shows the actual unemployment rate and the one predicted by regressing two-year changes in unemployment on the two-year change in the output gap, as well the square of the change in the output gap (included to capture a non-linear effect pointed out by Zach Pandl at Goldman-Sachs; no link available, I’m afraid).
The graph clearly shows the too-rapid rise and fall of unemployment relative to predictions over the past couple of years. While interesting, this doesn’t change the most important thing that such an analysis tell us: If we want the unemployment rate to continue falling at the same rate that characterized the past year-and-a-half, we better see much faster GDP growth. As Bernanke said:
“However, to the extent that the decline in the unemployment rate since last summer has brought unemployment back more into line with the level of aggregate demand [note: i.e., recent too-rapid declines “making up for” earlier too-rapid gains], then further significant improvements in unemployment will likely require faster economic growth than we experienced during the past year.”
To be concrete, the Congressional Budget Office is projecting growth in potential GDP of 1.8 and 1.9 percent in 2012 and 2013, respectively. Mark Zandi of Moody’s Analytics is projecting actual GDP growth of 2.5 and 2.9 percent in those years, respectively. This means the two-year change from 2011 is right back at that 0.8 percent difference between actual and potential GDP growth that has characterized the last two years, which means we should expect unemployment to fall by only 0.4 percentage points over that time. This is what people should really know about unemployment changes going forward: absent serious measures to boost growth, they will be excruciatingly slow.
Lastly, it’s worth examining if there’s any odd economic development that might explain the too-rapid rise in actual unemployment between the second quarter of 2009 and the last quarter of 2010 – the time period that saw predicted unemployment begin lagging actual unemployment by more and more.
One pretty clear suspect is fingered in the graph below, which shows the rise in average hours across economic recoveries. For the most recent recovery, the index begins in the second quarter of 2009 (the official trough of the recession).
One can see clearly that the rise in average hours worked was atypically fast in the current recovery. In fact, compared to previous averages, the length of the work-week rose by about 2 percent. This is a big deal, representing about 2.3 million workers that did not have to be hired because rising demand was absorbed by rising hours of incumbents instead.
But shouldn’t this change in hours be soaked up in our Okun regressions by the output gap variable (since hours always tend to be procyclical)? Not this time. A regression of the change in hours on the change in the output gap (and a time trend) under-predicts the rise in hours between the second quarter of 2009 and second quarter of 2011 by nearly 2 percent. Between the second quarter of 2011 and the fourth quarter of 2011, the predicted rise is actually slightly greater than the actual rise.
So, what to make of all this?
First, going forward, the best predictor of what will happen to unemployment remains the Okun-based estimates based on GDP growth. Given that most estimates of GDP growth in the next couple of years do not see it beating growth in potential output by much, there is little reason to expect that the recent rapid declines in unemployment rates will continue.
Second, rising average hours might explain a lot of the too-rapid rise in unemployment in 2009 and 2010.
Lastly, given this large rise in hours, an aggressive program to promote work-sharing instituted during the recession could have been a big help in not allowing rising hours to soak up so much of the extra labor demand, and would’ve allowed the economic activity spurred by the American Recovery and Reinvestment Act to translate more directly into higher head counts and lower unemployment. The Center for Economic and Policy Research’s Dean Baker had a good real-time proposal that would have been a real help. It’s not totally too late either – work-sharing pilot programs were included in the recent extension of payroll tax cuts.
The most annoying responses to the revelations about Apple’s inhumane and exploitative factory pay and working conditions in China are the variations on the theme that the Chinese workers are grateful (or ought to be) to have the work and even the grueling overtime hours. “Sure, it looks like exploitation to Westerners, but really, Apple is lifting their living standards.” No. Apple is exploiting these young Chinese workers, grinding them down, forcing them to work for pay so low they can’t survive on it without working far beyond anything fair or reasonable – or even legal under Chinese labor law. And the workers don’t have a choice; they either work the overtime or they’re fired.
The Fair Labor Association, Apple’s hand-picked auditor, found that Apple’s most important supplier, Foxconn, works employees far beyond the hours permitted by Apple’s code of conduct (a maximum of 60 hours per week), let alone Chinese law, which limits work hours to 49 per week. The FLA reports that “in November and December 2011, 34% and 46% of the workforce respectively worked up to 70 hours per week.” Students and Scholars Against Corporate Misbehaviour (SACOM), a Hong Kong-based labor rights organization, has documented Foxconn employees working 140 hours of overtime a month.
Keith Bradsher’s recent “news analysis” in the New York Times, “Two Sides to Labor in China,” blamed the workers for these sweatshop hours and tried to portray them in a positive light. Bradsher wrote: “But one reason that workweeks of 60 hours or more have been possible at factories run by Foxconn and others is that at least some laborers already on the payroll have wanted the extra hours.”
Bradsher believes the employees have a choice about working 60-70 hours a week. He writes that “the added expense of hiring additional workers can make it cheaper to ask employees for extra overtime…” Ask? When Foxconn employees were throwing themselves out of dormitory windows, committing suicide in reaction to the harsh conditions at Foxconn, the company reduced work hours to 60 a week, but it didn’t give workers a choice about working them. As an Oct. 2010 SACOM report revealed, “Despite fatigue, workers cannot reject overtime work, because Foxconn requires workers to sign a Voluntary Overtime Pledge.”
Bradsher cites the FLA’s survey of Foxconn employees, 34 percent of whom reported they “actually wanted even more hours.” How can workers want more than 60 hours a week? Bradsher says they’re young and bored, have nothing better to do, “and were eager to make as much money as possible so as to return to their home villages.” He never suggests that their pay is so low they can’t survive working the legal maximum number of hours. But that is exactly what SACOM found in 2010 when it compared the cost of living in Foxconn’s factory cities with Foxconn’s pay. Without overtime, the average Foxconn production employee earned about 60 percent of what was required to meet basic needs. Today, after wage increases that have been offset by higher food prices and what Bradsher admits are “soaring rents,” 72 percent of Foxconn employees at Chengdu told the FLA their salaries did not cover basic needs.
So when Apple apologists tell you that “the Chinese are different, they want to work long hours,” don’t buy it. The richest corporation in the world is grinding its workers to the bone because it can get away with it, not because the workers want to live that way.
Is the eurozone in recession? Eight consecutive months of rising unemployment indicate that the region could indeed be facing another economic downturn.
According to Eurostat, the European Union’s version of the Bureau of Labor Statistics, the unemployment rate in the 17 countries that use the euro climbed to 10.8 percent in February, its highest level since the currency’s introduction in 1999. Seven eurozone countries have unemployment rates of more than 10 percent; in comparison, the United States’ unemployment rate is 8.3 percent. Past historical periods have also seen lower unemployment rates in the United States than in most of Europe, but the difference over the last couple of years is that joblessness in the eurozone is obvious collateral damage stemming from the embrace of fiscal and monetary austerity.
“Europe’s leaders just haven’t been nearly as committed [as U.S. leaders] to boosting demand with expansionary macroeconomic policies, either fiscal or monetary,” says EPI macroeconomist Josh Bivens.
“To be clear, the United States hasn’t provided adequate support to its economy and job market—but Europe has been even worse,” he continued.
In Spain, nearly a quarter of the labor force is unemployed, including more than half of workers under age 25. Spain’s plan to combat its troubles? A $36 billion austerity package passed by its new conservative government. As EPI has argued before, austerity measures are inappropriate solutions to unemployment crises. This is clearly the case in Greece, Ireland, and Portugal, all of which had to enact austerity measures as a condition of receiving bailouts. In these countries, austerity has compounded economic troubles and failed to improve staggeringly high unemployment rates.
So how can the eurozone avert another crisis? Bivens thinks there are two separate questions that need to be answered. First, how are countries like Greece (and if we’re unlucky, Ireland, Italy, Portugal, and Spain) going to pay their debts (and how much of their debts will be written off by creditors)? Second, how are these same countries going to see growth in the next decade sufficient to ward off disastrous unemployment levels?
Bivens believes the second question gets much less attention—but is far more important.
“A key barrier to a country like Greece achieving growth in the coming decade is the lack of an independent monetary and exchange-rate policy,” says Bivens. “Greece absolutely needs to gain competitiveness in global markets as part of its medium-term macroeconomic strategy.”
He continued, “There are two paths there, exchange-rate adjustment or ‘internal devaluation’ [i.e., having Greek wages and salaries grow painfully slow for years]. The latter course is much more damaging; just look at Latvia, which fully embraced that strategy. The real lesson of the euro crisis is that all the tools of macroeconomic management need to be taken much more seriously than they have been.”
Note: Since this blog post was first published, the Tax Policy Center has updated its revenue scoring of the tax provisions in the Ryan budget. Numbers and figures have been revised to reflect the more recent score.
House Budget Committee Chairman Paul Ryan’s (R-Wis.) budget, which passed the House of Representatives on a party-line vote last week, continues to receive deserved criticism for its thoroughly dishonest treatment of the sweeping tax cuts it proposes. In a scathing critique, Paul Krugman honed in on its “fraudulent” nature: “The Ryan budget purports to reduce the deficit — but the alleged deficit reduction depends on the completely unsupported assertion that trillions of dollars in revenue can be found by closing tax loopholes.” William Gale of the Brookings Institution similarly concluded that “Ryan is gaming the system in creating budget estimates. … This is smoke and mirrors.
The contours of the Ryan budget’s tax cuts, as scored by the nonpartisan Tax Policy Center (TPC), are as follows:
- Cut and consolidate individual income tax rates to 25 percent and 10 percent brackets: $2.5 trillion
- Repeal the alternative minimum tax (AMT): $670 billion
- Repeal the surcharges included in the Affordable Care Act: $351 billion
- Cut the corporate rate to 25 percent and end taxation of multinationals’ foreign income: $1.1 trillion
- Allow Recovery Act expansion of refundable tax credits to expire: $210
= $4.5 trillion in revenue loss
Ryan’s budget blueprint describes these offsets this way: “Broaden the tax base to maintain revenue growth at a level consistent with current tax policy and at a share of the economy consistent with historical norms of 18 to 19 percent in the following decades.” And the budget totals in the Ryan budget reflect revenue averaging 18.3 percent of GDP over FY2013-22; similarly, the Congressional Budget Office’s long-term analysis of Ryan’s budget is predicated on the false assumption—provided by Ryan’s staff—that revenue will somehow total 19 percent of GDP over the long run (FY2025 and beyond).
This is simply dishonest. TPC’s analysis of the Ryan budget shows revenue averaging only 15.5 percent of GDP over FY2013-22, short of unspecified offsets.1 Yet Ryan wanted nearly $5 trillion in tax cuts and wanted revenue levels above 18 percent of GDP. Honest budgeting would force Ryan to choose between these two preferences (trade-offs being the whole point of budgeting). So Ryan chose dishonest budgeting, instead of changing the policy, he just changed the numbers.
We do know one thing about Ryan’s magic asterisk: it wouldn’t come anywhere close to raising revenue equivalent to roughly 3 percentage points of GDP over the decade (or roughly $6 trillion). For starters, he’s ruled out eliminating the preferential tax treatment of capital gains—the tax loophole most skewed toward the very top of the income distribution and estimated to cost $533 billion over the next decade, according to Citizens for Tax Justice. Furthermore, a new analysis by Jane Gravelle and Thomas Hungerford of the Congressional Research Service concluded that, “given the barriers to eliminating or reducing most tax expenditures, it may prove difficult to gain more than $100 billion to $150 billion in additional tax revenues through base broadening.” Adjusting for this range of feasible base broadening, the Ryan tax cuts would still require somewhere between $2.6 trillion and $3.2 trillion of deficit-financed tax cuts.2 Look at what happens to Ryan’s fiscal trajectory based on three alternative scenarios adjusting for: 1) no base broadening; 2) the low-end of feasible base broadening; and 3) the high-end of feasible base broadening.3
By 2022, public debt under the Ryan budget would be between $3.0 trillion (+19.6 percent) and $5.3 trillion (+34.2 percent) higher without the magic asterisk—a significant margin of dishonesty. This is not meant to breed fiscal alarmism or validate Ryan’s purported debt target; big budget deficits are inevitable in the aftermath of the Great Recession and premature fiscal retrenchment would jeopardize economic recovery. This is merely to prove that Ryan’s entire claim to fiscal responsibility rests on his tax gimmick.
With these tax cuts blowing the lid off of Ryan’s deficit reduction, his proposed evisceration of Medicaid, the social safety net, and public investments is exposed for what it really is: An attempt to gut the federal government and refund the tax bill to the highest-income households, not reduce the deficit. Some $5.3 trillion in non-defense spending cuts—nearly two-thirds of which come from programs for lower-income households—would roughly finance the $5.4 trillion cost of maintaining the Bush-era tax cuts, reduced estate and gift taxes, and the AMT patch. Ryan’s additional $4.5 trillion in tax cuts—two-thirds of which would go to households earning over $200,000—would be financed with a combination of increasing deficits and reducing tax expenditures other than preferential rates on unearned income, thereby shifting the distribution of the tax burden toward the middle class. Nothing screams fiscal charlatan like trillions of dollars worth of tax cuts skewed toward the affluent but financed by gimmicks and abdication of longstanding commitments to seniors, children, and the disabled.
1. TPC’s analysis is based on CBO’s Jan. 2012 baseline, whereas the Ryan budget is modeled from the March 2012 baseline. Adjusting TPC’s estimate of the Ryan plan for legislative and technical changes since the January baseline, the Ryan plan would see revenue average 15.6 percent of GDP over FY2013-22.
2. The $100 billion low-end and $150 billion high-end for base broadening are both set in FY2013 and held constant as a share of GDP thereafter.
3. The baseline for revenue comes from table S-1 of the Path for Prosperity (rather than TPC’s lower revenue baseline) and has been adjusted for lines 2-6 of TPC’s revenue estimate of the Ryan budget (T12-0123). Baseline outlays and debt held by the public are also taken from S-1, and debt service has been revised accordingly.
The Fair Labor Association (FLA), Apple’s auditor for its labor rights problems in China, issued a report last week that received widespread praise, including in the New York Times, whose reporting about workplace deaths, employee suicides and grueling overtime forced Apple to conduct the audit in the first place. This is not the first time Apple has commissioned such an audit, and it’s not the first time the auditor found serious problems.
In 2006, after British newspapers wrote about labor standards violations at Apple’s suppliers, Apple said an audit of a Foxconn facility revealed that more than a third of its employees worked more than the 60 hours-per-week limit imposed by Apple’s code of conduct. According to CorpWatch, Apple admitted that about 25 percent of the time, employees worked more than six days straight without a day off.
Apple vowed to clean up the violations it found and hired an outside consultant, Verite, to conduct ongoing audits of all of the factories where Apple’s products are assembled.
Fast forward to 2012, and Apple is once again telling the public it intends to improve, in precisely the same areas. But why should anyone think Apple’s commitment is any greater today than it was in 2006? Two important signs make me skeptical.
The first sign of trouble is the fact that the FLA’s “Remediation Plan” focuses exclusively on Foxconn and its scheduling, compensation, health and safety and industrial relations practices. Nothing in the plan makes Apple responsible for changing Apple’s own key behavior, the price it pays for Foxconn’s production. If Apple’s pricing is so tight that Foxconn can’t meet its profit targets without exploiting its employees, who’s responsible for their exploitation? If, as Apple claims, it truly wants to reduce the overtime hours Foxconn’s employees work to legal norms, without reducing the pay the workers receive, Apple can make that happen by paying more for each unit of production – enabling Foxconn to pay more more for each hour worked. But Apple hasn’t pledged that and the FLA doesn’t even mention the economics of Apple’s contracts with Foxconn. Apple’s public attitude is akin to saying: “We’re as pure as the driven snow, and our only taint comes from Foxconn’s sins.” But Apple has tolerated or compelled these practices for six years.
The second sign of trouble is that Apple and Foxconn have agreed to keep violating the law for the next 15 months, with the FLA’s blessing. Chinese labor law limits overtime per month to 36 hours, yet Apple and Foxconn have agreed to wait until July 1, 2013 to live within the law (page 12 in FLA’s report). As outrageous as this is, it seems to have gone unnoticed in all of the reporting on the FLA report. Perhaps the companies are right to think that Chinese law is a joke that can be ignored. But why doesn’t the FLA require the companies to comply with the law today, rather than next year? The FLA hours of work standard permits employees to work 60 hours per week — 80 hours of overtime a month, 44 hours longer than the law permits. How is this different or more acceptable than a standard that permits paying 25 percent less than the legal minimum wage?
Finally, I recommend that any of Apple’s customers who care about the well-being of the people who make their iPads take a few minutes to read the FLA report before taking comfort in Apple’s new commitment to decent labor standards. Almost three-quarters of Foxconn’s workers in Chengdu “said their salaries did not cover their basic needs (report page 9).” It’s no wonder so many are willing to work 80 hours a week; they can’t afford not to. Yet the FLA does not call on Apple and Foxconn to raise wages. Rather, “Given the concerns expressed by workers about whether wages cover their basic needs, the FLA recommends a follow-up study to document spending patterns and the actual costs of the components of a basic needs wage (report page 12).”
Now that’s a tough audit!
Last week, the Fair Labor Association released a report on its “independent investigation” of Apple supplier Foxconn, which employs 1.2 million workers and is China’s largest private employer and single exporter. I discussed the FLA report, and labor rights in the U.S. and China, trade, jobs and currency with C. Fred Bergsten, Director of the Peterson Institute for International Economics, and Judy Gearhart, Executive Director of the International Labor Rights Forum, on NPR’s Diane Rehm Show this morning.
There are serious questions about the “independence” of the FLA report, which was commissioned by Apple to conduct the investigation; Apple is a major contributor to FLA’s activities. Furthermore, although the report raised important issues such as excessive and unpaid overtime and health and safety concerns, it failed to address others, such as Foxconn’s harsh management practices and public humiliation of employees (well documented by groups such as the Hong Kong based Students and Scholars Against Corporate Misbehavior), Foxconn’s systematic abuse of forced interns, and China’s refusal to permit free, fair and independent trade union elections (although the report does acknowledge that company officials dominate local unions in Foxconn plants and it calls for open, democratic elections of union officials, it fails to address the fact that all unions in China must belong to the All China Confederation of Trade Unions, which is controlled by the government). Without the protections afforded by free, independent trade unions, it is unlikely that Apple or Foxconn will ever make good on the promised improvements in wages and working conditions in these factories.
Problems with excessive overtime, widespread safety problems and the absence of worker safety and health programs have been well known at Foxconn since 2006. Apple publicly promised at that time that it would correct these problems. The new FLA reports promise that excessive overtime will be eliminated by July 2013, 15 months from now. Apple could end this problem in a matter of weeks, not months or years, simply by raising the prices it pays for Foxconn’s products and then directing Foxconn to raise wages and hire more workers. The solutions are obvious. Engrained behaviors, however, are hard to change.
–The author thanks Ross Eisenbrey and Scott Nova for helpful comments.
A report released today by New York State Sen. Jeff Klein discusses the economic benefits of raising the New York state minimum wage to $8.50 per hour, and indexing it to inflation thereafter. This would put New York in line with 19 other states with minimum wages above the federal minimum, and 10 other states that have some form of minimum-wage indexing.
As we have done for other proposals to raise state minimum wages, we calculated the number of people who would be affected by the New York State proposal, and the increase in economic activity that would result from this pay raise for low-wage workers. The table below outlines the results.
Roughly 609,000 minimum-wage workers in New York would directly get a raise, while another 473,000 who currently have wages just above the proposed new minimum would also see a wage increase due to “spillover” effects as employers adjust overall pay structures to reflect the new minimum. On average, affected workers in New York would receive an additional $880 over the course of a year.
That may not seem like a lot, but it translates into an estimated $600 million in additional economic activity, and that increased economic activity means more jobs. In the table, the final two rows model what we might expect in increased employment as a result of this boost to regional economic activity, after controlling for any decrease in corporate profits. New York stands to gain about 4,700 payroll jobs, or about 5,200 full-time equivalent jobs (essentially accounting for the additional hours that some currently employed workers will receive). Obviously, these job numbers will not be a silver bullet for solving any state’s employment problems, but an additional several thousand jobs—at no added cost to state budgets—certainly would help.
The country as a whole has seen flat wage growth over the past four years as high unemployment levels have put tremendous downward pressure on wages. This lagging wage growth, combined with the fact that the federal minimum wage is now only 79 percent of what it was in 1968, means that low-wage workers nationwide could desperately use an increase in the wage floor. Given that Congress is unlikely to enact proposals to raise the federal minimum anytime soon, it’s encouraging to see states like New York taking steps to help low-wage workers on their own.
Effects of proposed New York minimum wage increase
|New York: Single increase to $8.50, modeled for July 2012|
|Size of increase||$1.25|
|Total Estimated Workers1||7,900,000|
|Total Affected as % of Workers||13.7%|
|Increased wages for directly & indirectly affected4||$950,612,000|
|Average Individual Increase in Annual Income||$880|
|Jobs Impact – Full-time employment growth6||5,230|
|Jobs Impact – Payroll Jobs growth||4,740|
Notes: Annual Population growth: NY: 0.71%, (state projected average annual rate from 2000 to 2020, according to Census). No assumed wage growth from 2011 wage values.
1 Total estimated workers is estimated from the CPS respondents for whom either a valid hourly wage is reported or one can be imputed from weekly earnings and average weekly hours. Consequently, this estimate tends to understate the size of the full state workforce.
2 Directly Affected workers will see their wages rise as the new minimum wage rate will exceed their current hourly pay.
3 Indirectly affected workers currently have a wage rate just above the new minimum wage (between the new minimum wage and the new minimum wage plus the dollar amount of the increase in the 2012 minimum wage). They will receive a raise as employer pay scales are adjusted upward to reflect the new minimum wage.
4 Increased wages: Annual amount of increased wages for directly and indirectly affected workers, assuming they work 52 weeks a year.
5 GDP and job stimulus figures utilize a national model to estimate the GDP impact of workers' increased earnings. Thus the total state stimulus may be lower than this amount because workers in each state will not necessarily spend all of their increased earnings in-state. However, we can assume that most of the increased earnings will be spent in-state, and thus most of the jobs created will be in-state. Jobs numbers assume full-time employment requires $115,000 in additional GDP and payroll employment requires an additional $127,000 in GDP.
6 The increased economic activity from these additional wages adds not just jobs but also hours for people who already have jobs (work hours for people with jobs also dropped in the downturn). Full-time employment takes that into account, by essentially taking the number of total hours added (including both hours from new jobs and more hours for people who already have jobs) and dividing by 40, to get full-time-equivalent jobs added. Simply counting new payroll jobs misses all the added hours for people with jobs.
Job impact estimation methods can be found in: Bivens, Josh L. 2011. Method memo on estimating the jobs impact of various policy changes. Washington, D.C.: Economic Policy Institute.
Source: EPI Analysis of 2011 Current Population Survey, Outgoing Rotation Group
Yesterday, I participated in a National Journal panel discussing budget issues with Steve Bell from the Bipartisan Policy Center and Laura Peterson from Taxpayers for Common Sense. One of the exchanges got to the topic of tradeoffs, with Bell arguing that, “if you take a look at the American public, they want what they want and they don’t want to pay for it.” [1:33:00 in the video below]
My response, which I’d like to flesh out a bit more here, is that just because budgeting is all about tradeoffs doesn’t mean that win-win policies aren’t out there. One notable example is infrastructure investment, which both creates jobs in the short run and raises long-run economic growth. In fact, the situation today is especially ripe for infrastructure for a number of reasons:
Low financing costs: The cost of borrowing is at historically-low levels, with interest rates on five-, seven-, and 10-year inflation-protected securities (TIPS) actually negative. This means the markets are paying the government to borrow money. But this is a temporary situation—as the economy picks up again, private returns will increase and the government will be forced to offer more generous borrowing terms to remain competitive.
Great deals: As state and local governments remain stuck in fiscal straitjackets, private commercial construction contractors are desperate for work, and their asking prices for projects has gone down. In fact, the Department of Transportation estimates that more than 2,000 additional transportation projects were funded due to competitively low bids or projects completed under budget. In other words, we’re getting much more bang for our buck than we usually do.
Fixing infrastructure costs less than rebuilding: Neglecting our infrastructure needs only makes the cost of inevitable repair compound over time. It’s a lot cheaper to repair a bridge than to rebuild one from scratch. For every $1 spent on preventative pavement maintenance, between $4 and $10 is saved on rehabilitation.
Right now we’ve got an amazing opportunity to do something that we need to do anyway at record-low costs, we’re practically being given the money, and if we delay investments, their eventual cost will be much higher. Oh, and it will create jobs. This isn’t win-win, this is win-win-win-win.
Iowa Sen. Tom Harkin, the Chairman of the Senate Committee on Health, Education, Labor and Pensions, has introduced a bill that shows the way to a better economic future for most Americans. The Rebuild America Act tackles many of the biggest problems that hold back the American economy and shut off opportunity for working families.
It’s an omnibus bill that will increase employment by making big infrastructure investments, developing renewable energy systems, addressing unfair foreign trade practices, providing assistance to state and local governments to retain police, firefighters and teachers, ending tax breaks that encourage companies to move jobs offshore, and promoting manufacturing in the United States.
It will help workers get a decent return on their education and their work by strengthening the minimum wage and overtime laws, better protecting the right to join a union and bargain collectively, enhancing retirement security, and guaranteeing paid sick leave.
It improves education by helping states improve teacher effectiveness and by investing in school modernization.
And it both reduces the federal deficit and increases tax fairness by closing loopholes that favor the rich, taxing Wall Street speculation, better balancing taxation of earned and unearned income, and instituting the Buffet Rule’s minimum 30 percent income tax on million-dollar-a-year incomes.
The bill would add millions of jobs to the economy, raise the typical family’s income and enhance its retirement security. The tax changes would shift the burden of hundreds of billions of dollars of federal taxation from working- and middle-class families to those who can afford to pay – the rich and ultra-rich.
We want to particularly applaud Sen. Harkin for his courage in swimming against the tide in two critical areas: Social Security and labor policy. The Rebuild America Act rejects the notion that Social Security is too expensive and that we can’t afford to meet the promises we made to America’s workers: That if they worked hard for a lifetime, they could retire with guaranteed benefits and inflation protection. Too many other politicians are ready, if not eager, to cut Social Security’s cost of living protection and to reduce benefits by raising the retirement age, no matter that such changes have the biggest impact on the retirement security of women and blue-collar and low-income workers, many of whom have seen little or no increase in life expectancy. By contrast, Sen. Harkin knows workers need more help, not less; that fewer and fewer workers have pensions; that 401(k) accounts are insufficient and undependable sources of retirement income; that Social Security is steadily replacing less and less of pre-retirement income; and that the Social Security COLA is not too generous, but rather too skimpy to keep up with the cost of health care inflation that drives the spending of older workers.
The Rebuild America Act therefore replaces the Social Security COLA formula with one that better accounts for cost inflation in the products and services that older workers pay for. It raises benefits across the board. And it pays for these improvements and addresses the program’s long-term revenue shortfall by “scrapping the cap” – eliminating the loophole that shelters incomes above $110,100 from Social security taxes.
In the area of labor law, the Rebuild America Act would make the most significant change in the minimum wage in our history by indexing it to inflation after raising it to a more adequate $9.80 an hour over a period of three years. The bill will also correct the gross injustice of freezing the minimum wage for tipped workers at $2.13 an hour, a problem that Congress ignored in both of the last increases it made to the minimum wage. Many states have acted on their own to address this problem, and Sen. Harkin is right to end this disgrace.
The Act will also address the continuing erosion of overtime protection, which is both the legal underpinning of the weekend and the best defense workers have against abusive schedules and worsening work-family conflicts. As long as employers have to pay 150 percent of regular pay for each hour worked beyond 40 in a week, they will be reluctant to force excessive overtime. But the Department of Labor has let the coverage of the overtime law erode steadily over the years, to the point that workers earning near-poverty salaries can be treated as exempt executives or administrators. The Rebuild America Act raises the income threshold for exemption back to historic levels and would guarantee overtime coverage for millions of workers who are unprotected today.
The values and policies embodied by the Budget for All, the budget of the Congressional Progressive Caucus (CPC) for fiscal year 2013, offer a stark contrast with those of the budget put forth by House Budget Committee Chairman Paul Ryan (R-Wis.). First, the Budget for All protects Medicare, Medicaid, the Affordable Care Act, and other elements of the social safety net. Second, it boosts public investments in education, infrastructure, and research and development. But the Budget for All and the Ryan budget are perhaps most diametrically opposed in their approach to economic stewardship over the weak recovery.
As my colleague Rebecca Thiess highlights, the Budget for All would finance a direct jobs program, infrastructure investments, targeted tax credits, and increased nondefense discretionary spending to ameliorate the ongoing crisis in the U.S. labor market. The Budget for All proposes increasing spending by $786 billion for job creation measures and public investments over the next two-and-a-half years (FY2012-14), relative to current law. This is critical: Expansionary fiscal policy remains the single best lever to fill the gap in aggregate demand and put Americans back to work. The Budget for All would accelerate economic recovery by increasing near-term budget deficits even while reducing longer-term deficits and sustaining primary balance over the second half of the budget window.
The Budget for All would increase mandatory and discretionary spending (excluding overseas military operations) by $259 billion in FY2013 and $261 billion in FY2014, boosting GDP by 2.3 percent and 2.2 percent, respectively, relative to current policy (the relevant baseline for aggregate demand). Net of the much smaller fiscal drag exerted by progressive tax reforms being gradually phased in, we estimate that the fiscal expansion proposed by the Budget for All would increase GDP by $280 billion (+1.8 percent) and $167 billion (+1.0 percent), respectively, in FY2013 and FY2014. By substantially boosting near-term aggregate demand, we estimate that the Budget for All would increase non-farm payroll employment by 2.1 million jobs in FY2013 and 1.2 million jobs in FY2014.
Conversely, the Ryan budget would accelerate the looming economic drag from contractionary fiscal policy with deep, aggressive spending cuts—failing the “first, do no harm” principle and sharply impeding job creation. My colleague Ethan Pollack recently estimated that the Ryan budget would reduce employment by 1.3 million jobs in FY2013 and 2.8 million jobs in 2014.*
On net, non-farm payroll employment would be roughly 3.4 million jobs higher by the end of FY2013 and 4.0 million jobs higher by the end of FY2014 if Congress adopted the Budget for All instead of the Ryan budget. To put this in perspective, the economy has gained 2.0 million jobs over the last 12 months but needs more than 10 million jobs to restore pre-recession unemployment and labor force participation rates. Going forward, the CPC budget would markedly accelerate the rate of rehiring, while the Ryan budget would drastically slow—or entirely wipe out—new hiring.
Immediately slashing government spending, as Ryan has proposed, is not a game or a joke—it’s economically irresponsible budget policy that has backfired across much of Europe and would seriously aggravate un- and underemployment. And as proven by the Budget for All, racing down the austerity path isn’t required for a fiscally responsible budget. The CPC budget would reach the same debt level as the Ryan budget without jeopardizing the economic recovery.
Fiscal responsibility demands sound economic stewardship, which means addressing the jobs crisis and closing the gap between potential output and actual GDP (the economy is currently running $883 billion—or 5.4 percent—below potential). While a large output gap persists, government spending cuts will have a particularly adverse impact on aggregate demand and fiscal sustainability will remain elusive. (Again, just look to Europe.)
The Congressional Progressive Caucus has proposed a credible budget that would prioritize jobs first and phase in deficit reduction as the economy strengthens (with emphasis on policies that will have relatively little deleterious impact on aggregate demand). Ryan has produced a budget that would choke off economic recovery in an attempt to gut government and refund the tax bill. The CPC budget is credible and economically viable; the Ryan budget is not. And literally millions of jobs hang in the balance between these two competing visions for the United States of America.
*The employment impact of the Budget for All is meant as an apples-to-apples comparison with these estimates for the Ryan budget, which were also calculated relative to current policy excluding spending on overseas military operations (which has a relatively small impact on domestic output).
Earlier today, the EPI Policy Center released The Budget for All: A technical report on the Congressional Progressive Caucus budget for fiscal year 2013, which details the composition and effect of this year’s budget alternative from the CPC. While the policies in the Budget for All reflect the decisions of CPC leadership and staff, the EPI Policy Center provided the CPC with technical assistance in developing, scoring, and modeling CPC policies and their cumulative budgetary impact.
First and foremost, the Budget for All would address our most pressing challenges by financing up-front job creation measures and sustained public investments. Overall, the Budget for All would allocate $2.9 trillion for front-loaded stimulus and investments in human and public capital over FY2012-22 relative to current law. This would include:
- $227 billion for a direct jobs program modeled off of Rep. Jan Schakowsky’s (D-Ill.) Emergency Jobs to Restore the American Dream Act;
- $247 billion in increased transportation outlays relative to current law, including $50 billion in immediate investments for 2012, $53 billion in rail investments, and $30 billion for an infrastructure bank;
- $135 billion over FY2012-2022 in tax credits to foster hiring, innovation, manufacturing, and insourcing jobs to the U.S.;
- $183 billion to reinstate the Making Work Pay tax credit from 2013-2015 (the payroll tax holiday would be allowed to expire on schedule Jan. 1, 2013);
- Undoing the Budget Control Act (both the discretionary spending caps and the automatic sequestration cuts), which would increase nondefense (NDD) discretionary outlays by $583 billion; and
- $1.6 trillion in additional NDD spending for domestic priorities in areas including education, scientific research, and health.
By the end of the budget window (FY2022), NDD spending would total 3.5 percent of GDP, compared with 2.5 percent under current law, 2.4 percent under Obama’s budget request, and 2.1 percent under Wisconsin Rep. Paul Ryan’s budget. By FY2022, NDD spending would be 38 percent higher than under current law, 46 percent higher than under Obama’s budget, and 65 percent higher than under the Ryan budget. On average, over the 10-year window, NDD spending in the Budget for All would total 4 percent of GDP, slightly above the 3.9 percent of GDP historical average over FY1962-2011.
The Budget for All is committed to protecting and strengthening Social Security, Medicare, Medicaid, and the Affordable Care Act, and in stark contrast to the Ryan budget, proposes no benefit cuts. The budget would build on health care reform by offering a public insurance option and negotiating lower Medicare pharmaceutical prices. Regarding national security, the Budget for All would responsibly end the war in Afghanistan and overseas contingency operations while realigning spending by the Department of Defense toward domestic priorities.
To adequately fund budget priorities while achieving a responsible fiscal path, the Budget for All proposes progressive tax code reforms that would ask more from the most fortunate in our society. These would include adding higher tax rates for millionaires and billionaires, eliminating the preferential treatment of capital income over earned income, taxing accumulated wealth, taxing financial speculation, and responsibly pricing carbon (rebating a quarter of revenue to low-income households). Regarding the Bush tax cuts, the Budget for All would let the top two rates expire on schedule (following Obama policy) and temporarily extend the 28 percent and 25 percent brackets, phasing them out as the economy strengthens. The Budget for All’s individual income tax rate reforms would save $1.7 trillion relative to full continuation of the Bush-era tax cuts and $1.3 trillion relative to Obama policy.
The Budget for All is economically responsible and fiscally sustainable throughout the budget window; it increases near-term deficits, reduces long-term deficits, and sustains greater public investments throughout the budget window. And equally as important, it does so without engaging in budgetary gimmicks; the Budget for All finances the likely continuation of the Alternative Minimum Tax patch and the Medicare physician payments “doc fix” over the next decade.
In short, this budget proves that there is a sensible, credible alternative to governing than the one put forth by Ryan, which would eviscerate the social safety net and other important programs. The Budget for All demonstrates that we can fulfill Americans’ top priorities—investing in a strong economic recovery and fostering shared prosperity—while meeting respectable fiscal targets and preserving the legacies of the New Deal and the Great Society.
On Monday, the Congressional Progressive Caucus released its Budget for All, a stark contrast and credible alternative to the misguided budget proposed by House Budget Committee Chairman Paul Ryan (R-Wis.).
Every budget reflects national priorities, not just a bottom line. The Budget for All would meet our most pressing challenges by increasing near-term job creation and public investments, strengthening economic security programs, realigning spending by the Department of Defense to domestic priorities, and financing government responsibly over the long run with progressive revenue sources that place our nation on a sustainable fiscal trajectory. The Budget for All is “fiscally responsible,” provides sound economic stewardship, protects the middle class, and supports upward mobility.
The most pressing challenge facing the United States is the ongoing jobs crisis, which the Budget for All acknowledges with $2.9 trillion in front-loaded job creation measures and sustained public investments. The budget would allocate $227 billion for a direct jobs program that puts Americans back to work through public service, as was done during the Great Depression. Transportation infrastructure investment would be increased by $241 billion (50 percent) over the next decade to boost employment and lay the foundations for economic growth. Nondefense discretionary (NDD) spending in areas including education, scientific research, and health would be increased by $1.6 trillion relative to current law. By the end of the budget window in 2022, NDD spending would be the same as in 2007 (as a share of GDP) and be 65 percent higher than under the Ryan budget and 50 percent greater than under the Obama budget.
The Budget for All would protect and strengthen vital social insurance programs such as Social Security, Medicare, Medicaid and the Affordable Care Act, maintaining commitments to provide economic security in retirement and health care to seniors, children, and the disabled. The budget would protect and build on health care reform by offering a public insurance option and negotiating lower Medicare pharmaceutical prices. And the Budget for All would essentially close the 75-year shortfall in the Social Security trust fund without cutting benefits by eliminating the cap on taxable earnings that has allowed the highest earners to pay an ever-shrinking share of wages to Social Security in recent decades.
This progressive budget would realign defense priorities towards domestic ones. The war in Afghanistan would be responsibly ended and spending by the Department of Defense would be gradually cut, with the savings allocated to domestic investments.
Lastly, the Budget for All would adequately fund all of these priorities with progressive tax reforms, largely by asking more from the highest-income households that have seen both sizable income growth and large reductions in taxes over the past decade. Higher tax rates would be added for millionaires and billionaires, and the preferential treatment of capital income over earned income would be eliminated. The 2001 and 2003 income tax rate cuts for high-income households would be gradually phased out over a decade, while lower tax rates and tax credits for working families would be preserved. Taxes on financial speculation, carbon emissions, and accumulated wealth would address societal challenges while raising large sums of revenue.
The EPI Policy Center provided technical assistance in developing, scoring, and modeling the Budget for All. The technical documentation of the details of the budget plan and the scoring of its measures are available on our site. We unequivocally conclude that the Congressional Progressive Caucus budget achieves fiscal sustainability, but more importantly, it does so while spurring economic recovery, strengthening Social Security, Medicare, Medicaid and the Affordable Care Act, and investing in human and public capital. The Budget for All, in short, sets a path that strengthens job growth, improves competitiveness, enhances economic security, lessens inequality and provides avenues for upward social mobility. This budget proves that there is a credible and sensible alternative to Rep. Ryan’s attempt to dismantle government and rebate the tax bill to the already well-off.
Economists arguing that there is indeed such a thing as a free lunch … as long as people are willing to eat it
Brad DeLong and Larry Summers have a new paper out that’s worth reading. Little in it is brand-new to obsessive followers of the fiscal policy debates of the past few years, but it’s a very useful compendium of evidence.
Their basic argument is that the effectiveness of fiscal policy support (say, like the Recovery Act) quite likely remains substantially under-estimated by most well-known models and assessments (and even these well-known models already make a powerful case for its effectiveness). They, in fact, go so far to say that:
“A combination of low real U.S. Treasury borrowing rates, positive fiscal multiplier effects, and modest hysteresis effects [i.e., the “scarring effects” of recessions – see here] is sufficient to render fiscal expansion self-financing”
To put this simply, fiscal support pays for itself, even in narrow budgetary terms (let alone in broader economic terms). This is a key lesson – one we have tried to impart before in a policy memo:
“The original Recovery Act spurred income creation that resulted in higher tax collections and lower safety-net spending, substantially blunting its bottom-line impact on deficits”
“While this caution may be useful, it should be made clear that the case for full self-financing over time of temporary fiscal support in an economy stuck in a liquidity trap is actually not totally implausible…”
Why is this point—that well-designed fiscal support programs are significantly or even totally self-financing—so important? Well, for some reason, far too many policymakers (even, or especially, ones who self-identify as Democrats, who one would think would be friendlier to calls for fiscal support for job creation) have settled on the mantra that short-term stimulus can only be done if coupled with long-term deficit reduction. There never was a real substantive reason for this stance – even if the Recovery Act, for example, had not come with any induced deficit offset at all, it would have added all of 2 percent to the long-run fiscal gap of the United States.
But, once one allows for the very real possibility that well-designed fiscal support adds nothing to long-run deficits, the logic of holding it hostage in the name of concern over long-run deficits falls apart completely. In short, holding up short-term fiscal support in the name of extracting long-run promises on deficit reduction makes about as much sense as insisting that a house with drafty windows that’s also on fire can only have the flames doused if somebody can be found to simultaneously do some caulking.
The Office of Management and Budget just posted a draft of its annual report to Congress on the benefits and costs of federal regulations. This official documentation of all major regulations reviewed by OMB includes an individual listing of the benefits and costs of all such rules finalized by the Obama administration through Sept. 30, 2011 (the end of fiscal year 2011). This listing, Table D-3 found on pages 126-128, includes nine final rules issued by the Environmental Protection Agency and two final rules issued jointly by EPA and the Department of Transportation.
If the monetized benefits and costs of these 11 individual rules are tabulated (hereafter referred to as the “Obama EPA rules”), the results are strikingly positive. As the table at the end of this post indicates:
- The benefits of the finalized Obama EPA rules are valued at $98 billion a year (all figures in 2010 dollars). Most of the benefits come from saving lives and other health benefits, but also include economic benefits such as reduced fuel expenditures by consumers or increased worker productivity.
- The compliance costs of the Obama EPA rules amount to just $8.3 billion a year, or far below one one-thousandth of the economy.
- The net benefits from these rules is $90 billion a year. The ratio between benefits and costs is 12-to-1.
- Using methodology I wrote up previously, I estimate the economic benefits from the joint EPA/DOT rules alone, connected to fuel efficiency and greenhouse gas standards for cars, amount to about $13 billion a year, or more than the compliance costs for all 11 Obama EPA rules.
Since the OMB report is designed to cover data only through the end of the previous fiscal year, it does not include EPA’s “air toxics” rule that was finalized on Dec. 16, 2011. This rule has significant compliance costs, amounting to $10 billion a year, but much larger benefits, amounting to $64 billion a year (using the midpoint of the benefit range). Combining this rule with the rules in the OMB report, the benefits of Obama EPA rules finalized to date amount to $162 billion a year, compared to compliance costs of $18.3 billion a year (about one one-thousandth of the economy). The net benefit figure for this combination of EPA rules is $144 billion a year.
Cost-benefit data should not be considered precise, and there are many complexities to such analysis that have not been fully addressed (such as many benefits are not monetized). Nonetheless, the magnitude of the net benefits of the Obama EPA rules shown by this data indicates that they are likely to be of much value to the nation.
Annual costs and benefits of major EPA rules finalized during the Obama administration, through Sept. 30, 2011 (in millions of 2010 dollars)
*These rules are joint EPA/DOT rules
Source: Table D-3, Draft 2012 Report to Congress on the Benefits and Costs of Federal Regulations and Unfunded Mandates on State, Local, and Tribal Entitities. EPI converted the data from 2001 dollars to 2010 dollars using the GDP deflator
All budget proposals should be evaluated first and foremost by how they address the most important problems facing the nation. Today that problem is joblessness. Unemployment is still elevated at 8.3 percent, the highest in a generation, while the average duration of unemployment is still at peak levels (about 40 weeks). Poverty rates for young children (under the age of 6) are at their highest recorded levels, while the number of households in extreme poverty (earning incomes of less than $2 per day) has doubled since the mid-1990s. Although the economy has added 735,000 jobs in the last three months, even at this rate it would still take five years before the labor market fully recovered. In short, any policy that fails to address job creation—or at least fails to extend the economic provisions that we’ve already put in place—should be rejected.
Paul Ryan’s latest budget doesn’t just fail to address job creation, it aggressively slows job growth. Against a current policy baseline, the budget cuts discretionary programs by about $120 billion over the next two years and mandatory programs by $284 billion, sucking demand out of the economy when it most needs it and leading to job loss. Using a standard macroeconomic model that is consistent with that used by private- and public-sector forecasters, the shock to aggregate demand from near-term spending cuts would result in roughly 1.3 million jobs lost in 2013 and 2.8 million jobs lost in 2014, or 4.1 million jobs through 2014.*
Of course, this leaves out taxes. Ryan’s proposal involves cutting taxes on corporations, eliminating the Alternative Minimum Tax, maintaining the Bush tax cuts and preferential rates on capital gains and dividends, and consolidating the rate structure into two brackets, 10 percent and 25 percent. He says he’ll pay for these tax cuts (excluding the Bush tax cuts, which are already currently in effect) by eliminating tax expenditures, so it won’t result in revenue loss.
Now, temporary tax cuts can create jobs because they pump more money into the economy and boost consumer and business spending. The payroll tax holiday is one such example. But the fact that Ryan’s tax proposal won’t change net revenue levels in the near-term means that its economic effects will be minimal – and it will certainly not materially offset the job declines stemming from spending cuts. Worse, the composition of Ryan’s tax-shift means that it will likely result in a small job loss because it shifts the tax burden from high-earners to middle-class households. Low-income households will also face higher taxes because Ryan would allow certain tax credits like the Earned Income Tax Credit, Child Tax Credit, and the American Opportunity Tax Credit to fall from their current levels. Redistributing money away from people who spend more of each marginal dollar of disposable income (low- and moderate-income households) to those with much higher savings rates (high-income households) is broadly recognized as leading to a decline in aggregate demand.
*2-year figure in job-years
In a conference call with investors Monday, Apple CFO Peter Oppenheimer argued that the company could not repatriate its $65 billion (yes, with a ‘b’) in earnings and investments held overseas because the corporate income tax constituted too large a “disincentive” to do so. This was apparently the latest in a lobbying effort by Apple to have Congress institute a repatriation “tax holiday” similar to one passed in 2004, that saw hundreds of billions of dollars of foreign-held corporate earnings brought back to the country under preferential tax rates.
Calls for another corporate tax holiday have been growing in the past six months, with various pieces of legislation introduced in the House in 2011 that would reward companies that repatriate profits with a low tax rates. These calls for a repatriation holiday are often bipartisan (House legislation introduced in the summer of 2011, for example, is co-sponsored by Utah Democrat Jim Matheson and Texas Republican Kevin Brady).
It is important to note that a repatriation holiday solves no economic problem at all … unless one defines Apple investors’ obligation to pay taxes as a problem.
The best economic case made in favor of such a holiday is that by encouraging U.S. corporations to return their overseas holding to the domestic economy, this will greatly increase the supply of investment capital that can be mobilized to help businesses increase capacity.
But, as we’ve noted over and over again, U.S. businesses today still are not using anywhere near the full amount of capacity they already have. And access to cheap credit for corporations is historically easy. And business investment is the one area of the economy that is actually growing historically fast. And corporations are already sitting on historically large amounts of investable capital. In short, there is no plausible reason at all to think that repatriating foreign earnings provides any relief to the actual economic problems facing the U.S.
What a holiday would do, especially given the 2004 holiday, is convince U.S. corporations that profits earned abroad will always be given an opportunity to be brought home at very low tax rates in the future. And this will provide further incentives to firms to increase the share of their profits that are earned abroad, which means increasing the share of jobs and capacity that is held abroad.
Apple (and other multinationals) already has the chance to defer taxation on profits held overseas – this is a substantial tax benefit already. There is no public policy case at all for giving them and other multinationals another holiday from corporate taxes. Luckily, the Obama administration seems unswayed so far by Apple’s complaints.
Representatives of fish processing companies in Alaska are complaining about the possibility that they might lose access to 4,000 to 5,000 temporary guest workers they hire each year through the State Department’s “Summer Work Travel” (SWT) program, a part of the J-1 visa Exchange Visitor Program originally designed to facilitate a cultural exchange between Americans and citizens of other countries. The companies worry that they won’t be able to find enough workers this summer and that the whole industry will be negatively impacted as a result. The fundamental problem is that the industry has come to depend on an exploitable foreign workforce instead of hiring U.S. workers.
The J-1 SWT program was not designed to be a temporary foreign worker program. Its purpose is to facilitate a cultural exchange between foreign college students and American residents. If fish processors need a workforce, they should look to unemployed Alaskans and other Americans first, and if they still can’t find enough workers, there are other work visa programs that are more appropriate (for example, the H-2B program). Secretary of State Hillary Clinton and the State Department should not be persuaded by the fish processors or the two U.S. Senators from Alaska, who have urged the secretary to spare the industry from a ban on using J-1 SWT student workers.
The concern of the fish processors likely stems from an Associated Press story about a leaked memo outlining a number of changes to the SWT program the State Department might implement this year. This includes prohibiting the employment of SWT student workers in seafood processing plants and other potentially dangerous workplaces.
The following is an excerpt from the statement of purpose in the Fulbright-Hays Act, the legislation that created the J-1 Exchange Visitor Program which includes SWT. It clearly states what the program is designed to do:
The purpose of this chapter is to enable the Government of the United States to increase mutual understanding between the people of the United States and the people of other countries by means of educational and cultural exchange; to strengthen the ties which unite us with other nations by demonstrating the educational and cultural interests, developments, and achievements of the people of the United States and other nations, and … thus to assist in the development of friendly, sympathetic, and peaceful relations between the United States and the other countries of the world.
Even if you read the entire Fulbright-Hays Act, you won’t find anything that suggests a congressional intent to provide employers with a temporary workforce or to help them fill labor shortages. It’s clear the SWT program is not primarily a guest worker program; it is intended to facilitate a cultural exchange. The State Department’s new Guidance Directive outlines this clearly. The work component of this cultural exchange is designed to allow the SWT student worker to interact with Americans and to allow him or her to earn enough money to travel to and within the United States. This allows foreign students from lower-income backgrounds to visit the United States when they otherwise might not be able to afford it. From that perspective, it’s a good thing, but it’s impossible to argue with a straight face that J-1 student workers in Alaskan fish processing plants are experiencing the cultural exchange envisioned in the Fulbright-Hays Act.
A recent investigation revealed an example of what SWT recruiters for fish processing jobs tell potential participants about the cultural exchange program they offer:
“We’re looking for hard workers who are not afraid to work every single day, up to 16 hours a day,’’ said Sarah Russell of Leader Creek Fishing in the village of Nakenak [sic]. “You will make a lot of money in a very short period of time and you won’t spend it anywhere because there’s really nothing to do in Nakenak, other than work.”
That says it all.
Russell admits the J-1 SWT student workers will work long hours – double all-day shifts to be exact. If you work 16 hours a day, when will you have time to interact with other Americans? Perhaps in the workplace? Probably not, since the plant is likely to be staffed with many other SWT workers from around the world. Russell also notes that the job is located in an isolated location with nowhere to shop and nothing to do. I assume that also means there are no cultural or educational activities available locally. How are SWT student workers supposed to interact with Americans and learn about American culture if they live far from them and are working for two-thirds of the day? (Presumably they sleep during the eight hours they have all to themselves.) Quite simply, they can’t, and that’s why it doesn’t make sense to allow fish processing jobs in the SWT program. Read more
We recently passed the one-year anniversary of the “uprising” in Wisconsin, which began with a governor allegedly trying to wrestle with state fiscal challenges, and quickly became the focal point for an outright attack on public sector workers. Underlying Gov. Scott Walker’s position was a belief that public sector workers were impeding the state’s economic performance. In the midst of draconian cuts to public sector employment, there emerged outlandish claims that Wisconsin’s economy was leading the nation in job growth. No single month’s employment numbers should be relied on to tell the story of what’s happening in a state economy. But looking at the longer trend provided by year-over-year data is instructive.
EPI looks at state employment trends on a monthly basis (the most recent state level data are Jan. 2012 data). Looking comparatively at all states often tells an interesting story, but sometimes it’s good to drill a little deeper, or to look through a lens that examines regional trends.
As seen in Figure 1, overall non-farm employment since Jan. 2011 has rebounded in the Midwestern states surrounding Wisconsin, with Michigan leading the region with Jan. 2012 employment 1.6 percent higher than in Jan. 2011. Wisconsin stands out in the region, lagging with employment significantly lower — by 0.5 percent — in Jan. 2012 than a year earlier.
Figure 2 Source: EPI analysis of BLS data
While Figure 1 showed trends over the last year in overall employment, Figure 2 shows trends in private sector employment. Wisconsin appears to have returned to a “break even” point by Jan. 2012 (noting the caveat above that single month “trends” should be used with extreme caution), but it is still very clearly an outlier amongst its neighboring states.
Our colleagues at the Center on Wisconsin Strategy wrote in June that Gov. Walker should be neither credited (nor blamed) for employment trends that result from factors outside his influence. The trends we see above, however, are substantially within his influence. We and others have cautioned repeatedly that states that close their budget gaps by laying off public sector workers do so at the peril of their overall economy. To be clear, we are not talking only of the fact that unemployed public sector workers will be added to state unemployment rolls (though they have been in states across the country), but that their ability to contribute to the economy is curtailed by their unemployed status. Because public sector workers are a vital part of every state economy—firefighters, teachers, police officers and department of health officials all buy clothing, groceries, and movie-tickets just like private sector workers—laying them off hurts us all by reducing economic activity, which holds back the recovery.
Fair-minded people would surely agree that we want our governments to make smart policy choices. The data above underscore the results of two policy choices. In one choice, the decision to rescue the auto sector, we see that the result is Michigan leading the region in employment growth. In the other choice, the decision to lay off thousands of public sector workers, we see that the result is Wisconsin lagging behind the region (indeed, the nation) in employment growth.
On Wednesday I participated in a panel discussion called Public Investment: Key to Prosperity, sponsored by Americans for Democratic Action. Leaving aside the broader case for public investments, I’d like to point out that this topic is important not just because we continue to underinvest in infrastructure, education, and innovation, but because public investments are a powerful messaging tool for progressives. The right is exceedingly effective at demonizing all government spending as wasteful and, in the era of deficit hysteria, greedy as well because it forces us to pass debt on to future generations.
But public investments, which make up about half of all domestic (non-security) discretionary spending, are exactly the opposite of this characterization—they are investments made now, but their benefits accrue to society over decades and sometimes centuries (the Erie Canal has been in operation for nearly 200 years!). The left does well talking about the importance of individual programs, but unless we can start linking it all (or at least many) together under a single conceptual umbrella, we’ll keep losing the budget battles that happen at the macro level.
This message gets to the broader social contract. Elizabeth Warren’s hyper-viral video is really about the role that public investments play in an individual’s success, and the debt that successful taxpayers owe back to society in the form of higher tax rates. For a deeper look at this, check out The Self-Made Myth, which shows how many successful business leaders—from Warren Buffet and Ben Cohen to Donald Trump and Ross Perot—owe their success to government’s investment in them.
Chinese Premier Wen Jiabao claimed in remarks Wednesday that the yuan’s exchange rate may be close to an equilibrium level. Premier Wen claimed China has already achieved basic balance in international payment, which he defined as a current account surplus below 3 percent of gross domestic product. However, recent data and forecasts from the International Monetary Fund show that although China’s current account surplus is still recovering from the recession, it has never fallen below 5.2 percent of GDP. The IMF projects that China’s current account balance will increase to 7.2 percent of GDP by 2016.
Recent estimates by William R. Cline and John Williamson of the Peterson Institute show that China’s currency remains at least 24 percent undervalued relative to the U.S. dollar. Although China’s currency has been allowed to fluctuate against other currencies, China firmly controls the value of the yuan against the dollar, because the United States is the chief market for China’s exports. Recent appreciation in the yuan (also known as the renminbi) has not been sufficient to reduce China’s global trade surplus to a sustainable level. In 2011, the U.S. trade deficit with China reached $301.6 billion, 14.6 percent more than in 2010. In Jan. 2012, the monthly U.S. trade deficit with China increased again to $26.0 billion, an increase of 12.6 percent over levels in Dec. 2011.
China invested over $330 billion in purchases of new foreign exchange reserves in 2011, and historically about two-thirds of those reserves have been held in U.S.-dollar denominated assets. China is illegally intervening in foreign exchange markets to artificially suppress the value of its currency against the dollar and other currencies. This acts like a subsidy on all Chinese exports, and a tax on all U.S. exports to China. It also limits U.S. exports to every other country in the world because China is our top competitor in world export markets.
History demonstrates that China will not significantly revalue the yuan unless it is faced with threats of significant tariffs or other trade restraints. Congress threatened to impose tariffs in 2005, when the currency was even more undervalued, and China began to revalue but then stopped. Now, China is declaring the problem solved when in reality, it’s far from solved.
Paul Krugman has denounced China for its “predatory” trade policies. Fred Bergsten has described China’s currency intervention as the “largest protection measure adopted by any country since the Second World War – and probably in all of history.” Taking strong measures to end China’s currency manipulation will be good for Chinese consumers because it will lower prices of oil and other commodities in China. It will also create more jobs in the United States and other countries, because it will increase exports and shrink trade deficits. The time has come for the United States to declare China a currency manipulator and to threaten large, across-the-board tariffs unless and until they revalue enough to shrink their massive global trade surpluses.
U.S. sends the right message with WTO complaint on China’s illegal restrictions on rare earth exports
The Obama administration filed a complaint on Tuesday at the World Trade Organization challenging China’s restraints on its exports of rare earth minerals. This much-needed action will be good for both consumers and workers in the United States and other countries. China reacted immediately, promising to defend its actions and threatening that it could trigger further trade disputes. China’s export restraints are a clear violation of its WTO obligations, and it doesn’t have a leg to stand on in this dispute. Ending those restraints will lower prices for a wide range of high-tech products such as solar cells and hybrid and electric vehicles, and it will stimulate job creation in the United States.
The administration’s trade complaint covers tungsten and molybdenum (minerals used in steel production) in addition to rare earths, and includes over 100 specific products. Under the terms of its accession to the WTO, China was allowed to retain export duties at specified rates on 84 commodities. However, it maintains tariffs as well as quotas and other illegal restrictions on exports on rare earths and other metals. China controls 95 percent of the world’s production of rare earths minerals, which are critical ingredients in high-tech manufacturing of products ranging from smartphones to hybrid cars to missiles. None of the items covered in the administration’s WTO complaint are included in the list of 84 items that China is entitled to restrict with export duties.
Production of rare earths can be damaging to the environment. In 2009, China stopped issuing new licenses for rare earth mines, closed some illegal mines and set domestic production caps. If applied with equal effect to domestic and export sales, such restrictions would be legitimate under the WTO. Higher prices for rare earths will eventually encourage production in other countries that have large deposits, such as Australia, Brazil, Canada, Greenland, South Africa and the United States, but new mines will take five or more years to develop.
By restricting and taxing rare earth exports, China reduces the costs of these critical materials for their own domestic producers and raises the costs for producers in the rest of the world. Japan and the EU jointly filed the WTO case with the United States. Recent industry data show that the export price of a basket of rare earths from China was more than 120 percent higher than China’s domestic price for the same basket of minerals. Thus, China’s rare earth restrictions unfairly tilt the playing field in favor of its own domestic producers and raise the cost of high-tech products to consumers in the U.S. and other countries. Three U.S. manufacturers of photovoltaic cells, including Solyndra and Everygreen Solar, have recently declared bankruptcy in the face of cut-throat, subsidized competition from Chinese manufacturers who benefit from plentiful access to cheap rare earths.
China’s illegal policy of restricting rare earth exports is just one of many examples of its unfair trade practices. Massive subsidies to key industries such as auto parts, glass and paper are also hurting domestic industries, and currency manipulation by China and other Asian countries has cost the United States millions of jobs. We applaud strong action by the administration in these cases and look forward to continued strong enforcement of all U.S. fair trade laws by the administration’s planned Interagency Trade Enforcement Center.
–The author thanks Monique Morrissey for comments
The lead article in Monday’s business section of the Washington Post on the reported “boom” in U.S. exports to China painted an inaccurate and distorted view of U.S.-China trade. Headlined by a photo of Chinese Vice President Xi Ping visiting an Iowa family farm in February, the article claimed that a “richer China” has a “growing appetite for … American soybeans, cars, airplanes and medicine.” While the article does acknowledge the soaring U.S. trade deficit with China, it claims that such exports are a “bright spot.” In fact, those exports are swamped by soaring imports and trade deficits with China, which displaced 2.8 million U.S. jobs between 2001 and 2010 alone.
Review of actual trends in U.S. exports to China paints a very different picture than the one described in the Post article. Waste and scrap were the fastest growing U.S. exports to China, increasing $3.0 billion in 2011 (25.8 percent). The growth in agricultural products ranked a distant fifth on this list, increasing $0.9 billion (6.0 percent). Of the 10 fastest growing exports to China, seven were unprocessed commodities (as indicated by the black bars), including paper products, because 61.0 percent of U.S. paper exports to China in 2011 were unprocessed wood pulp. The vast majority of such exports are used as inputs for making paper and other products for export, not for Chinese domestic consumption. Overall, although total U.S. exports to China increased $11.2 billion in 2011, imports increased by $34.4 billion and the trade deficit increased $23.3 billion. U.S. export of raw materials so that China, not the United States, can make higher value-added industrial products is an ongoing recipe for the decline of American manufacturing and for North American economic failure.
The Post cites unnamed experts who claimed that the main reason for the increased exports “is a booming China where wealthier tastes include an increased appetite for meat—and hence for soybeans used as livestock feed.” The growth in demand for grains pales in comparison to China’s voracious appetite for waste, paper and metal scrap, chemicals, minerals and ores and raw wood—commodities China turns into job-displacing exports. The rapid growth of Chinese exports to the U.S. and the world are the source of China’s growing wealth, and such wealth has not resulted in exports to China growing “exponentially” (e.g., faster and faster each year), another flawed claim from this report. Exports in 2011 increased at the third-slowest rate since China joined the World Trade Organization in 2001. Export growth was slower only in the recession years of 2008 and 2009. Sadly, our exports to China are more closely tied to China’s demand for U.S. raw materials for its own production and exports than to Chinese consumers’ appetites for our products.
— The author thanks Ross Eisenbrey and Doug Hall for helpful comments and Hilary Wething for research assistance.
It is not at all clear what problem Charles Murray is trying to solve in his New York Times piece Narrowing the New Class Divide. But it can’t possibly be the economic inequality that has been growing for the last 30 years. While it is important to equalize the opportunity to internships, no one serious about addressing economic inequality would put this as one of their top four policy recommendations. The same can be said about Murray’s other three ideas.
My colleague, Josh Bivens, presents real policies to address America’s economic inequality in his book Failure by Design. Any one of Biven’s policies listed below would have a larger impact on reducing inequality than all four of Murray’s “solutions.”
- A higher and indexed minimum wage
- Strengthening workers’ right to organize
- Guaranteed retirement and health security
- A national and more democratic response to globalization
- Restricting the excesses of the financial sector
- Managing international capital flows
- Investments in infrastructure, including educational infrastructure
- A national commitment to achieving full employment
- A national commitment to addressing racial inequality
These are the proposals of someone seriously concerned about economic inequality. Murray, on the other hand, selects policies which he admits at the outset “would not do much good.”
Murray’s last book, The Bell Curve, argued that nothing could be done about inequality because it was all genetic. That argument did not go over too well. He has repackaged his thesis, but he is still arguing that nothing can be done to address inequality. But we know better.
High-scoring, low-income students no more likely to complete college than low-scoring, rich students
In the New York Times on March 7, Charles Murray offers some solutions to the class divide, then dismisses them nearly as quickly as he mentions them on the grounds that they wouldn’t actually work or aren’t necessary. Whether his facts on the class divide are accurate is not the subject of this post, but rather a closer look at a couple of his “solutions.”
Murray makes some decent points about the problems with unpaid internships and the benefits they may afford only those who come from families wealthy enough to allow such experiences. Aside from offering children of well-off parents the ability to pad their resume with unpaid internships , my colleague Ross Eisenbrey argues further that illegal unpaid internships are a scourge on the labor market. Murray rightly states that, “Internships that pay the minimum wage are still much more feasible for affluent students than for students paying their own way through college.”
The part of his article that I take issue with are his arguments about access to higher education. Murray suggests replacing ethnic affirmative action with socioeconomic affirmative action (an argument for another day), then later dismisses it as unnecessary, because “a high proportion of academically gifted children from the working class already get scholarships to good schools.” Let’s take a look at the evidence.
The relevant issue is the quality of education accessible to children from families in different positions in the income scale. The figure below compares the family income of children in the entering classes at top-tier universities. Nearly three-quarters of those in the top-tier universities come from families with the highest incomes, while 3 percent and 6 percent of the entering class come from the lowest and second lowest income groups, respectively – or, the bottom 50 percent of families.
Still, Murray might argue that those findings represent meritocracy at work, as those from high-income families have, perhaps through their privileged positions, acquired the intellectual tools to succeed at top schools. The second figure belies this argument. This figure shows that even after controlling for academic ability, higher income children are still more likely to complete college. Each set of bars shows the probability of completing college for children based on income and their math test scores in eighth grade. For example, the first set of bars (for the students with the lowest test scores) shows that 3 percent of students with both low scores and low incomes completed college, while 30 percent of low-scoring children from high-income families managed to complete college.
The fact that college completion is higher for each successive income group among similar scoring students is evidence against a completely meritocratic system. The pattern implies that at every level of test scores, higher income led to higher completion rates. The key comparison in this figure is the fact that high-scoring students from low-income families complete college at nearly the same rate as low-scoring, high-income students (29 percent vs. 30 percent). In other words, high-scoring, low-income children are no more likely to complete college than low-scoring, rich children.
In no way do these data suggest that a high proportion of children (gifted or not) from low-income families achieve placement or completion at universities (and definitely not top schools).
James Pethokoukis responds to the Wall Street Journal coverage of my analysis of entry-level wages of recent college graduates by implying that the erosion of wages earned by new college graduates is because there are too many Liberal Arts majors. Here’s the chart the Journal published:
The remarkable thing about recent college graduates is that the wages they earn early in their careers fell over the prior business cycle, 2000-07, as well as in the recession. This is the case for both men and women. As usual with Pethokoukis, he does not really supply any data directly on point. Instead, he lists a number of random items about college enrollment and STEM (science, technology, engineering and math) degrees as reported by Alex Tabarrok in a recent Chronicle of Higher Education story. In the piece, Tabarrok asks, “If students aren’t studying science, technology, engineering, and math, what are they studying?”
Since Pethokoukis doesn’t supply it, here are data on the distribution of fields of study by young college graduates, ages 18-29, in 2001 and 2009 from the Census’ Survey of Income and Program Participation (SIPP):
|Liberal Arts/Social Science/Philosophy||12.4%||11.4%|
|Source: Analysis of Census SIPP data for 2001 and 2009|
|*Population where highest degree is a bachelor’s degree|
There’s been no big change in the distribution of fields between 2001 and 2009 that could have led to the fall in wages of recent college graduates relative to those in entry-level jobs in 2001. There are somewhat fewer STEM graduates in 2009. However, wages should have been lifted by the expansion of business majors. To see how all of the changes in composition might have affected wages, I did a shift-share analysis of the field distribution in 2001 and 2009, asking, ‘How has the change in the composition of fields affected the average wage?’ If the 2009 composition (across 18 different majors) of employment across fields prevailed in 2001 at the wages of each field in 2001, then the average wage would have been … drum roll … 0.1 percent higher. That is, the impact of changes in the composition of fields over the 2001 to 2009 period was ABSOLUTELY NOTHING. The drop in entry-level wages happened within the particular fields of study, not because of the fields that students studied.
Are Liberal Arts majors dragging everyone down? The SIPP tabulations provided by Census do not have wage data by field for young workers but they do for all workers. The monthly earnings of full-time workers (using Table 4C in 2001 and 2009) with a Liberal Arts degree grew 19.8 percent in inflation-adjusted terms from 2001 to 2009. I suspect that Liberal Arts majors aren’t sabotaging America’s wages.
Oddly enough, I sort of agree with Pethokoukis’ bottom line. He says:
“And rather than pushing students to attend a four-year, brick-and-mortar college in pursuit of the BA, how about business-backed training and apprenticeship programs leading to a high-skill technical degree just like in Germany and some other northern European nations? … More education for all. But not college for all.”
As I wrote in the New York Times’ Room for Debate last week, College Is Not Always the Answer. My bottom line: “We need a nation that has and values all sorts of work and skills, which means providing decent pay and benefits for many types of jobs.”
Earlier today, the House of Representatives passed the Jumpstart Our Business Startups (JOBS) Act in overwhelming bipartisan fashion (390-23). The JOBS Act is a package of six bills, four of which had already passed the House, and all of which would lift or relax Securities and Exchange Commission rules. The bill is intended to make it easier for small businesses to go public. But as the Washington Post’s Ed O’Keefe notes, “despite its name, Republican leaders couldn’t say how many jobs the bill would help create.” Why? Because cutting red tape doesn’t address the fundamental plight of the U.S. economy: a deep and prolonged aggregate demand slump.
As of Jan. 2012, the U.S. economy had fewer jobs than in Jan. 2001. More than 11 million jobs would be needed to return the unemployment rate to its pre-recession level (5.0 percent). Full employment would not be reached until 2019 if January’s pace of hiring (243,000 jobs added) continues. And the February employment report—due out tomorrow—is projected to show a deceleration in hiring. As of the fourth quarter of 2011, actual economic output fell $883 billion (5.4 percent) below potential economic output. Mass underemployment and a gargantuan output gap can’t be chalked up to red tape—this affliction is the byproduct of the housing market imploding (dragging down with it personal consumption and real estate investment) and fiscal contraction at the state and local level.
- Will the policy make a real difference in job creation in the next 24 months?
- Is the policy effective and efficient?
- How is the policy funded?
- Is the policy at the appropriate scale to produce a substantial number of jobs?
How does the JOBS Act stack up? Well, it won’t make a real difference in near-term hiring. There’s no cost, bang-per-buck, or funding mechanism to be evaluated, period. And rather than being of the wrong scale to produce a substantial number of jobs, the policy is on the wrong scale altogether (the supply side rather than the demand side).
In a divided Congress, bipartisanship is certainly necessary to meaningfully address the jobs crisis at hand, but bipartisan support is hardly a sufficient condition. Restoring full employment requires much more than titling an uncontroversial bill so its acronym spells ‘jobs’ – substantive job creation legislation must noticeably lower the unemployment rate. Unfortunately, the JOBS Act misses that mark altogether.
A couple days ago, Harvard economist Gregory Mankiw tried his best to defend the carried interest tax loophole by blowing smoke at the debate and hoping no one would notice. The carried interest loophole allows hedge fund and private equity managers to reclassify their compensation for management services—a hefty slice of the return on their investors’ capital—as capital gains, which are taxed at a preferential 15 percent rate instead of the top marginal income tax rate of 35 percent. Mankiw is an economic adviser to former Massachusetts Gov. Mitt Romney, who inadvertently thrust the carried interest loophole into the spotlight with his 13.9 percent effective tax rate. But no amount of smoke or sand can cover up Romney’s tax return or a tax code that throws fairness out the window for the millionaires and billionaires in high finance.
Rather than defending carried interest outright, Mankiw muddies the water by leading readers through five examples of varying business arrangements and their respective tax treatment, attempting to illustrate that the line between labor and capital income is often blurred. Fair point. The tax code is complicated and similar modes of economic activity are often taxed differently, violating the principle of horizontal equity. Indeed, the tax code grossly violates the principle of horizontal equity when compensation is reclassified as investment income, as the carried interest loophole allows. Inadvertently, Mankiw is making a strong case for again equalizing the tax treatment of income derived from wealth and income derived from labor (as was done under the Tax Reform Act of 1986). After all, why should the tax code incentivize one compensation arrangement over another?
And Mankiw brushes off the second half of the fairness question: The carried interest loophole and the preferential treatment of capital gains it confers also violate the principle of vertical equity (the basic tenet of a progressive tax code that effective tax rates should rise with income). Instead, he compares Romney to a carpenter specializing in business fixer-uppers, implying that this tax question is about fairness to the middle class. But this is about someone with a net worth between $190 million and $250 million paying less than 15 percent on $21.7 million in income and the principle of vertical equity being undermined where it is most needed (where the money is).
This flaw in the tax code spans well beyond the presidential campaign trail: Private equity firm The Carlyle Group recently disclosed that its three founders each received in 2011 a $275,000 salary, a $3.5 million bonus, and roughly a $134 million share of investment profits, much of which is carried interest. Additional returns on their personal investments in Carlyle ranged from $57 million to $78 million. With so much income taxed at a 15 percent rate, it’s hard to imagine their effective tax rates landing in a different ballpark than that of Romney. The carried interest loophole helps the wizards of high finance to undermine the basic principles of fairness in the tax code. And unless repealed, this Wall Street subsidy will cost taxpayers $13 billion to $24 billion over a decade (the range of estimates in President Obama’s four budget requests, all of which have proposed repealing the carried interest loophole to no avail).
As Alec MacGillis notes, Mankiw’s half-hearted defense of the carried interest loophole is odd because he had previously concluded that, “Deferred compensation, even risky compensation, is still compensation, and it should be taxed as such.” But that was before he became an economic adviser to Romney. One of Mankiw’s famous “10 Principles of Economics” is that people respond to incentives, as he’s aptly proving.
The carried interest tax loophole is simply indefensible, as demonstrated by Mankiw’s fickle muddy-the-water defense. There are certainly gray areas in the tax code, but no amount of smoke can shroud this particular loophole as anything but an egregious subsidy to high finance.