I’ve generally been a fan of Planet Money – and still refer people to ‘another frightening show about the economy’ for a good summary of what led people to get so panicky in Sept. 2008. So, I’m afraid I find Adam Davidson’s first New York Times Magazine column – titled “It’s the economy” and labeled an exercise in “[trying] to demystify complicated economic issues…” – to be pretty disappointing.
He covers a lot of ground, so my list of disagreements is going to be scattershot, but here’s a quick taxonomy. First, I don’t buy his characterizations about what is generally agreed upon and what is seriously contested among economists. Second, he really undersells how well studied the concept of providing Keynesian-style fiscal support to ailing economies is. Finally, he doesn’t help readers in their attempt to make an evidence-based decision on what is easily the most important economics question today: Should Congress and the Administration be spending more to help lower today’s 9 percent unemployment rate?
Let’s start with the general – Davidson portrays economists as hopelessly divided and unsure about whether or not debt-financed spending and tax cuts (i.e., something like another Recovery Act, which I’ll just call “fiscal support” from now on) could lower today’s unemployment rate, but relatively united when it comes to how to reform taxes and education and health care systems.
This is the reverse of the truth – there is wide agreement that debt-financed fiscal support in a depressed economy will lower unemployment. Now, it’s true that there are holdouts from this position. And others who think the benefits of lower unemployment are swamped by the downsides of higher public debt (they’re wrong, by the way). But, the agreement* is much more widespread – ask literally any economic forecaster, in the public or private sector, that a casual reader of the Financial Times has heard of if, say, the Recovery Act boosted economic growth. They will all tell you “yes.”
You won’t find anywhere near such a consensus on long-run tax or education or health care policy. In fact, public finance economists can’t get unanimous agreement on if, in the long run, income accruing to holders of wealth should be taxed at all (it should, by the way). In short, anybody waiting for the current unpleasantness to pass and for economists to unite in harmony in future policy debates shouldn’t hold their breath.
Davidson also claims that there is wide agreement that “many Americans don’t know how to do anything that the world is willing to pay them a living wage for.” I’m not quite sure what this means. I guess it’s true in the strictly tautological sense that there are a lot of involuntarily unemployed workers out there, but if it is meant to be an indictment of American workers’ skills (and it’s hard for me not to read it that way) – then there’s no serious basis for this indictment.
Most distressingly, Davidson doesn’t rise above the “opinions on the shape of the world differ” review of the argument about the virtues of debt-financed fiscal support as the answer to today’s unemployment crisis. He writes as if this argument has lain completely unstudied since the Great Depression and that advocates for fiscal support in the last three years have taken a huge leap of faith in pushing it as the answer to today’s troubles. This is, again, so at odds with what has actually gone on in the profession that it’s hard to figure out his basis for claiming it. If nothing else, the experience of Japan’s Lost Decade alone has inspired thousands of pages on recessions (and jobless recoveries) driven by deficient demand. And no, a Google or Lexis search on “job creation” won’t actually capture all academic work relevant to this.
He also writes that the point of large-scale fiscal support was to “goad consumers into spending again.” Not really. A good chunk of the Recovery Act was indeed aimed at households, but it didn’t rely on some esoteric trick to bamboozle people into spending – instead it gave them money (or its near equivalent). And much of the most-effective parts of the Recovery Act actually recognized that consumers were unlikely to begin spending again and had the government spend the money directly. The recession was largely caused by consumer retrenchment, but this doesn’t mean that recovery has to come through consumer spending – instead we can provide the spending power through other sectors.
Lastly, Davidson notes that there is a rump of economists (he calls them, reasonably enough, the Chicago School) that argue that debt-financed fiscal support cannot help economies recover from recessions. But, it’s important to note that there is pretty simple evidence that can be brought to bear on this Keynesian versus Chicago debate. Nobody denies, for example, that the government could borrow money and just hire lots of people – hence creating jobs. What the Chicago school argues is that this borrowing will raise interest rates (new demand for loans will increase their “price,” or interest rates) and this increase in interest rates will dampen private-sector demand. But interest rates have not risen at all since the Recovery Act was passed and private investment has risen, a lot.
Those in the demystifying business really should point lots of this stuff out.
*Note: The Kaufmann survey describes the results wrong – any multiplier greater than zero means that debt-financed fiscal support has boosted the economy.
The Senate appears poised to pass two components of President Obama’s American Jobs Act, having found the first area of bipartisan agreement. These two components, however, fall woefully short of what is needed to address the jobs crisis.
The first provision would provide tax credits for hiring veterans, with bigger credits for hiring veterans who have been out of work for more than six months and those with service-related disabilities. It would also expand education and training opportunities for up to 100,000 older veterans. Helping veterans find employment or vocational training is a laudable goal. The problem is that this hiring credit is a rounding error in terms of national economic activity and will not visibly budge the dial on the national unemployment rate.
As Larry Mishel recently pointed out, scale is critical to evaluating any jobs plan. The president proposed a $447 billion jobs bill that would boost employment by 1.9 million jobs and reduce the unemployment rate a percentage point, according to Mark Zandi. The $1.6 billion cost of the Senate’s bill for veterans, on the other hand, represents only one-hundredth of one percent of GDP.
Worse, a second provision would repeal a requirement that, starting in 2013, will withhold 3 percent of payments to government contractors, in the form of a credit against contractors’ tax liability they already owe. Essentially, the cost of helping veterans is simultaneously helping government contractors avoid taxes. Of course, the increased tax avoidance would cost money – but the Senate provided a “pay-for” in the form of decreasing eligibility for Medicaid and subsidies for those seeking to buy health insurance under the Affordable Care Act (i.e., the health reform bill passed at the beginning of 2010).
So, to recap, the big “jobs-plan” coming out of the Senate today would help veterans (good), but would not move the dial on overall joblessness (bad), would facilitate tax avoidance by government contractors (bad), and would pay for this loss in tax revenue by eroding some of the benefits of health reform (bad). Will this pass? Probably—so much for the alleged benefits of bipartisanship. The likely success of this legislation owes first and foremost to the fact that it would not be paid for with a millionaires’ surtax. Over the last month, Senate Republicans have filibustered all of the following measures, which would have been paid for with varying surtaxes on incomes of more than $1 million:
- $447 billion for the entire American Jobs Act (10/11/2011)
- $35 billion to put teachers and first responders back to work (10/20/2011)
- $56 billion to build roads, repair bridges, and create an infrastructure bank (11/3/2011)
Helping some of the 240,000 unemployed veterans of the wars in Iraq and Afghanistan is merited, but so is helping the broader pool of 25 million un- and underemployed Americans. As we have pointed out over and over again, boosting GDP growth in a $15.2 trillion economy and seriously tackling persistent underemployment requires hundreds of billions of dollars in additional fiscal support. Republicans in the 112th Congress, however, have filibustered (or blocked through other procedural means) all job creation proposals that would provide any meaningful help ameliorating the jobs crisis.
The Washington Post‘s Ezra Klein with a useful observation…
Just a reminder: The market will literally pay us to borrow money from them for 5, 7 or 10 years. Pretty good deal for a country that has, say, trillions of dollars in infrastructure repairs it needs to make, or millions of workers who are unnecessarily unemployed. More here.
Here are the real interest rates on Treasury’s TIPS (click to enlarge):
On Friday, the Bureau of Labor Statistics released its monthly report with the most recent data on jobs and employment in the United States, a bleak reminder that things aren’t getting much better for the unemployed in this country. Sadly, as the International Labor Organization’s annual World of Work report reveals, the world economy is no better, and the risk of social unrest has increased dramatically in rich countries as a result (see figure below). The ILO’s calculations are based on “levels of discontent over the lack of jobs and anger over perceptions that the burden of the crisis is not being shared fairly.”
Just in the past year, we’ve seen violent clashes erupt between protestors and police in London, New York, Rome, and Oakland as a direct result of citizens protesting budget austerity, joblessness and a sputtering economic recovery. And in encampments literally all over the world people are peacefully protesting income inequality and widespread joblessness as part of the Occupy Wall Street movement. Thanks to a 17 percent youth unemployment rate in the U.S., young people in New York, Tulsa, Sacramento, Philadelphia, Minneapolis and elsewhere have plenty of time on their hands to protest and make their voices heard. Even recent college graduates have an unemployment rate that’s almost double what it was before the recession.
But just because they’re peaceful does not mean the OWS protestors are not seething with anger about the way that high level executives in the financial services industry – who are some of the wealthiest people in the world (better known as “part of the 1 percent”), have escaped prosecution or serving any jail time after bringing our economy to the brink of collapse, while the industry as a whole somehow managed to escape serious reform by Congress.
One of the other principal gripes of the peaceful OWS protestors is that Congress has failed to do almost anything to invest in the economy or create jobs since the stimulus package was passed in 2009, despite persistent joblessness and underemployment. Foreign governments in other developed countries have failed at this as well – and the discontent is palpable. Just look at the scale of protests in Spain, spurred in part by the country’s eye-popping 46 percent youth unemployment rate.
From most reports, it appears that the OWS protestors are committed to remaining peaceful – for now. Let’s hope it stays that way, despite this new evidence that things may deteriorate if economic conditions fail to improve.
My colleagues at EPI recently outlined how the grievances of the Occupy Wall Streeters are fact-based and supported by ample evidence. The ILO’s 2011 World of Work report offers a new estimate that should motivate 99 percent of the global population to join together into one massive movement that challenges the financial and political elite to enact policies that will put people back to work around the world. The table below is the ILO’s estimate that by 2013, there will be a global shortage of 40 million jobs – that’s a lot of desperate, hungry people with way too much time on their hands.
In a blog post yesterday, Paul Krugman again noted that the growth in income inequality is not all about education.
He pointed to two different charts to illustrate: one showing the growth of the top 1 percent relative to other income groups and a second with wage growth by education levels. Since the two charts had different scales, it was hard to see just how out of whack the education-explains-inequality story really is.
Below is a chart that combines the two series in one chart, showing that the top 1 percent has outpaced, by a very wide margin, not just those with less formal education, but college grads as well. And this gap between the growth of the top 1 percent and the rest is much larger than the growth gap between education levels.
This is not to say that education is not important. The chart also shows that those with a college (or post-secondary) degree have outpaced others. But it’s also clear that this trend only explains a small part of the broader inequality story.
(Note: The top 1 percent line shows the growth in average after-tax incomes for this group, via the CBO, data from Figure 2. The education lines show the growth in wages for all workers, via EPI’s State of Working America data on wage and compensation trends by education. Both are inflation adjusted.)
As Americans wrap their heads around the meaning of the growing “Occupy” movements in cities throughout the nation, trying to determine whether or not the 99 percent vs 1 percent breakdown of Americans constitutes “class warfare,” there are a great many irrefutable facts that need to inform such discussions. Many have been clearly articulated recently, (including this great collection by my EPI colleagues). In this blog post, I begin a renewed examination of how the decline of manufacturing employment has contributed to the erosion of the American middle class, and in the process, left many state economies in shambles.
Employment in the manufacturing sector has long provided a foundation for the American middle class. In 1999, former EPI economists noted key features of manufacturing employment:
Manufacturing provides middle-class jobs and a channel of upward mobility for non-college-educated workers (especially men). Compensation is higher and fringe benefits (such as health insurance and pension coverage) are more common than in other industries that, like manufacturing, employ non-college graduates. Blue-collar workers in manufacturing are also more likely to be union members, and thus they have more bargaining power than do comparable workers in services.
In 1999, there were troubling signs that all was not well in the American manufacturing sector, with the “Asian crisis” identified as a growing threat; a threat which my colleague Rob Scott has repeatedly shown to have continued to erode American employment (see, for example, Growing U.S. trade deficit with China cost 2.8 million jobs between 2001 and 2010). The alarming decline of the American manufacturing sector has of course only gotten worse over the intervening decade, leaving in its wake many state economies that have yet to recover. Since Jan. 2000, the American manufacturing sector has lost 5.5 million jobs, nearly a third (32.1 percent) of the Jan. 2000 total. Six states – Michigan, North Carolina, Rhode Island, Mississippi, New Jersey, and New York – have lost over 40 percent of their manufacturing workforce, while another five states have lost more than 37 percent of their manufacturing employment (collectively, the dark red states in the figure below). Indeed, only Alaska has seen growth in its manufacturing sector since 2000, though numbering less than 2,000 workers.
In future posts, I’ll examine the impact the erosion of manufacturing employment has had on wage trends in those states that have been hardest hit by the decimation of manufacturing employment. Lest readers despair, here are some concrete suggestions for what can be done to breathe new life into American manufacturing:
- The Alliance for American Manufacturing has a comprehensive plan for job creation based on the following five strategies: expanding American production, hiring, and capital expenditures; investing in America’s infrastructure; enhancing our workforce; making trade work for America; and rebuilding America’s innovation base.
- AAM’s Executive Director Scott Paul appeared Tuesday night on The Ed Show, noting how different the American economy would be if 5.5 million manufacturing jobs had not been lost over the past decade.
I apologize for continuing to harp on this Rick Perry study, but I just can’t help myself. As I mentioned in an earlier post, the first thing that really jumps out at you is the breathtaking intellectual dishonesty. But beyond its complete inconsistency with Perry’s ideology and professed objectives, the analysis simply doesn’t make sense. Here are a few examples:
1) GDP growth is impossibly high: Remember that Heritage Foundation analysis of the House Republican 2012 Budget, the one that predicted economic growth and unemployment at levels most economists considered impossible? Well, John Dunham and Associates’ (JDA) projections underpinning the analysis of Perry’s tax plan are even more impossibly higher! The Heritage analysis found that the average annual real growth rate from 2014-2020 would be about 3.1 percent. JDA is predicting that under Perry’s plan, it would be 5.3 percent. Reality’s overrated anyway, right?
2) Double counting: The analysis claims that “overall income is based on growth in nominal GDP and population (pg. 4).” See the problem here? Yeah, that’s right, nominal GDP already takes into account population growth. We checked their numbers, and it does appear they grew income by both GDP and population, so it doesn’t seem to be just a typo.
3) Other weird stuff: Check out the qualified dividends forecast from Table 2 of the analysis. From 2016-2019 dividends grow at an average 12.6 percent, including 13.2 percent in 2017, 14.0 percent in 2018, and 8.2 percent in 2019. And then 2020? Whoops. According to this forecast, qualified dividends in 2020 will be exactly the same as in 2019, to the dollar. Same thing with 2011 and 2012. The chance that that’s not a mistake is about zero.
4) Optional or mandatory?: It is unclear whether JDA modeled an optional flat tax or a mandatory flat tax as a replacement for the current income tax. The campaign maintains that JDA did model optionality. But their stated methodology does not mention how they modeled which taxpayers would choose which system, and their description of the proposal—”a 20 percent flat rate for both personal income taxes and corporate income taxes”—also makes no mention of having a choice between the current system and the new system.
We contacted the Perry campaign in regards to these numerous errors and omissions, but have yet to hear back. These aren’t minor problems – the entire analysis is suspect and the Perry campaign should retract these numbers.
At EPI’s 25th anniversary celebration last night, we presented an award to Paul Krugman. (You know, because he’s short on credentials and really could use some professional validation.) Harry Hanbury produced a very candid video about him for us, and it’s well worth seeing – it’s not just a hymn of praise, it actually has a great narrative arc.
MORE: Multimedia on EPI at 25
I think the only thing I’d add that the video didn’t emphasize (because it was made for people, not economists) is just how inspiring Krugman’s work is for economists who are actually trying to make sense of the real world. Nobody else so consistently reaches back for the tools that we’re all taught in grad schools (many of which he built, it bears saying) – tools like graphs and equations and models that often seem dry and abstract – and holds them up against developments in the real world to see what they actually can and can’t explain. He runs with the things that are useful and (often pretty brutally) discards the things that aren’t. For those of us who got into the economics business to understand the world around us, his work is an inspiration.
Krugman’s acceptance speech
[pro-player width=’540′ height=’304′ type=’video’ image=’http://www.epi.org/files/2011/Krugman_Award.png’]http://www.youtube.com/watch?v=-pKRBLdG1eA[/pro-player]
A clear trend is developing among the economic plans of the GOP presidential hopefuls: shift the burden of taxation from upper-income to lower-income households. Yesterday, the Tax Policy Center released an analysis concluding that Texas Gov. Rick Perry’s plan would cut taxes on high-income households, raise taxes on low- and middle-income households, and produce bigger deficits. The gist of Perry’s plan is to add an optional federal income tax to the current code: a flat 20 percent tax on (almost all) income less personal exemptions, charitable giving, home mortgage interest, state and local taxes, and all capital gains and dividends income (aptly dubbed an “Alternative Maximum Tax” by Howard Gleckman).
Those earning more than $1 million would see their average tax bill fall by more than half, a tax break of $496,000 in 2015 alone, relative to current policy. The highest income 0.1 percent of households (with income above $2.8 million) would see a tax break of over $1.5 million—even more egregious than the mammoth tax cut they would receive under Herman Cain’s “999” plan.
Meanwhile, Perry’s plan appears to let the Bush-era tax cuts expire in 2013, meaning that lower-income households would lose their expanded earned income tax credit, child tax credit, and the 10 percent bracket. (The John Dunham and Associates analysis for the Perry campaign uses a current law baseline and TPC also concluded that the Bush-era tax cuts would expire on schedule.) The Bush-era tax cuts were regressive and disproportionately benefited upper-income households, but a fraction of these tax cuts have gone to lower- and middle-class households; Perry would effectively do away with these tax cuts while giving higher-income households an even bigger tax cut. This would mean an average tax increase of over $400 for households earning between $20,000 and $40,000. Although this may appear at odds with Perry’s anti-tax ideology, higher taxes for the poor and middle class is in fact entirely consistent with his misleading rhetoric lambasting the “injustice” that nearly half of households don’t pay federal income taxes.
The chart below depicts TPC’s analysis of effective tax rates by cash income level under Perry’s plan versus current policy. On average, households with income under $50,000 see a tax hike. Above this level, tax cuts balloon as income rises. Millionaires would be left paying a lower effective tax rate than a middle class family earning between $50,000 and $75,000. This completely violates the idea of a progressive tax code and the Buffett Rule.
The natural result of modestly raising taxes on working families while slashing taxes for upper-income households is hemorrhaging revenue: this is not about “shared sacrifice” or the budget deficit. As my colleague Ethan Pollack points out, the Perry campaign relies on highly dishonest dynamic scoring to claim their tax code produces more revenue. Official budget scorekeepers incorporate behavioral responses but not dynamic growth effects into tax policy analysis, because research shows growth effects are generally small and can break either way depending on how tax cuts are financed (see this CBPP overview of dynamic scoring). TPC’s static model shows Perry’s plan losing $995 billion relative to current law, a decrease of 27 percent, in calendar year 2015 alone ($570 billion relative to the inadequate levels projected under current policy).
Working households would get hammered again when that additional revenue loss is financed with draconian spending cuts, as required by the balanced budget amendment and spending cap component of Perry’s economic plan. This is merely a plan to dismantle government and refund all the savings, plus some of working families’ disposable income, to upper-income households.
I’ve been reading through Rick Perry’s official analysis of his tax plan (scored by John Dunham and Associates), and hoo boy, it’s a doozy. Difficult to know where to begin.
The intellectual dishonesty is breath-taking. The basic conservative argument that tax cuts increase economic growth goes like this: tax cuts for the rich results in more capital formation, which fuels greater productivity and higher economic growth. In other words, supply-side growth with demand catching up. It’s a pretty ridiculous model in the face of huge demand shortages, but hey, at least it’s a model.
But as Matt Rognlie points out, the model that Rick Perry used is very different, and in fact has a lot more in common with traditional Keynesian demand-side economic models than conservative supply-side models. In fact, this economic model (called IMPLAN) is usually used to justify government public works projects, such as sports stadiums, because this model shows that the economy can be significantly improved through government spending.
Wait, what? Rick Perry’s using an economic model that shows that government spending helps the economy? That’s right, partner. In fact, the IMPLAN model (which we’re decently familiar with at EPI) will actually show that spending cuts reduce demand more than tax cuts boost it (because a portion of the tax cuts are saved), so the net effect is likely negative. And to be clear, JDA did assume that the plan would cut spending by the same amount as the revenue loss (page 7, footnote 7).
So how did the analysis show a positive economic impact? Simple: they assumed the spending cuts, but didn’t model them, despite the fact that it’s logically inconsistent to claim that tax cuts have an effect on demand but spending cuts don’t. The only reason they got a positive economic impact was because they did not model the entire plan. Had they, it’s pretty clear that the analysis would have shown that Perry’s overall budget plan—tax cuts paired with offsetting spending cuts—would, on net, hurt jobs and economic growth.
Former Secretary of Labor Ray Marshall released his new book, Value-Added Immigration: Lessons for the United States from Canada, Australia, and the United Kingdom, at a forum at EPI this morning. The book examines the employment-based immigration policies of the principal immigration-receiving countries and contrasts their data and evidence-based policy development with our own very partisan policy making, which has been governed by ideology and interest group advantage rather than a rational examination of the national interest.
Marshall made clear at this morning’s forum that a realistic hope for progress depends on putting one federal agency in charge, gathering data for informed decision-making, and committing ourselves to pursuit of a high value-added immigration policy, rather than simply a pursuit of cheap labor. Unlike Australia and Canada, which track the experience of immigrants in longitudinal studies and adjust their policies to improve outcomes, the United States does not even know how many “temporary” non-immigrant workers are legally in the U.S., let alone how they are faring.
Marshall was joined on a panel by three distinguished researchers: Philip Martin of the University of California, Davis, one of the nation’s foremost experts on agricultural economics and labor migration; Michael S. Teitelbaum of the Alfred P. Sloan Foundation and Harvard Law School, a demographer and expert on STEM education and immigration; and Ron Hira, of the Rochester Institute of Technology, an expert on the offshoring of IT work and the relationship between our non-immigrant visa programs and the health of the domestic engineering and computer science workforces.
Martin and Teitelbaum, like Secretary Marshall, praised the flexibility of the Australian and Canadian systems and their use of rational, objective point systems to determine the admission of skilled immigrants. Each also praised the U.K.’s Migration Advisory Committee for its collection and use of very extensive labor shortage statistics, its use of “bottoms up” information from local businesses, unions and government sources, and its non-partisan method of researching, reporting, and analyzing whether importing workers is the sensible way to solve particular problems. All three commenters agreed with Marshall that the current state of immigration and labor market data in the U.S. is far inferior to that in the countries studied and inadequate to the task of informing the policy debate.
Value Added Immigration: Lessons for the United States from Canada, Australia, and the United Kingdom, is available from EPI for $15.95.
GDP grew at 2.5 percent in the third quarter – and that seems to be about the growth rate to expect for the next year (which will be an improvement from the 1.6 percent growth that has characterized the most recent 12 months). This is, as we’ve noted, insufficient to drive down the 9.1 percent unemployment rate.
It is, however, worth remembering just why there are so many unemployed workers in the country: the depth and length of the Great Recession, caused by the bursting housing bubble (and perhaps amplified by the corresponding financial crisis). The unemployment rate is slightly down and employment growth since the recession ended in the middle of 2009 is actually roughly in-line with the recoveries we’ve seen in the past two decades (following the 1990 and 2001 recessions). Further, to the degree that the current recovery is slightly under-performing these previous two, it’s in the hemorrhaging of public sector jobs.
So why is unemployment so much higher today compared to nine quarters after these two other recessions ended? Because the output losses (and hence corresponding job-losses) suffered during the Great Recession were so much larger – meaning that we have a much larger overhang of economic slack (both unemployed workers and idle factories) to put back to work.
The figure below shows GDP declines during the Great Recession compared to these previous two recessions, as well as GDP gains nine quarters into recovery for the Great Recession and the previous recessions.
As we’ve also observed before, recoveries from recessions happened much more quickly in the years prior to 1990, reflecting in part that monetary policy was much more effective in driving recoveries pre-1990 (since it was generally monetary policy tightness that caused these recessions, monetary loosening could hence lead to rapid recovery).
So, focusing for a second on just those recessions that have happened in the two decades (give or take a year), we see something clear – this recovery lags the average by 1.1 percent of GDP, but the hole left by the recession was larger by an average of 4.5 percent of GDP, meaning roughly that it was the difference in the losses caused by the recession that explain 80 percent of why unemployment is so high relative to its pre-recession level.
So while it’s true that we slightly lag the pace of post-1990s’ recoveries, it is clear that what really explains why so many more workers and so much more capital remains idle today compared to recoveries past is just how ferocious the preceding recession was.
Does this leave today’s policymakers off the hook? No – they should do more. The past is the past and just because a problem is inherited doesn’t mean it shouldn’t or can’t be solved. Clearly in retrospect not enough was done to boost the economy following the 1990 and 2001 recessions (some speculative reasons why are here). And clearly there is more we can do now to boost the sluggish demand growth that is the main cause of today’s economy operating below potential.
But, it is worth remembering where the problem came from. As we get further and further from the Great Recession, the temptation is great to act as if citing it as the root cause of today’s problems is just unseemly dwelling on the past and dodging blame. But, really, it does matter how it all started.
Rick Perry’s out with his tax plan, and while he might be winning the “who can pander to their base the most” award—beating out strong efforts by Mitt Romney and Herman Cain—his proposal proves to be an utter disaster for the economy and the middle class.
On the tax side, the plan would do the following:
- Replace the graduated income tax with an optional 20 percent flat rate with a slightly broader base
- Slash the corporate tax by almost half
- Abolish the estate tax
- Enact a temporary repatriation holiday
- Eliminate taxes on capital gains and dividends
- Raise the personal exemption for households to $12,500 per person
Perry makes two basic claims about his plan. First, he says that the “net benefit will be more money in Americans’ pockets.” For corporations and high-income households, that’s certainly true, even though their tax rates are already at historic lows. But it does that by shifting the tax burden onto middle- and low-income households, whose incomes have actually fallen over the last decade.
Second, he claims that his plan will simplify the tax code, so simple that you can “file your taxes on a postcard.” Yet his tax code is optional, meaning that millions of households will have to do their taxes twice to see under which code they should file (and if they think they might be subject to the Alternative Minimum Tax, they’ll have to do their taxes three times!). Layering another tax code over the current one makes filing taxes more complicated, not less.
Now, it’s certainly the case that the tax code is too complex. But it’s telling that his proposal doesn’t even attempt to tackle the issue of unfairness, which has sparked protests across the country. Most people hear that Warren Buffet pays a lower tax rate than his secretary and conclude that he should be taxed at a higher rate, one more comparable to middle-class workers. Rick Perry, however, thinks his taxes should be cut even further.
And how does he pay for these tax cuts? No surprise here: massive cuts to the social safety net and public investments. He’d raise the Social Security retirement age, potentially raise the Medicare eligibility age, eliminate all the expanded health insurance coverage in the Affordable Care Act, and take an axe to non-defense discretionary spending, which has already been slashed by the Budget Control Act.
It’s the basic conservative approach to budget and tax policy: (1) pretend that you care about deficits, (2) give huge tax cuts to corporations and the top 1 percent, and (3) slash the very programs that people depend on because now we “can’t afford them.” The rich get richer, and even more risk and cost is pushed onto the middle- and low-income households that can least bear the burden. Perry may call this tax plan “fair.” but I don’t think that word means what he thinks it means.
So this Halloween season, the middle class might want to skip Perry’s house, because for them he’s got no treats, only cruel, cruel tricks.
Nonresidential investment has been growing rapidly for quite some time – seven straight quarters averaging 10.5 percent growth. We have noted before that this provides powerful evidence that business fear of future regulatory uncertainty seems to be an odd explanation of sluggish economic growth – businesses are, in fact, actually spending pretty quickly during the recovery.
Is it a puzzle that nonresidential investment is coming on two years of rapid growth, yet employment growth remains sluggish? After all, if businesses seem fine in taking on new machines, why aren’t they fine in taking on new staff?
I’d argue the answer to these questions are ‘not really’ and ‘read on.’
First, it’s worth remembering that nonresidential investment just isn’t that big a part of the overall economy – it has averaged 11.1 percent of GDP since 1995 and sits at 10.3 percent today. While it’s nice that it’s performing well, it just doesn’t have enough heft by itself to drive overall trends in either output or employment growth. Contrast this with consumer spending sitting at about 70 percent or more of total GDP.
Second, nonresidential investment is hugely cyclical – from the last quarter of 2007 to its trough in the second quarter of 2009, it fell by 22.4 percent – or about 2.5 times farther than the drop in employment. Today, despite its good growth for nearly two years, it remains well below trend. In fact, Thursday’s report on third quarter GDP shows that the simple level of nonresidential investment remains nearly 8 percent below its pre-recession peak. So, it’s been growing very well for a while now, but it fell extraordinarily far during the recession.
Third, it’s important to remember that, like job-growth, investment has to grow just to keep overall economic slack stable. So, we need roughly 100,000 jobs each month just to keep the unemployment rate stable while absorbing new labor market entrants. And, we need 8 percent of GDP to be invested each year just to keep the overall capital stock from shrinking through depreciation that occurs in the private business sector.
Lastly, it’s worth asking whether investment is now so high after seven straight quarters of growth that it is threatening to change the economy’s capital/labor ratio in an appreciable way. That is, firms invest so that each worker has a useful bundle of capital to work with – one that hopefully grows over time and makes each worker more productive. If investment per worker begins rising well above trend, this could mean that output is just becoming more capital-intensive for some unspecified reason or that firms will have to start soon hiring to stabilize this ratio.
Neither seems particularly likely – investment per worker remains below its 2007 level even as employment shrank over that period. And this means that it remains well below what a simple extrapolation of the pre-recession trend would argue.
In short, the trend in nonresidential investment is nice, but it won’t by itself bring about a robust recovery. More importantly, it mostly represents simply an ongoing climb out of a steep, recession-induced hole (which should sound familiar) combined with an attempt to run ahead of simple depreciation. And this trend certainly presents no puzzle in that it’s not being accompanied by more rapid hiring.
In Dec. 2008, the U.S. auto industry stood on the brink of collapse. The Obama administration negotiated a restructuring plan for the industry that took General Motors and Chrysler through quick bankruptcies, helped get them back on their feet again, and provided bridge financing for auto parts makers and auto finance companies. This plan was widely criticized at the time but restructuring has paid big dividends for the nation, autoworkers and the domestic auto industry.
If the auto industry had been allowed to collapse, between 1.1 and 3.3 million jobs would have been lost between 2009 and 2011. After restructuring, more than 78,000 jobs have been added in U.S. motor vehicle production. All three U.S. auto companies returned to profitability in 2011 and they earned combined profits of nearly $6 billion in the first quarter of this year. Total sales and market share of the Big Three are all up sharply since 2009.
GM, Ford and Chrysler have bargained new labor agreements with the UAW, recently approved by workers at each company, which will ensure increased employment and investments in the United States by all three firms. The completion of these agreements and the strong improvement in the performance of U.S. automakers shows that the Obama administration made a wise decision to invest in the auto industry restructuring package. If the industry had been allowed to fail, costs to federal, state and local governments in the form of reduced tax payments and increased unemployment compensation would have totaled between $83 billion and $249 billion in 2009 alone.
The auto industry restructuring plan has yielded a huge return on taxpayer investment and put the industry and its workers on a solid path to recovery. I estimate the federal, state and local governments saved between $10 and $78 for every net dollar invested in auto industry restructuring—a very savvy investment at a time when failure to intervene would have been catastrophic for the domestic economy.
The Congressional Budget Office released a report yesterday that provides more detail into their hugely valuable reporting on household income growth at different points in the income distribution. There’s plenty to dig into here, but, we’ll start with just noting that the report confirms what we posted today: that the primary complaint of the Occupy Wall Street movement – that economic inequality is rising, and economic policy, driven by the interests of the already well-off, is driving that rise – is spot-on.
The CBO report focuses on 1979-2007 – the last year before the Great Recession. While inequality actually tends to fall in the immediate aftermath of recessions (as incomes derived from the stock market fall more quickly than others, and these incomes are disproportionately claimed by the richest households), we know that over this period that inequality has always risen very sharply after the immediate recession-years.
One immediate comparison that comes to mind when examining data on inequality is a simple comparison of the growth of mean versus median income between 1979 and 2007. Mean income is just the simple average – it’s essentially how much the economy was able to generate on a per household basis. Median income growth is a measure of how a household smack in the middle of the distribution – poorer than half of households but richer than half – has done over the same period. If income growth is much faster for already-rich households (and it definitely was over this period) then mean income growth is going to outpace median growth. And, we can ask how much households at the median could be earning today if their income growth matched the overall average. This doesn’t seem too much to ask in terms of economic outcomes – the richest 1 percent in 1979 made considerably more than the typical household – so even if all incomes had simply grown at the overall average rate, there would be a considerable income gap today. Instead, of course, median growth fell far below average growth. If it hadn’t, the CBO data indicates that the median household would have had $75,160 in after-tax income in 2007, rather than the $61,800 it actually had.
In short, the inequality driven by households at the top claiming so much of the overall growth acted as a $13,360 tax on the median household. I should note that those used to citing Census Bureau numbers on median incomes will find these income numbers to be high. That’s because these are a measure of “comprehensive income” that includes many things – like in-kind transfers and imputed taxes besides the money incomes reported by Census.
Speaking of taxes and transfers, we can also look at how policy most visibly affects income trends – looking at how taxes and transfers affect the evolution of inequality. Because the federal income tax is progressive and because transfers (Social Security, unemployment insurance, Medicare, Medicaid) make up a larger share of low- and moderate-income households’ incomes, the effect of taxes and transfers overall is to, at any given point in time, reduce the inequality that results from market-based incomes (though, to be clear, policy has fingerprints all over market-based incomes as well).
But, the CBO notes that “shifts in the distribution of government transfer payments and federal taxes also contributed to the increase in after-tax income inequality.” See the chart below from the CBO report and focus on the top-line. This top line shows the contribution that taxes and transfers make to reducing inequality – and it shows this contribution has fallen significantly between 1979 and 2007. That is, this most visible hand of policy – the effect of taxes and transfers – has actually changed in the direction of increasing inequality (or reducing it less) relative to its 1979 levels. In short, tax and transfer policy is leaning with the wind of rising inequality rather than against it.
EPI has strung together a series of posts and papers on why regulatory changes enacted and proposed in the past couple of years are clearly not a contributor to the economy’s sluggish recovery from the Great Recession. We’ve been especially critical of the vague claims that “uncertainty” over regulatory change has dampened job-growth. Basically, we’ve done the analysis that anti-regulatory forces have not done – specified just what the evidence would look like if regulatory change or uncertainty was dampening growth and then examining the actual facts-on-the-ground to see if it was consistent with the story. Punchline: it wasn’t.
But we’re just EPI and the debate has seemed a bit lonely; until now.
The Treasury Department, in an important blog post, has reviewed the evidence that we cited and more to assess the case for regulatory changes or uncertainty stifling growth – and they find it as content-free as we did.
Treasury cites low hours per employee (yet to regain their pre-recession peak), low rates of capacity utilization, low bond-rates (even for industries facing regulatory changes), and low rates of financial volatility – along with high profit margins and high rates of investment in equipment and software – as all bolstering the case against regulatory uncertainty as a prime suspect for dampening economic recovery.
As we explained previously, low rates of capacity utilization and average hours per employee argue against regulatory uncertainty as a driver of sluggish growth because even if firms were reluctant, because of uncertainty, to make new permanent commitments to staff or investments, there’s no reason why future uncertainty would cause them to under-utilize their incumbent labor force and capacity. Slack demand, of course, would cause them to under-utilize these. Low bond rates and financial volatility argues that financial markets sure don’t see future uncertainty that needs to be priced into interest rates charged to American business. High rates of profit argue that nothing – not regulatory burden or anything else – has hampered business profitability – and high rates of investment in computers and software argues that businesses lack of spending is not the prime cause for sluggish growth in general. It’s amazing that just three years removed from the absolute meltdown of the most conspicuous experiment in market self-regulation over the past decades, the GOP Congress wants to argue that it’s excessive regulation that is stifling the economy, without providing an iota of evidence.
The Treasury’s post is very encouraging in that it signals an administration that has decisively rejected this view and seems determined to follow the evidence in continuing to push for smart, well-studied regulatory changes without worrying that they’re somehow strangling the recovery. In recent weeks, President Obama himself has undertaken some increasingly powerful pushback on that portion of the GOP jobs-agenda that consists simply of “deregulate.” These developments, along with the administration’s proposal and advocacy for the American Jobs Act show a genuinely fact-based commitment to doing what would really work (and ignoring what wouldn’t) to reduce unemployment.
This is the first entry in a series of commentaries on the economic philosophies of the major candidates for the 2012 presidential election. Only candidates who have consistently polled at or near 10 percent are included, which at the start of this project includes Republicans Rep. Michele Bachmann (Minn.), Rep. Ron Paul (Texas), Newt Gingrich, Gov. Rick Perry (Texas), Herman Cain, and Mitt Romney. The series will conclude with President Barack Obama.
A Look at Michele Bachmann’s economic worldview
“In my perfect world, we’d take the 35 percent corporate tax rate down to nine so that we’re the most competitive in the industrialized world. Zero out capital gains. Zero out the alternative minimum tax. Zero out the death tax.” — Bachmann as quoted in the Wall Street Journal
The Minnesota representative’s economic program is vague on specifics but generally conforms to what other Republican candidates have advocated. Bachmann has been most forceful in her desire to repeal Obamacare the Patient Protection and Affordable Care Act (PPACA). Another key plank in her platform is cutting government spending to get deficits under control. Yet, repealing PPACA would actually add to deficit according to the Congressional Budget Office. Conveniently, Mrs. Bachmann dismisses the CBO report and has dismissed other non-partisan reports when careful research counters her assertions. That’s her right, I suppose. It would be nice, though, if she would substantiate her rhetoric. Just saying.
“For my tax plan, I take a page out of one of my great economists that I admire, Ronald Reagan. And under my tax plan I want to adopt the Reagan tax plan. It brought the economic miracle of the 1980s. Why not go with what works? You can’t argue with success. I want to reinstitute the Reagan tax model from the 1980s.” — Bachmann on Fox News
I will assume Bachmann was attempting humor by calling Reagan an economist. It is funny, though, that she doesn’t view the economic performance of the Clinton years as worthy of replicating, despite the fact those years brought higher growth and balanced budgets.
Take a canard, any canard
A recent Bachmann fave is to talk about excessive regulation driving up employer costs and limiting jobs. This notion is, in fact largely wrong and dismisses the benefits of regulation (see this EPI report). Several weeks ago, Bachmann railed against regulation at an Iowa meat packing plant and said the food industry is over-regulated. Interestingly, a well-regarded study that surveyed food industry managers found that only a small minority thought the industry was too regulated, about the same number thought it wasn’t regulated enough, and the vast majority felt the industry was regulated just right.
Declaration of independence
Bachmann and Ron Paul, though signatories to a pledge to condition a debt ceiling increase on so-called “Cut, Cap and Balance” legislation, opposed their party’s efforts to do so. Alas, her ultimate disagreement wasn’t that the cut, cap and balance approach would wreak economic devastation (see this EPI Commentary), but that it wasn’t extreme enough because it did not repeal and defund the PPACA.
“I will demand a return to our Founders’ vision of smaller, smarter government within the enumerated powers laid out in the Constitution.” — Bachmann campaign website
That statement is part of Bachmann’s platform on budgets and deficits and seems to be the guiding principle for her presidential platform. This assessment of the Founding Fathers has long been part of the Republican catechism, yet it is simply not true.
First, the Founders were not a monolithic bloc. Even someone not well versed in the specifics of American history understands the general arc of why the republic was formed: Our constitution, which she asserts is her guiding document, resulted from the failure of the Articles of Confederation, our first governing structure, to deliver necessary results. The Articles made the federal government subordinate to state governments, a circumstance Founder Alexander Hamilton described as “inconsistent with every idea of vigor and consistency.” Hamilton and other founding figures like James Madison, George Washington and Benjamin Franklin were proponents of a federal government empowered to do what was necessary to advance the United States so long as the people consented.
A principal reason, remember, for abandoning the Articles was government’s inability to pay its debts. I say with great confidence that the Federalist founders would have strongly disagreed with Bachmann’s position during the debt ceiling debate.
Don’t get me wrong—the federalists were not always right, nor did they unanimously agree. That’s actually the point. Asserting that there was a singular founding vision for this country demonstrates, at best, poor understanding of our history.
Next in the series: Ron Paul.
Every month, the Bureau of Labor Statistics releases updated data on the employment and unemployment situation facing each state. We, in turn, provide a quick analysis of these new data, a process which has for the most part consisted of finding new ways to highlight how truly dismal this recovery has been for virtually every state. And while the data on employment and unemployment trends present a mixed bag of late — with far too many states making negative progress towards economic recovery, one measure that gets far too little media attention is the state level “jobs deficit” — the number of jobs needed to get back to pre-recession unemployment rates (including the jobs required to return to pre-recession level AND the jobs needed to keep up with population growth since the beginning of the recession).
For states with the greatest population growth, employing a growing population and workforce during a recession can be challenging. The data show that of the 10 states with the greatest population growth since Dec. 2009 (the beginning of the recession), six of those states — Colorado, Arizona, North Carolina, Georgia, South Carolina, and Idaho — fall in the top 10 in terms of the current jobs deficit as a percent of Dec. 2009 employment. As seen in Figure 1, there are distinct regional patterns, with states in the West and Southeast facing the largest jobs deficits as a percentage of pre-recession employment.
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Notably, these states coincide very closely with the states experiencing the greatest economic distress as a result of housing foreclosures, further driving home the fact that each indicator of state economic and fiscal distress is intertwined with others (see, for example, our previous post highlighting a recent IRLE study showing that state budget distress is highly correlated with distress in the housing market, and is not caused by public sector unions).
State governors have been quick to pat themselves on the back when they have positive employment growth to report. Indeed, the governor of Texas has made his track record on job creation a centerpiece of his campaign for the Republican presidential nomination. Yet these jobs deficit numbers highlight the fact that even Texas has a long way to go to erase its jobs deficit. If one looks at the number of jobs required to erase state jobs deficits, Texas has the third largest jobs deficit to address — 654,700 jobs — behind California (1,781,100 jobs deficit) and Florida (973,300 jobs deficit). Figure 2 shows the number of jobs each state must create in order to erase the jobs deficit that continues to impede economic recovery throughout the nation. Only North Dakota has successfully erased its jobs deficit, showing growth of 19,500 jobs beyond the employment level needed to get back to pre-recession unemployment rates.
America works best when Americans work. Since it will take some time to make inroads on the 11.6 million national jobs deficit, state and national leaders should continue extended unemployment insurance benefits, and boost wages for those who are working by increasing the minimum wage. Until every state has successfully returned to pre-recession levels, state and national leaders need to focus like a laser on creating quality jobs that contribute to shared prosperity and a moral economy.
House Majority Leader Eric Cantor (R-Va.) just declined to give a much anticipated speech on inequality at Wharton (apparently giving a speech to the public was a deal breaker). The transcript, however, can be found here.
His opposition to the American Jobs Act was premised in an objection to progressive taxation (masquerading as concern for soup kitchens and the poor). Blocking funds to keep teachers in classrooms—exacerbating the widening teacher gap—will, of course, impede upward mobility. Now, he manages to turn concern about inequality into an argument against progressive taxation:
“Instead of talking about a fair share or spending time trying to push those at the top down, elected leaders in Washington should be trying to ensure that everyone has a fair shot and the opportunity to earn success up the ladder. The goal shouldn’t be for everyone to meet in the middle of the ladder. We should want all people to be moving up and no one to be pulled down. How do we do that? It cannot simply be about wealth redistribution. You don’t just take from the guy at the top to give to the guy at the bottom and expect our problems to be solved.
Instead, we must ensure fairness at every level. We must ensure that those who abuse the rules are punished. We must ensure that the solution to wealth disparity is wealth mobility. We must give everyone the chance to move up. Stability plus mobility equals agility. In an agile economy and an agile society, people are climbing and succeeding.”
So how does the House Republican 2012 budget Cantor pushed through the lower chamber go about giving everyone the chance to move up?
- Slashing Pell Grants
- Slashing food stamps (the old block-grant-and-defund trick)
- Slashing health care for children (Wisconsin Rep. Paul Ryan’s budget would halve federal spending on Medicaid over the next 20 years)
- Repealing the health care expansion to 34 million non-elderly adults
- Immediately cutting discretionary spending, which would cause 900,00 job losses in the first year alone
- Slashing the top corporate tax rates on individuals and businesses to 25 percent, then “broadening the base” to recoup this $2.5 trillion revenue loss through unspecified reforms. Who picks up the tab? Probably low and middle-income households
Two-thirds of the spending cuts in the Ryan budget would come from programs for lower-income families, according to Bob Greenstein. Nothing in the Ryan budget or their revealingly titled “House Republican Plan for America’s Job Creators” demonstrates sincere concern for inequality, poverty, upward mobility, or unemployment.
The Goldman-Sachs macroeconomics team is calling for the Federal Reserve to get really aggressive to help the economy. Paul Krugman, “out of a combination of a sense that support is building for a Fed regime shift and sheer desperation,” gets on board as well. Meanwhile, the Center for Economic and Policy Research’s Dean Baker has been there for a while.
And now the big guns – me and my 400 words in U.S. News and World Report. Really, the pressure has become irresistible now, no?
Macroeconomic Advisers has a new analysis of the Republican alternative to the American Jobs Act.
Bottom line job impact through 2013:
- Obama’s American Jobs Act: +1.3 million
- Republican’s Jobs through Growth Act: zero (or worse).
Read below via Macroadvisers: Man Up: AJ(obs)A vs. J(obs)TGA (emphasis added):
Last week the Republican leadership unveiled the Jobs through Growth Act (JTGA) as a counterpoint to the President’s proposed American Jobs Act (AJA). JTGA includes a Balanced Budget Amendment (BBA), reform of the income tax code, repeal of “Obamacare,” Dodd-Frank, and other regulations, fast-track authority for the president to negotiate new trade agreements, and the easing of restrictions on the exploration for new domestic sources of energy.
Without more detail on the Republican plan, we cannot offer a firm estimate of its economic impact in either the short or long run. However, if what we do know of JTGA were enacted now, we would not materially change our forecasts for either economic growth or employment through 2013.
If actually enforced in fiscal year (FY) 2012, a BBA would quickly destroy millions of jobs while creating enormous economic and social upheaval.Read more
As I wrote in an earlier blog post, the American Jobs Act contains about $35 billion of extremely needed state and local budget relief. It also appears that this will be the first piece of the AJA to reach the Senate.
This is one of the most important pieces of the entire jobs package, and probably the most misunderstood.
First, it’s important to understand that this is not a “bailout,” as Sen. Mitch McConnell (R-Ky.) would have you believe. State budget shortfalls have not been caused by fiscal mismanagement, but rather by the weakness of the national economy, over which any individual state has little power. But because they must balance their budgets, their budget cuts do collectively drag on economy-wide growth. In other words, the justification for state and local budget relief has little to do with helping governments themselves and everything to do with protecting the economy from harm.
Second, state and local budget relief is often criticized as only helpful to government workers. Again, wrong. It’s true that providing budget relief would lead to fewer layoffs of firefighters, police, and teachers. And that’s a great thing—it’s not like the recession has magically caused our streets to get safer, houses more fireproof, and students more self-taught. We still need these public services as much as ever before, and by skimping on them now in the name of budget austerity would just inflict needless pain.
But, according to research I conducted a few years back (research that’s unfortunately still extremely relevant), over 60 percent of the job impact of state and local budget relief would fall in the private sector. There are four primary ways in which state and local budgets in particular support private-sector jobs:
1) Transfer payments: A significant portion of state budgets goes toward transfer payments, such as Medicaid or unemployment benefits. These programs have some overhead costs, but the vast majority of these funds go straight into consumers’ pockets, who then spend the money in the private sector.
2) Private contracting: More and more work is being done on the local level not by government workers, but by private workers on public contracts. See those construction workers repairing that bridge on your way to work? They’re likely employed by a private contractor, but if the government cuts highway spending, poof! Their job is gone.
3) Equipment suppliers: While many services are subsidized or contracted out by the public sector—and thus actually provided by the private sector—others are provided in-house. Public safety and education come to mind. But the funds aren’t all spent on public employee salary and benefits—much of it is spent on equipment and materials as well. Firefighters need hoses and trucks, and teachers need books, computers, and chalk. Everyone needs office supplies. And all those goods are produced by private-sector workers.
4) Re-spending: The first three items in this list show how budget cuts can cause private-sector job loss. True, there will be public-sector job loss as well. But as all these workers lose their jobs—both private and public—they cut back on their spending on food, clothing, durables, and other consumer goods. And who provides consumer goods? Private-sector workers.
Viewing state and local budget relief as only affecting the public sector underestimates just how intertwined the public and private sectors really are. State and local governments are creating a substantial drag on economic growth because they’re being forced to cut back, and that economic slowdown is hurting everyone. Budget relief is thus a highly targeted and effective way to maintain public services and reduce joblessness, both public and private, throughout the economy.
The ongoing Occupy Wall Street movement launched on Sept. 17 and its “We are the 99 percent” campaign highlights that the top 1 percent has fared very well while the 99 percent have not fared so well over the last few decades. (The conservative rebuttal, “We are the 53 percent,” referring to households with positive federal income tax liability, is insultingly flawed and misleading.) OWS’ mantra is easily supported by data, as EPI President Lawrence Mishel highlighted in this week’s economic snapshot.
From 1979 to 2007, the inflation-adjusted pre-tax incomes of the highest-income 1 percent of families (in 2011, the 1 percent are those with incomes exceeding $441,000) increased 224 percent. Think that’s impressive? The incomes of the top 0.1 percent rose 390 percent. So where does that leave the rest of us?
For the bottom 90 percent of Americans, incomes grew just 5 percent over the same 28-year period. Whether it’s the bottom 90 percent or the OWS folks’ 99 percent, this much is clear: We have a winner-take-all economy and the substantial rise in economic inequality has prevented the vast majority from improving their living standards in line with what was possible. The nation’s not broke, even if the bottom 99 percent are.
It’s popular to criticize Keynesian economics by alleging that the Recovery Act was an experiment in fiscal expansion, and because two-and-a-half years later the economy still hasn’t roared back to life, it must have failed.
What this criticism forgets is that the federal government isn’t the only government setting fiscal policy. While the federal government did conduct Keynesian expansionary fiscal policy over the last few years, the states have been doing the reverse, acting, as Paul Krugman put it, like “50 Herbert Hoovers” as they cut budgets and raise taxes. They’re forced to do this because the cratering of private-sector spending which threw the economy into recession blew huge holes in their budgets (in particular with a huge fall in income, sales, and property taxes, and increases in demands on safety-net programs), and just about all of them are required to balance their budgets each year. Overall, states have had to close over $400 billion in shortfalls over the last few years – this is spending power siphoned off from the economy and acts as a significant “anti-stimulus.”
This means that just looking at the amount of federal stimulus that’s been enacted significantly overestimates how much fiscal support has actually been pumped into the economy. In fact, as the Goldman Sachs graph below shows, the net fiscal expansion across all levels of government only lasted through the third quarter of 2009. For the last two years, state and local cuts have been overwhelming the federal fiscal expansion, making overall fiscal policy across all levels of government actually contractionary and creating a net drag on economic growth.
Click to enlarge
What’s needed to reverse this drag of public-sector austerity on growth? The $35 billion for state and local aid that’s part of the American Jobs Act is a good start, as it would help keep states and local governments from being forced to cut further. As the last two years of austerity have shown, this would only serve to further weaken the economy. And if we’re going to get out of this economic hole, we first need to stop digging down further.
Last week, Congress considered two important pieces of legislation that will affect imports and exports; one would provide a substantial boost to the U.S. economy in the near term while the other will be irrelevant at best. The first was S 1619, The Currency Exchange Rate Oversight and Reform Act of 2011. I have estimated that ending currency manipulation with China and other Asian countries could create up to 2.25 million jobs over the next 18 to 24 months, boosting GDP by up to $285.7 billion and reducing the federal budget deficit by up to $857 billion over the next 10 years.
This bill passed the Senate with a strong, bipartisan majority of 63 votes. A similar measure passed the House last year by an overwhelming, bipartisan majority of 349-79. This year, the companion bill to the Senate measure, HR 639 has attracted 225 co-sponsors, also a bipartisan majority. However, the bill faces opposition in the House this year from Republican leadership, who may not allow it to come up for a vote, while the White House has also expressed concerns about the legislation.
Contrast the fate of currency legislation with the package of free trade agreements negotiated by the Bush administration with South Korea, Colombia and Panama. These deals were rushed through both chambers of Congress last week just in time for the visit of South Korea’s president Lee Myung-bak. The Korea and Colombia FTAs were opposed by more than two-thirds of House Democrats, and 64 percent opposed the Panama FTA. Yet, both were approved by the House and Senate and will be signed into law by President Obama later this week.
At best, the administration claims that these deals will support a few tens or hundreds of thousands of jobs that could be created over the next decade (I have estimated that when the effects of growing imports are included, we are likely to lose over 200,000 jobs over the next seven years due to the Korea and Colombia FTAs alone). But the United States has a jobs crisis now. A decade from now, if employment finally recovers, these deals could simply end up moving jobs from one industry to another. FTAs are no answer to the jobs crisis, even in the best case.
Given the jobs crisis, why can’t we pass currency legislation that enjoys broad, bipartisan support? Why are controversial trade deals that will have, at best, a minimal impact on unemployment being rushed through Congress with a full-court press from the White House? The answer is simple. Big business opposes restrictions on China trade because they earn enormous profits on cheap and subsidized imports from China, and because low real wages in China keep a lid on wages of their U.S. workers. And big business favors FTAs, because they make outsourcing easier. So it turns out that the Occupy Wall Street group has it right. When it comes to trade, it’s not about ideology, or politics, it’s about the money.
The Tax Policy Center’s verdict on Herman Cain’s ‘999’ plan is in, and it’s not pretty for the vast majority. Last Sunday, Cain claimed on Meet the Press that his plan would lower taxes on most Americans. Analysis of the plan proves otherwise. The average household would see an $836 tax increase, with 84 percent of households paying more, relative to current tax policies. In this case, that’s what ‘broadening the base’ entails: more households paying much more in taxes.
Mr. Cain said the elderly wouldn’t be made worse off, because the elimination of capital gains taxes would offset the new taxes levied on their consumption, again a wildly unfounded claim. It turns out that 86 percent of elderly households would see a tax hike, which is unsurprising because fewer than 10 percent of households will even pay capital gains taxes this year, again according to TPC. If the vast majority is getting hosed, who’s reaping the benefit?
I recently characterized the ‘999’ plan as the inverse of the so-called ‘Buffett Rule’ that millionaires and billionaires shouldn’t be paying a lower effective tax rate than middle-class households. TPC’s distributional analysis demonstrates just this. The chart below depicts effective tax rates under current policy (blue) and the ‘999’ plan (red) across various cash income ranges.
Under a progressive tax code, effective tax rates should rise with income. TPC treats the ‘999’ plan effectively as a 23.6 percent flat sales tax, which is in fact the final phase of Mr. Cain’s tax plan (TPC’s wonky explanation here and Howard Gleckman offers a more accessible explanation here). Upper-income households consume less of their income than middle-class families, hence lower effective tax rates and a regressive tax code. (Note: the tax code is less progressive than the blue bars suggest because the federal tax code is layered on top of regressive state and local taxes, as Citizens for Tax Justice notes in this report.)
Under ‘999,’ average tax rates would begin to fall for households with income exceeding $200,000. Households with income exceeding $1 million would see their effective tax rate roughly halved from 32.9 percent to 17.9 percent, for an average tax break of $455,000, relative to current tax policies. The top 0.1 percent of filers—those with incomes of roughly $2.7 million and above—would get an average tax cut of $1.4 million, as Jared Bernstein depicts nicely. This is where the benefit of eliminating wealth taxes (i.e., capital gains, dividends, and estate taxes) really kicks in; the highest-income 0.1 percent will pay 49 percent of all capital gains taxes this year.
The American consumer is in no position to lead the economy to recovery. Lower-income and middle-class Americans are burdened by mortgage debt and lost housing equity, underemployment, and a decade of falling real median income. In this context, I fail to see how jacking up taxes and slashing disposable income for 84 percent of the population constitutes responsible tax reform, much less a jobs plan. It’s more along the lines of kick ‘em when they’re down.
Mr. Cain’s ‘999’ plan amounts to highway robbery, not a jobs plan. It’s simple, all right, simply a massive redistribution of after-tax income up the earnings distribution.