Calculating the cost of war

Today marks 10 years since the commencement of the U.S war against Afghanistan. To date, Congress has appropriated approximately $1.3 trillion dollars to prosecute that conflict along with the war in Iraq. This estimate is consistent across varied sources and is readily available from the Congressional Research Service, but tallying appropriated costs understates the true cost of our war efforts. In a nutshell, these figures do not include the debt service to finance the wars, which for the first time in U.S. history have been not been offset by tax increases. They also do not include war expenses hidden in the Pentagon’s base budget, or the costs of providing medical care and disability benefits for the thousands of veterans permanently injured by fighting abroad.

A group of academics has added it all up and estimates that the cumulative costs of the wars are up to $4 trillion and rising. Staggering though that number may be, what appalls me is that their estimate, the most comprehensive publicly available, is ultimately an unofficial one. There has been no official accounting or independent audit of Iraq and Afghanistan war costs so that taxpayers know exactly what value they have received for their money. Contrast that with the federal government’s accounting of the American Reinvestment and Recovery Act (ARRA), which has an entire website that gives laypersons, policy wonks and researchers customized looks at how virtually every dollar of ARRA funds were allocated and spent. Yet for war costs, already well above what was spent on ARRA, we are forced to rely on unofficial estimates.

This lack of transparency weakens our democracy by not allowing Americans to hold our elected officials accountable for decisions they make to engage in conflict. Rep. John Lewis (D-GA) has introduced The Cost of War Act, a bill that takes only 91 words to direct the Department of Defense to publish, on a public website, the cost of our current wars. The value of such an action—especially if the end result is as robust as—would be to force this Congress to have an adult conversation about priorities, spending, deficits and debt. Right now, the only sunlight on federal spending shines on the non-defense, discretionary side, which is dwarfed by defense spending–all of which is discretionary. Exposing it all to the same level of scrutiny would lead to better debate among our policymakers.

To be sure, even if there were a definitive, transparent accounting of the financial obligations incurred by the war efforts, we would still not have an understanding of the true costs of war. What might we have used the money on, if not the wars? Imagine what hundreds of billions invested in infrastructure or education would do to reduce unemployment and increase competitiveness. Or, imagine the economic productivity that the more than 6,000 killed would have generated over their lifetimes. These opportunity costs are either difficult or impossible to calculate, but are nonetheless real. But even if the metaphysical costs of the Iraq and Afghanistan conflicts are too philosophical to consider, it is certainly possible to calculate and publicize the dollars and cents we have spent and continue to spend on our military efforts.

Could currency legislation lead to a trade war? Think again

On Wednesday, Senator Orrin Hatch claimed that the Currency Exchange Rate and Oversight Reform Act of 2011 (S 1619)  (the Currency Reform Act) could cause “a huge trade war … with China.” Nothing could be further from the truth. A large share of our exports to China are intermediate products that are used to produce exports to the United States. If China raised tariffs or otherwise restricted imports of those products, it would simply raise the cost of their own exports to the United States. Furthermore, U.S. imports from China exceed our exports to that country by a ratio of more than 4 to 1. So every dollar in tariffs imposed by China would, in theory, be matched by four dollars in U.S. tariffs on their exports, if China ever tried to engage us in a trade war. But history shows us that they will not.

Senator Hatch also disparaged my latest report on China trade and U.S. employment, but I’ll save that argument for another post. We appreciate his use of our research, and are glad that he felt it necessary to respond.

In Aug. 2005, the Senate passed much a much tougher currency bill sponsored by Senators Chuck Schumer and Lindsey Graham (S. 295) that would have imposed a 27.5 percent tariff on all imports from China if it failed to revalue within 180 days. That bill never passed the House and never become law. Nonetheless, shortly after the bill was approved in the Senate (by a veto-proof majority), China began to revalue, for the first time in more than seven years, ultimately allowing the yuan (or RMB) to rise by 18.6 percent over the next three years. China did not retaliate.

China will not retaliate if the Currency Reform Act becomes law because it will hurt its own exporters if it does, and because China will benefit if it does revalue. If the yuan is allowed to appreciate, it will lower the cost of oil, food and other imported commodities in China. This will put downward pressure on inflation, which has been accelerating rapidly in China this year. Lower fuel and food prices will be particularly helpful to low-income families in China, who are very dependent on these basic commodities.

As shown in my most recent report on China trade and U.S. employment (Table 2), some of the most important U.S. exports to China are basic commodities used in producing exports such as chemicals ($11.6 billion, 13.5 percent of total U.S. exports to China), scrap and second hand goods ($8.5 billion, 10.0 percent) and semiconductors ($6.1 billion, 7.1 percent). Agricultural products ($15.4, 18.0 percent) could be vulnerable, but U.S. imports from China, which could be subject to some trade restrictions, were $363.6 billion and exceeded agricultural exports by a ratio of 23:1 in 2010.

When Senator Hatch referred to a “huge trade war,” most people think of the Smoot-Hawley Act of 1930, which raised tariffs on about one-third of U.S. imports to a peak of 59.1 percent. However, average tariff rates rose to only 19.8 percent in 1933. Canada, our largest trading partner retaliated with higher tariffs on about 30 percent of U.S. imports, and Germany developed a system of autarky (little or no trade).

The Currency Reform Act of 2011 would not impose sweeping, across-the-board tariff increases (as did the Smoot-Hawley Act). It defines a new process for determining which currencies are “fundamentally misaligned,” and defines new procedures for conducting negotiations with such countries including new consequences, especially when a country persistently fails to revalue despite continuing negotiations. These measures are intended to spur negotiated solutions to currency manipulation, not to spark a trade war.

The Currency Reform Act also authorizes the Commerce department to take currency manipulation into account in anti-dumping and countervailing duty investigations. But these changes will affect a small share of total U.S. trade with currency manipulators. Again, there is nothing similar in these proposals to the broad, across-the-board tariffs imposed in the Smoot-Hawley act.

“Trade war” is a term that is easily thrown around in legislative debate and by political commentators. As Fred Bergsten has noted, China’s currency manipulation “is by far the largest protectionist measure adopted by any country since the Second World War – and probably in all of history.” The Currency Reform Act is a measured response designed to bring about a negotiated end to China’s predatory economic policies. China has launched a trade war on the rest of the world. It is important to stand up to the bully, to restore balance to the global trading system and world demand.

The teacher gap

Over the last three years, state and local government employment has dropped by 641,000 as state and local budgets have been squeezed as a result of the recession. With kids heading back to the classroom this fall, it’s worth considering how much of that drop has hit public schools.

Of the decline in state and local government jobs over the last three years, close to half (278,000) was in local government education, which is largely jobs in public K-12 education (the majority of which are teachers but also includes teacher aides, librarians, guidance counselors, administrators, support staff, etc). On the other hand, over the same period, public K-12 enrollment increased by 0.6 percent (using the actual and projected enrollment growth rates found in Table 1 here). Just to keep up with this growth in the student population, employment in local public education should have grown at roughly the same rate, which would have meant adding around 48,000 jobs. Putting these numbers together (i.e., what was lost plus what should have been added to keep up with the expanding student population) means that the total jobs gap in local public education as a result of the Great Recession and its aftermath is around 326,000.

This decline means not only larger class sizes, but also fewer teacher aides, fewer extra-curricular activities and a narrower curriculum for our children. Furthermore, this number almost surely understates the real gap. Between 2008 to 2010, the number of children living in poverty increased by 2.3 million, and is likely even higher today. Increased child poverty increases the need for services provided through schools. Instead, public schools have fewer personnel and fewer resources to educate more students, and more students with greater needs.

Quick Take: Miserably low job growth

The unemployment rate is for the moment holding steady at 9.1 percent, but at the current rate of job creation, the unemployment rate will soon begin to rise again. We are mired in high unemployment with miserably low job growth. This country has 14 million unemployed people, and the job growth rate has unmistakably slowed down since the spring.


This morning’s data release shows that 103,000 jobs were added in September. That number, however, includes around 45,000 Verizon workers coming off the picket lines, so the net new jobs the economy created in September was actually around 58,000. This level of growth is in line with the dismal average of the last four months, which was 64,000, and that was a slowdown from the not-doing-much-more-than-keeping-up-with-population-growth average of 123,000 of the prior 14 months.

The H-2B guestworker program puts downward pressure on American wages

This past January, the Department of Labor (DOL) published a final rule establishing a new wage methodology for determining the appropriate wages to be paid to guestworkers in the “H-2B” program—a temporary immigrant guestworker category intended to help employers fill labor shortages. Among other things, U.S. law and regulation require that H-2B workers only be authorized to enter and work in the United States if the H-2B worker’s employment will not be “adversely affecting the wages” of United States workers. The DOL’s new rule will require that H-2B workers receive the average wage paid to all workers in the same occupation and geographical region in order to prevent downward pressure on the wages of U.S. workers. But for now, the rule’s implementation has been delayed—and a lobbying firestorm by businesses and members of Congress, led by Senator Barbara Mikulski from Maryland—has put its survival in doubt.

The chart below shows the difference between the hourly rate that H-2B crab pickers and landscape workers are currently paid in Maryland under the old (and still current) rule, and the statewide average for all workers in the given occupation, which is what workers should be paid in order to prevent wages from being depressed for U.S. workers. H-2B crab pickers and landscapers are underpaid by $4.82 and $3.35 per hour, respectively.

Click figure to enlarge

These data suggest that employers have been using the H-2B program as a way to degrade the wages of U.S. workers. H-2B crab pickers in Maryland (i.e., workers who literally pick the meat out of a crab, like this), who fall under the occupational category of “Meat, Poultry, and Fish Cutters and Trimmers” above, are paid the federal minimum wage ($7.25), when the state-wide average is $12.07 per hour.

Another way to look at this is that a crab picker earning the state average will earn $25,105 over the course of a year, which is above the poverty line for a family of four ($22,113). But current H-2B crab pickers only earn $15,080 a year—which is about $7,000 below the poverty line. For landscapers in Maryland, the results are similar—in both cases the increase in hourly wage will literally lift the H-2B worker out of poverty.

You can read more about the H-2B program and the Labor Department’s wage rule in my new extended commentary, H-2B employers and their congressional allies are fighting hard to keep wages low for immigrant and American workers.

So’s your mother. And Reagan. And you’ve never run a business!

A few days ago, Paul Krugman noted the evidence-free “rebuttal” offered up by the American Enterprise Institute to Larry Mishel’s takedown of the “regulation is what’s holding back recovery” argument. The title of Krugman’s post -“So’s your mother. And Reagan” – captured the useful content of what I generally hear from those engaged in hand-waving about “job-killing regulations.”

On Tuesday, though, I got to hear another argument from Peter Schiff on John Stossel’s show. I was making the case that it’s hard to see how regulation is driving up costs and robbing firms of profitability given that profit margins (unit profits as a share of total costs) were at their highest  levels in either 42 or 45 years (depending on whether you looked at pre- or post-tax rates*). And, as Brookings’ Gary Burtless has pointed out, if you’re profitable now and fearful of future regulations, then you’d be doing everything you can to produce goods and services for sale now rather than later; we should see strong employment growth in the short-term.

Now, what would keep firms that were making record profits on each unit shipped from deciding to ship even more units and hire more workers to do so? A shortfall of demand (i.e., not enough customers) maybe?

Hearing this argument, Schiff made a careful, empirically-based case for why I was wrong started sneering that I had never run a business. It’s true, I haven’t. But I can look at data.

*The data came from Table 1.1.15 of the National Income and Product Accounts (NIPA) from the Bureau of Economic Analysis – Price, Costs, and Profit Per Unit of Real Gross Value Added of Nonfinancial Domestic Corporate Business.

Click figure to enlarge

China’s People’s Bank: The lady doth protest too much

On Monday, the Senate agreed to move ahead with debate on the China currency bill, approving a petition to proceed on the measure by a 79-19 marginthis morning they voted to proceed to a final vote, also by a strong margin. Predictably, the People’s Bank of China responded by claiming that the yuan (or RMB) has appreciated “greatly” and is close to a balanced level. The best indicator that China is manipulating its currency is simply that it must buy hundreds of billions of dollar in U.S. assets each year to keep it from moving ever higher. That’s how we know that they haven’t done enough.

China’s purchases of Treasury bills and other types of foreign exchange reserves have accelerated in the past year, as I showed on Monday. In the past 12 months (ending June 30, 2011), they acquired nearly $730 billion in additional reserves. Between 2005 and 2010 their reserve acquisitions averaged between $400 and $450 billion, which indicates that the yuan is even more undervalued than it was a year ago. This is true despite the yuan’s real, inflation-adjusted appreciation of 7.4 percent in the past year.

William R. Cline and John Williamson of the Peterson Institute have produced some of the best estimates of China’s currency manipulation. In a series of annual reports on fundamental equilibrium exchange rates (FEERs), they have estimated that China’s currency manipulation increased from 24.2 percent in 2010 to 28.5 percent in 2011, despite the fact that China’s real exchange rate appreciated over the past year. Three factors explain why China’s estimated FEERs increased in 2011.

First, the International Monetary Fund has estimated that China’s global current account surplus (the broadest measure of its trade balance) will more than double from $305 billion in 2010 to $852 billion in 2016 (an increase of 179 percent), as shown in the graph below.  There is widespread agreement among the G-20 leaders (including China) that global trade flows must be rebalanced to help end mass unemployment around the world. These IMF predictions show that unless China sharply revalues, world trade flows will become even more distorted than they are today. Among the top five currency manipulators identified by Cline and Williamson (China, Malaysia, Hong Kong, Singapore, and Taiwan), China is responsible for the vast majority (83 percent) of the estimated global surpluses of these currency manipulators in 2016.

Click figure to enlarge

Second, the IMF predicts that China’s current account surplus will rise from 5.2 percent of GDP in 2011 to 7.2 percent in 2016. Cline and Williamson project in their latest research China’s that current account will rise even faster, to 7.8 percent of GDP in 2016. China’s rapidly growing GDP, combined with a rapidly growing trade surplus as a share of its GDP, and its stubborn addiction to currency manipulation will, if unchallenged, destabilize both the U.S. and global recoveries, as suggested by the IMF’s own forecast of global trade imbalances shown above.

The final nail in the case against the People’s Bank is its own massive and growing accumulation of foreign exchange reserves, as noted above. China has invested trillions of dollars to prevent the appreciation of their currency to a fair market value. China’s currency manipulation is a fundamental threat to the U.S. and world manufacturing system. It artificially suppresses the value of the yuan, subsidizing China’s exports to the United States and raising the cost of U.S. exports – both to China and to every country where U.S. exports compete with Chinese products. Enough is enough. It’s time to get tough with China and other currency manipulators.

Progressive counter-pressure for the Fed?

The Occupy Wall Street (OWS) protests have been spreading. In Chicago, protestors have gathered around the Chicago Federal Reserve Bank. Again, the protestors seem to have chosen an awfully good symbolic venue – over the past two years, the Fed has been under ferocious political attack from conservative politicians who want them to stop trying to reduce unemployment with monetary policy. If the Occupy Chicago protests provide counter-pressure from more progressive perspectives, this would be a great thing.*

We’ve already noted the letter from four GOP leaders to Federal Reserve Chairman Ben Bernanke last month demanding that he declare surrender in trying to help the faltering economy. This is just the latest in what has been a pretty remarkable effort by conservative politicians to stop the Fed from trying to boost the economy and to convince it to fret about the phantom danger of inflation.

It’s pretty telling that the best that prominent Democratic politicians have managed in response is some hand-wringing that such criticisms threaten the sanctity of central bank independence – essentially demanding that the GOP “leave Ben Bernanke alooooone!”

However, as Mike Konczal notes, even in the best of times, central bank independence as practiced by the Fed should hardly be a prime progressive demand. The Fed’s Open Market Committee – the body that sets the monetary policy direction of the economy – contains 12 slots. Seven of them are for Fed Governors (there are currently 2 vacancies on the Board of Governors), who are generally either economists or policymakers with some expertise in issues the Fed confronts. But five are set aside for presidents of the Fed’s regional reserve banks. These presidents are picked by the board of directors for each regional bank – and these boards are comprised of financial-sector (commercial bank) executives. Essentially, the finance sector gets to pick 5 of the 12 voting members of the FOMC. If one thinks that the interests of the financial sector are not necessarily the same as those of, say, unemployed workers (and I think they’re not) – perhaps the financial sector is more scared of inflation and less scared of unemployment – then central bank “independence” should probably be treated as less sacrosanct than it currently is in D.C.

Imagine, for example, that somebody demanded that the AFL-CIO get 5 voting slots on the FOMC. That would, of course, be considered absolutely crazy by those determined to preserve central bank independence as a principle (i.e., the vast majority of professional policymakers and analysts inside the Beltway). Of course, in practice, this would mean an FOMC that tried much, much harder to fight unemployment than the one we currently have, so crazy sounds pretty good to me.

Worse, this ingrained deflationary bias of the Fed is being reinforced in the current crisis by conservatives who want to abandon all the policy measures (fiscal, monetary and exchange-rate) that could actually help reduce joblessness. Some lonely (and admirable) voices calling on the Fed to do more are out there, but they’re few and far between (and sometimes working for the Bank of England, instead of the Fed).

Finally, however, there seems to be a little pushback. Besides Occupy Chicago, Massachusetss Representative Barney Frank wants to take away the voting power of the five rotating regional banks and replace them with political appointees that must be approved by the Senate. Given that the political appointees of the current Fed have consistently shown more concern over unemployment than their regional bank colleagues, this would be a good (if small) first step to privileging democracy over Fed “independence.”

*It’s true that the president of the Chicago Fed has been admirably aggressive in calling for more Fed action to reduce unemployment, especially relative to his other regional bank presidents. So, maybe protests can follow in Dallas, Minneapolis, and Philadelphia?

Eric Cantor cares about poverty?

Via Roberton Williams over at TaxVox, I see that House Majority Leader Eric Cantor has a surprising objection to President Obama’s American Jobs Act (AJA) and its pay-fors: it will hurt soup kitchens and Americans living in poverty. How? By taxing upper-income individuals, of course. Thank goodness compassionate conservatism isn’t dead.

As I noted earlier, the largest component of the revenue offsets for the AJA would limit the rate at which itemized deductions and specified above-the-line deductions and exclusions reduce tax liability for households with adjusted gross income above $200,000 ($250,000 for joint-filers). These tax expenditures increase in value with one’s marginal tax rate. The president’s proposal would cap the value at 28 percent, slightly reducing the benefit from 33 percent or 35 percent for these upper-income tax-filers. Cantor objects to the proposal on the grounds that it would further “tax charitable donations to soup kitchens, churches, and cancer research centers.”

Williams makes two excellent points: if the tax policy objective is a higher incentive to charitable giving, Cantor should 1) not object to restoring the top marginal tax rate to 39.6 percent, which he does, and 2) not support lowering the top marginal tax rate to 25 percent, which he also does. Indeed, the House Republican 2012 budget would cut both the corporate tax rate and top individual tax rate to 25 percent at a revenue loss of $2.0 trillion(some of which is theoretically offset by eliminating unspecified tax expenditures—perhaps perennial GOP targets such as the Earned Income Tax Credit), on top of continuing the regressive Bush-era tax cuts to the tune of $3.8 trillion.

From Flickr Creative Commons by republicanconference

But the Republican budget reveals much deeper hypocrisies when it comes to the interests of poor and working families than the marginal tax rate. Bob Greenstein of the Center on Budget and Policy Priorities estimated that two-thirds of the spending cuts in their budget come from programs for lower-income Americans. Food stamps are cut and federal spending on Medicaid—health care for the disabled, poor children, and poor seniors—is slashed in half over the next 20 years. Medicaid alone would be cut by $1.4 trillion this decade.

Broadly speaking, Cantor objects to a revenue offset that would only affect 2.2 percent of the population, according to the Tax Policy Center, most of whom earn at least tenfold the poverty threshold for a family of four. More critically for impoverished Americans, the $447 billion in near-term job creation would boost employment by 1.9 million jobs and reduce the unemployment rate by 1.0 percentage point next year, according to Mark Zandi of Moody’s Analytics. In 2010, the federal poverty threshold for a family of four was $22,113; a family with earned income at this level would receive a payroll tax cut of $686 under the American Jobs Act, but not under the House budget. Unemployment insurance kept 3.2 million Americans out of poverty last year; the American Jobs Act would extend emergency unemployment benefits, but the House budget would not. Soup kitchens aside, putting Americans back to work and strengthening, rather than eviscerating, the social safety net is the way to address rising poverty.

Cantor is correct that the tax incentive for charitable giving would decline, although only for 2.2 percent of households. Expressing this concern in the name of the poor is, however, irreconcilable with the budget he steered through the House of Representatives, which would represent a massive redistribution of wealth from low- and middle-income families to the so-called “job creators.”

“That’s where the money is”

Just a quick reminder why the actual Wall Street is an attractive place for those wanting to protest the direction of economic policy. When asked why he robbed banks, Willie Sutton famously allegedly [ed. note – Snopes tells me that Sutton denies having said this and that it was an “enterprising reporter” who attributed this quote to him. Shoot. Well, it’s a good line so I’m going to stick with it, caveat emptor and all that) replied, “That’s where the money is.”

The figure below shows the share of all corporate-sector (about 60 percent of the overall economy) salaries and profits (and profits broken out by themselves) that are claimed by the finance sector. After a very brief dip in 2008, the recovery has been fast and has continued (accelerated?) the trend of finance claiming an ever-larger share of the economy. It also shows the share of the overall economy (GDP) earned by finance – and this too has reached its highest level on record.

So why go to Wall Street to demand shared prosperity?

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American Enterprise Institute authors say Social Security and pensions are a bargain

In a report for the Ohio Business Roundtable, AEI’s Andrew Biggs and Jason Richwine estimate the cost to private-sector employers of Social Security and traditional pensions at just 2 percent of wages. This will come as a surprise to employers used to paying roughly three times as much for this coverage, as well as anyone who’s followed Biggs’ work over the years and knows he’s no fan of either Social Security or defined benefit pensions.

But this time, Biggs isn’t promoting Social Security privatization or 401(k)s. Instead, he and Richwine are trying to make the case that government workers in Ohio are paid a whopping 43 percent more than workers in the private sector, attempting to counter an EPI study that found government workers were, if anything, slightly underpaid. To do this, Biggs and Richwine systematically low-ball the pay of private-sector workers and inflate that of teachers and other state and local government workers in Ohio, who aren’t covered by Social Security.

Studies published by the Center for Economic and Policy Research and the Center for Retirement Research at Boston College support Rutgers University Professor Jeffrey Keefe’s research for EPI showing that public sector workers have lower salaries than comparable private sector workers and receive the same, or slightly lower, compensation once benefits and hours are factored in.

So how do Biggs and Richwine arrive at a 43 percent pay premium for government workers in Ohio? As Keefe and Amy Hanauer of Policy Matters Ohio explain, Biggs and Richwine selectively alternate between the actual cost to employers of providing fringe benefits and their supposed value to employees. So, for example, they magnify the cost of public-sector retiree health benefits by using the cost of purchasing insurance on the individual market, but they don’t do the same for life insurance provided by Social Security. According to Keefe, they also double count the cost of retiree health insurance by ignoring the fact that it’s paid for through pension contributions in the public sector, while falsely assuming that no private-sector workers receive these benefits.

Biggs and Richwine also claim that job security should be valued at 9 percent of earnings for government workers–12 percent once their supposedly higher pay is factored in–even though the evidence that state and local government workers actually have more job security is weak. Last but not least, Biggs and Richwine more than triple the cost of public pensions by projecting a very low rate of return on public pension fund assets, a favorite theme of  Biggs.

Truly shared sacrifice includes Wall Street

The Occupy Wall Street (OWS) protests have stretched into their third week and seem to be growing in strength and numbers. The protestors have been generally mocked by press coverage for having an inchoate message. Though this general criticism is going to be generally true of any large gathering, it’s worth noting that failure of message discipline has hardly been the death-blow to other protest movements that tend to get treated much more respectfully by the press. Further, a simple root of their protest is that U.S. economic policy is unfairly tilted towards the already affluent – and I surely would not disagree with that.

If it was decided, however, to turn the attention garnered by the OWS protests into a single policy “ask” (not saying this would be a good decision – I know nothing about effective organizing!), I’d probably nominate the financial speculation tax (FST).

Even a very small FST (say 0.25 percent on the sale or purchase of a stock, with rates on other financial assets set so as to minimize tax-arbitrage opportunities) has the potential to raise significant amounts of revenue very progressively and to reduce short-term, destabilizing financial speculation while imposing only trivial costs on longer-term, productive investments. Investing in America’s Economy, EPI’s long-run budget blueprint, proposed an FST that the Tax Policy Center estimated would raise $821 billion over the next decade—revenue that would finance more job creation, ease budgetary pressures elsewhere, and help to eventually stabilize public debt as a share of the total economy.

From Flickr Creative Commons by Mathew Knott

To put the cost of the tax in perspective, it is important to realize that an FST of this size would raise today’s transactions costs for financial speculation by less than they’ve fallen (due to market innovations and technology) since the 1980s – and nobody in that decade seemed to think that high financial transactions were strangling market participants’ ability to engage in trading.

In short, such a tax would raise money from a sector (finance) that has profited enormously in recent decades (aided by government guarantees) while too much of the rest of the economy has lagged. It would also provide a progressive and extraordinarily efficient way to raise tax revenue – providing a much less painful way to resolve much of the debate over long-run budget sustainability. Consequently, the policy is gaining momentum on the American left and abroad. In budget proposals for the Peter G. Peterson Foundation’s Solutions Initiative, the Center for American Progress and the Roosevelt Campus Network also proposed FSTs, as did the Congressional Progressive Caucus’s People’s Budget. The European Union also appears to be headed towards a uniform FST.

Given that many of today’s most enthusiastic deficit-hawks like to talk about “going after sacred cows” and “shared sacrifice,” it is odd indeed that an FST doesn’t loom larger in the U.S. fiscal policy debate, particularly among the deficit-obsessed political centrists. Maybe the OWS crowd really does have a point about how economic policy is made.

The bad economy is not just a state of mind

Robert Samuelson argued this past Sunday that lack of confidence is a factor holding the economic recovery back – pointing to low rates of consumer spending and business investment as evidence. One hears (or a variant – that it’s “uncertainty” holding back the economy) a lot, so it’s important to note that there’s no evidence for it.

Larry Mishel has shown that the argument that business uncertainty about regulation and taxation is holding back the recovery has no evidence behind it. One thing he could’ve added to this is the fact that capacity utilization rates – think of them as the employment rate of the nation’s capital stock rather than its labor force – remain very low – 77.3 percent in August, compared to a non-recessionary average of 80.8 percent between 1979 and 2007.

The uncertainty argument is supposed to be about firms not wanting to make commitments to future costs – so they eschew investment and long-term hiring. But, as Larry’s paper shows, they’re not eschewing investment (equipment and software investment is currently actually outperforming the last three recoveries). Firms are also not using their current stock of productive inputs – the incumbent workforce and plant and equipment – at anywhere near full capacity. What does uncertainty have to do with not working your current workers as many hours per week as you did before the recession or running your factories as long?

What would keep businesses from working their labor force as hard as they did pre-recession or running factories at the same pace? Lack of demand – the other (and actually convincing) explanation for why the recovery remains so sluggish.

Samuelson (and others) also points to consumers’ lack of confidence as inhibiting recovery – and this could, in theory, be the cause of weak consumer spending. Of course, the $8 trillion reduction in wealth erased by the housing bubble’s burst could explain this as well (and does a much better job of it).

Further, it’s important to note that today’s levels of consumer spending and saving do not look obviously “too low” by any measure. The jump in personal savings from just about 1.5 percent of disposable income in 2005 to over 6 percent by the end of 2008 was a large driver of the recession – households, seeing themselves much less wealthy because of the housing bubble’s burst decided to stop spending so much and this was a key driver of the downturn. But, a 6 percent personal savings rate may just be the appropriate one for households that don’t see their assets inflated by stock or housing bubbles. From 1979 to 1996 (right before the stock market bubble really reached absurd levels) the personal savings rate averaged 7.6 percent.

So, is behavior by today’s consumers really about excessive “fear?” Not obvious to me. And is today’s corporate behavior evidence of excessive risk-aversion, or of just poor sales?

Again – the traditional Keynesian diagnosis of deficient demand is old and has gotten boring to many. But it has the virtue of actually being correct. Today’s sluggish economy simply needs more spending (and government is the only sector likely to provide it in the near-term), not pep talks.

Poll shows support for increasing Social Security benefits

All the talk about the supposed need to cut Social Security hasn’t had a noticeable impact outside the Beltway, where support for the program remains strong across demographic and political lines. A survey commissioned by the Institute for Women’s Policy Research and the Rockefeller Foundation found that 61 percent of women and 54 percent of men support increasing Social Security benefits. That’s perfectly rational, considering that benefits replace a shrinking share of pre-retirement earnings even without additional cuts.

While women and Democrats show the strongest support for social insurance programs, even Republican men oppose Social Security and Medicare cuts. And contrary to the stereotype that people care only about themselves and aren’t willing to pay for government programs, when surveyed about taxes the most enthusiastic response was to the following statement: “I don’t mind paying Social Security taxes because it provides security and stability to millions of retired Americans, the disabled, and the children and widowed spouses of diseased workers.” Roughly nine in 10 women (88 percent) and eight in 10 men (82 percent) agreed with that sentiment, even more than the majority who said they didn’t mind paying Social Security taxes because they knew they themselves would receive benefits when they retired.

The Great Recession and bursting of the housing and stock market bubbles has only strengthened support for social insurance programs, which is not surprising since we tend to take such programs for granted until we really need them. Only 37 percent of women and 44 percent of men now expect to maintain their standard of living in retirement, whereas a majority of both women and men thought their retirement savings had been adequate before the recession (they were probably wrong, but that’s another story). This doesn’t just reflect generalized anxiety: while the share of respondents who worried about ending up in a nursing home increased only modestly since 2007, the share who worried about not having enough money to live on and not being able to afford health care in retirement jumped markedly, as did the share worried about Social Security being cut back or eliminated (63 percent of women and 54 percent of men are now worried about Social Security cuts, up from 55 percent of women and 41 percent of men in 2007).

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China’s currency manipulation reached record level in June 2011

In light of this afternoon’s cloture vote in the Senate on China’s currency bill, I think it would be helpful to go over why the bill is so important. Simply put, unlike most bills that proponents claim are about “job creation,” this one actually is. Since it entered the World Trade Organization in 2001, China has engaged in massive intervention in currency markets, buying U.S. dollar-denominated assets to boost the value of the dollar and keep their own currency artificially cheap. This acts as a subsidy to U.S. imports from China, and it raises the cost of U.S. exports — both to China and to every country where U.S. exports compete with goods coming from there.

Between 2007 and 2010, China invested nearly $450 billion per year in Treasury bills and other foreign exchange reserves to keep its own currency cheap. In the year ending June 30, 2011, China’s purchases of foreign exchange surged to nearly $730 billion, and its total holdings reached $3.2 trillion, as shown in the figure below. Roughly $2.2 trillion (70 percent) of China’s foreign exchange reserves are held in Treasury Securities and other dollar denominated assets.

Click figure to enlarge

The best estimates arethat the Chinese currency, known as the yuan (also known as the Renminbi, or RMB), is undervalued by approximately 28.5 percent, relative to the dollar.  China’s currency manipulation has compelled others to follow similar policies in order to protect their relative competitiveness and to promote their own exports. Hong Kong, Malaysia, Taiwan, and Singapore have currencies that are undervalued by 27.5 percent to 38.5 percent against the dollar.

In The Benefits of Currency Revaluation I showed that full revaluation of the yuan and other undervalued Asian currencies would improve the U.S. current account balance by up to $190.5 billion, increasing U.S. GDP by as much as $285.7 billion, adding up to 2.25 million U.S. jobs over the next 18-to-24 months, and reducing the federal budget deficit by up to $857 billion over 10 years. This change to the current account balance would also help workers in China and other Asian countries by reducing inflationary overheating and increasing workers’ purchasing power.  Revaluation is a “win-win” for the global economy.

We’re not in Mayberry any more

As an advocate for education policies to help children living in poverty narrow the achievement gap, I, like many others, tend to think of the Bronx, Newark, and East St. Louis as epicenters of stubborn rich-poor and white-Black achievement gaps. But the Great Recession has put millions of children living in suburbs and even in the bucolic “heartland” of America in dire educational straits. And as a recent New Yorker article illustrates, this reality has been festering for a decade, with origins long before the housing and economic busts of the past few years.

So-called education reformers and the “experts” on whom they rely point to unions, lazy teachers, and uninspired principals as the culprits. Yet, 50 years of rigorous evidence make clear the vicious impact of poverty and its various familial stresses on student well-being. This body of research is backed in real time by the inability of No Child Left Behind, Race to the Top, and other policies focused on standards-and-accountability measures to substantially narrow the gaps.

George Packer’s assertion that since September 11, “the country’s problems were left to rot” is all-too clearly played out in Mount Airy, N.C., the town that inspired Andy Griffith’s Mayberry. This American small town is indeed, Packer says, typical, but not in any ideal way. Rather, Surry County’s job losses have spread since 9/11 from former textile workers to veterans newly back from multiple tours in Iraq and Afghanistan. Packer concludes ominously that “You were your kids’ hero when you went, but three years later, when you might be losing your home or you’re impoverished, you might not be your kids’ hero anymore.” Long-term unemployment, unstable housing, insufficient food and stressed-out home environments also mean that you won’t be the same parent or teacher anymore. Mayberry, welcome to the Bronx.

Really, that’s all you got?

Over at the American Enterprise Institute blog, James Pethokoukis responds to my recent paper, Regulatory uncertainty: A phony explanation for our jobs problem, and blog post. I presented evidence that trends in investment, private-sector job growth, unemployment, and work hours were not inferior in this recovery compared to other recent job-challenged recoveries. That is, I noted that this recovery fares well relative to the recoveries under George W. Bush and George H. W. Bush. If you look at what employers are doing rather than what trade associations are saying, you would see that uncertainty about regulations and taxation has not impeded job growth. What we are seeing is what you expect given the slow growth in GDP.

What was especially curious to me is that Pethokoukis has no counter-argument or data other than, “But go ahead and contrast the Obama recovery, instead, to the Reagan recovery where private sector jobs grew 9.9 percent during its first two years.” Really, that’s it. The whole evidence that uncertainty is holding back jobs is that job growth in the Reagan recovery was a “V” recovery. Actually, the first two years of the recovery starting in Nov. 1982 was 9.4 percent, but what’s 0.5 percent job growth between friends? How does 7.2 percent private-sector job growth in the Gerald Ford-Jimmy Carter recovery fit into his story?

Pethokoukis is scrupulous enough to note that I do provide a good reason for the better job-performance in the Ronald Reagan recovery – that recession began with the short-term policy rates controlled by the Federal Reserve at 19 percent! There was plenty of room to use conventional monetary policy to get the economy moving. This time, the economy entered recession with these rates just over 4 percent. Oh, and the fact that this recession was caused by a financial crisis – something that research has shown again and again produces much slower recoveries.

Anyway, this just seems to confirm to me that there is no “there there” in the economic case that uncertainty about regulation and taxation is holding back job growth. I looked for any analysis that those articulating this view could point to and did not find any. I guess they do not have any over there at AEI.

Nine-nine-nine nonsense

Presidential candidate Herman Cain has made quite a splash with his “999” plan, but the catchiness of the proposal’s branding belies a subtle attack on low- and middle-income working families (and a not-so-subtle windfall for financiers and businesses).

Along with efficiency, the core principal behind a progressive tax code is one of equity—that the distribution of the nation’s tax liability should take into account one’s ability to pay. In other words, Americans with higher income should pay a higher share of their income in taxes than those with lower income. Mr. Cain’s plan would radically jettison this principle of equity along with the rest of the code.

Mr. Cain advocates a 9 percent tax on each of earned income, corporate income, and consumption. This would entail two changes: (1) a drastic cut in corporate and individual income taxes for high-earners, and (2) an increase in income and consumption (sales) taxes for low- and some middle-income households. Additionally, the proposal would eliminate all taxes on capital gains, dividends, foreign profits, and large estates and gifts (objectively the most progressive federal tax)—again a boon to the highest-income and/or wealthiest Americans. In a second bait-and-switch, the diminished taxes on earned income and corporate income would eventually be swapped for even higher taxes on consumption (the so-called “fair tax”).

Indeed Mr. Cain’s plan is just about diametrically opposed to Warren Buffett’s plea to stop coddling multi-millionaires and billionaires, many of whom pay lower effective tax rates than middle-class households because of the preferential tax treatment of investment income. It is hard to fathom a hedge fund manager paying a higher effective tax rate than a secretary under Mr. Cain’s plan; financiers would be able to receive all of their compensation as tax-free investment income and taxable consumption presumably accounts for a smaller share of income (certainly a smaller share than that of Mr. Buffett’s secretary). The windfall from eliminating investment income taxes would accrue to the top 1 percent of earners, who will pay over 70 percent of all capital gains and dividends taxes in 2011.

In recent congressional testimony, Syracuse University professor and tax expert Len Burman stated that “the biggest loophole is the lower rate on capital gains” and that “tax breaks on capital gains undermine the progressivity of the tax system.” Rebuilding an equitable tax code necessitates curtailing, rather than exacerbating, the preferential tax treatment of investment income over work income. That does not mean equalizing taxes on investment and work income at zero rates while amplifying a flat consumption tax, which would be even more regressive.

Mr. Cain’s tax proposal only makes sense if you believe that the problem with the current tax code is that low- and middle-income households have it way too good, and they should give more of their income to those poor Americans making more than half a million dollars a year.

Government losses a big part of state unemployment increases

On Monday, The New York Times released a nice graphic showing the changing trends in state unemployment rates immediately before the recession, immediately after the recession, and today. As my colleague Doug Hall explains in a recent blog post, the graphic highlights the lack of significant job growth for the country as a whole, and the exceptionally dire conditions for 11 states in particular. Eight of these 11 states have actually experienced an increase in their unemployment rate since June 2009: Alabama, California, Florida, Georgia, Illinois, North Carolina, and South Carolina.

To get a better understanding of what’s driving the uptick in unemployment for these eight states, I broke down the changes in total employment by major industry category from June 2009 to Aug. 2011. If you calculate the number of jobs lost in each major industry as a percentage of the total jobs lost for each state—excluding all industries that gained jobs—the numbers are very telling. In five of the eight states (California, Georgia, Illinois, North Carolina, and South Carolina), the largest proportion of jobs lost was in the government sector. In both California and South Carolina, more than half the jobs lost were in government. Alabama, Florida, and Nevada saw their largest job losses in construction, which might be expected given the enormous losses those three states took when the housing bubble burst.

States nationwide have had to deal with severe budget shortfalls, and many state legislatures have turned to massive budget cuts as the cure-all. With so many states struggling to regain jobs lost during the recession, adding public sector workers to the ranks of the unemployed is clearly a step in the wrong direction. Moreover, addressing budget shortfalls through budgets cuts not only decimates the public sector workforce, but it also devastates the private sector. (My colleague Ethan Pollack’s research shows that, “for every dollar of budget cuts, over half of the jobs and economic activity will be lost in the private sector, for a number of reasons,” including the fact that a significant portion of state spending is  on goods and services supplied by the private sector.)

Click table to enlargestate_jobloss_by_industry

Are hedge-fund managers making my health insurance premiums expensive?

The Kaiser Family Foundation’s annual survey of employer health-insurance was released yesterday, and it showed a 9 percent increase in premiums for employer-sponsored premiums.

The average family plan now costs over $15,000. Employees kick in just over $4,000 directly, but most economists will tell you that they actually “pay” the remainder in the form of wages that are lower than they would be if this insurance was not provided by their employer. This is, as everybody knows, a staggering cost for most American families. And, while year-to-year changes in premiums may differ from underlying health care costs, the enormous increases in health spending in recent decades can pretty much be explained by these underlying medical costs – so if we want premiums to stop rising so fast, we better do something about these underlying costs.

One would be remiss to not point out that America’s largest single-payer insurance system (Medicare) actually has done a much better job of controlling health care costs than the private system that provides employer-sponsored insurance. Take the most recent estimates comparing per beneficiary costs in Medicare to costs of comparable benefits in private plans (table 13 here). If these private costs had matched the slower growth rate of Medicare over the past three decades, that $15,000 family plan would cost just over $10,000 today. And most experts think that there’s plenty to be done to even restrain Medicare’s costs. In short, there seems to be a lot of room to figure out how to reduce cost-growth – and very good reasons (about $5,000 worth, in the case of family premiums) to do it.

But, since the point of this post is more raw speculation, it’s also useful to think about the role of rising economic inequality in driving up health care costs. A recent paper in Health Affairs (gated, sorry) by Miriam J. Laugesen and Sherry A. Glied demonstrates that physician salaries (particularly specialists – orthopedists, in their study) are significantly higher in the United States than compared to even those in our rich industrial peers. The authors make the smart point that, “One explanation for the higher incomes of U.S. physicians may lie in the broader U.S. income structure. The share of income received by people in the top 1 percent of the U.S. income distribution far exceeds the corresponding share in the comparison countries.”

The intuition is simply that prospective doctors need to earn more as doctors in the United States in order to keep them from pursuing high-salary careers in finance, law, etc. The broader point is that if doctors are going to be in the upper reaches of the income distribution (which seems fine – they are well-trained, accomplished people), and if policies are pursued that drive vastly disproportional growth in these upper reaches, then this means my insurance premiums are going to get expensive; one person’s income is another person’s cost. This point applies to doctors’ salaries as well as to many other aspects of the medical-industrial complex (pharmaceutical companies, device-makers) and it’s one that we should think about right away when we read the Kaiser report.

Less money, less marriage

The New York Times recently provided a perfect illustration of the dynamics behind the declining marriage rate in its story on Reading, Pa., the city with the highest poverty rate in the country in 2010. It featured the story of Ashley Kelleher, a waitress at an International House of Pancakes, who has been supporting her three children as well as the father of two of them.

“For the past five years, it has been me paying the bills,” she said. Kelleher said she wants to get married someday, but only to a partner who is financially stable. The man she is with now, however, is not.

Social conservatives have looked everywhere for explanations for the decline of heterosexual marriage, everywhere but the American economy. But the research on this issue clearly shows that financially insecure men are less likely to marry.

We can see the relationship between men’s earnings and marriage in the figure below. The figure shows “less money, less marriage,” to quote the authors of a recent report from Pew Social and Demographic Trends. Although the Pew research shows “no significant differences by education or income in the desire to get married,” the less money a male has, the less likely he will actually marry.

For the past 30 years, more and more of America’s income and wealth has been concentrated among America’s rich, leaving less and less for everyone else. With the decline of manufacturing and the decline of unions, men have been particularly hard hit. Half of male workers have experienced stagnating or declining wages over the last 30 years. For Latino and African American men, it is more than half. As a larger share of men are pushed down the earnings scale, their likelihood of marrying declines.

The decline of marriage is a collateral consequence of the growing economic inequality over the last 30 years. If social conservatives want more people to marry, they will need to insist on less economic inequality.

See Reducing poverty and increasing marriage rates among Latinos and African Americans for more on this issue.

Health insurance premiums continue to rise far faster than workers’ earnings and overall inflation

Today, the Kaiser Family Foundation and Health Research & Education Trust released their Employer Health Benefits 2011 Annual Survey. It’s full of great charts and graphics about the state of employer-sponsored health insurance premiums, costs to workers, types of plans, and much more.

The top line numbers alone are fairly shocking. Average family health insurance premiums rose from $13,770 in 2010 to $15,073 in 2011, up 9 percent. In 2010, total family premiums had only risen 3 percent, but the leading story then was about how employees were paying an increasing share of the total premium, on average 30 percent for family plans.

To put these numbers in perspective, Kaiser/HRET compares both total health insurance premiums and the portion of premiums paid for by workers to workers’ earnings and overall inflation from 1999 to 2011. Their figure, displayed below, illustrates how premiums have risen over three times faster than workers’ earnings and four times faster than overall inflation.

Click figure to enlarge

Given the high cost of employer-sponsored health insurance, it comes as no surprise that the share of non-elderly Americans with such coverage fell from 2000 to 2010, as shown in the Census data released earlier this month. The combination of a bad economy, general lack of bargaining power among workers, and steeply rising health insurance prices in 2011, as shown in today’s release, will surely lead to lower coverage rates, when the Census data on health insurance coverage comes out next year.

Regulatory uncertainty not to blame for our jobs problem

Republican politicians and business groups keep telling us that business investment and hiring is being held back by uncertainty over future regulations and taxation. For instance, Maine Senator Susan Collins said in introducing her bill to put a moratorium on all new regulations:

“Businesses, our nation’s job creators and the engine of any lasting economic growth, have been saying for some time that the lack of jobs is largely due to a climate of uncertainty, most notably the uncertainty and cost created by new Federal regulations.”

Her view has been repeated by others – like House Majority Leader Eric Cantor  and the Chamber of Commerce. This story is also being told by some of the dissenters on the Federal Reserve Board’s Federal Open Market Committee, as Mike Konczal recently reported. Nobel Laureate Robert Lucas just made this argument in a Wall Street Journal interview, but he at least had the decency to note, “I have plenty of suspicions but little evidence.”

In a recently released paper, I present evidence that if you examine what employers are actually doing in terms of hiring and investment, this story about regulatory (or tax) uncertainty driving current job trends does not hold up. Private sector job growth has been weak in each of the last three recoveries and the current recovery’s private job growth matches up with the early 1990s recovery and is far better than that of the 2001 recovery. Investment in equipment and software has been stronger in this recovery than in the prior two recoveries. Last, weekly work hours are still substantially below those prior to the recession: uncertainty about future regulations cannot explain why employers do not increase work hours of currently employed workers to meet current demand for goods and services. A reasonable explanation for this work hours puzzle is that those sales opportunities do not actually exist, i.e., demand is lacking.

READ MORE: Regulatory uncertainty: A phony explanation for our jobs problem

If you also examine what employers and their economists are saying in private surveys, you find that what businesses actually identify as their challenges does not fit this story either. In other words, what the heavily politicized trade associations in Washington (like the Chamber) are saying does not correspond to the real challenges facing both large and small businesses.

The National Federation of Independent Business (NFIB), which describes itself as “the leading small business association representing small and independent businesses,” does a regular survey of small businesses. One question that has been asked since 1973 is, “What is the single most important problem your business faces?” The answer choices are inflation, taxes, government regulation, poor sales, quality of labor, interest costs, health insurance costs, the cost of labor, and other matters. Interestingly, the single largest response is “poor sales,” the choice of 30 percent of respondents since President Obama was sworn in (averaging the 10 quarters between early 2009 and Spring 2011). That seems to accord with slack demand as the key concern of small businesses.

However, I was on a radio panel discussion with an economist from the Heritage Foundation who acknowledged this fact, but then highlighted that taxes and regulation were the next highest concerns identified in the NFIB surveys—evidence, he claimed, that tax and regulatory uncertainty were also preeminent. And, he correctly cited the data. In the Obama years, some 13.9 percent of small businesses identified government regulation and another 20.8 percent identified taxes as their primary problem, the leading answers after “poor sales.” I was fortunate enough to obtain the entire historical series (back to the fourth quarter of 1973) on this question from the NFIB so I could put this in historical perspective, constructing the averages for each presidential term as shown in the figure below:

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It turns out that small businesses have always complained about regulation and taxes and not especially so under Obama. For instance, the share concerned about regulation under Obama (13.9 percent) is not substantially higher than under George W. Bush (9.9 percent and 11.0 percent) or Ronald Reagan’s second term (12.8 percent). There is also less concern about regulation under Obama than under Bill Clinton or George H.W. Bush. Recall also that there was rapid employment growth in the second Clinton term, so high concerns about regulation (which rose steadily from Reagan’s first term to their highest level in Clinton’s first term) are not necessarily associated with poor employment growth.

There’s a similar story on taxes. Sure, there are 20.8 percent of respondents on average in the Obama years who see taxes as the primary problem facing their business. Yet, that intensity of concern about taxes is not all that different than under George W. Bush and is less than the presidential terms from the first Reagan term through Clinton’s second term. It is hard to find a recent spike in concern about regulations or taxes that supports a story of escalating uncertainty or fears of regulations holding back the economy.

State unemployment trends — spinning our wheels and spinning the data

There is a striking set of graphics in yesterday’s New York Times that explores “The Nation’s Unemployment Landscape.” A series of three maps of the United States shows state level unemployment rates when the recession began in Dec. 2007, when it ended (according to the Business Cycle Dating Committee, National Bureau of Economic Research) in June 2009, and the most recent state unemployment data, showing state unemployment rates in Aug. 2011. Accompanying the maps are a series of line graphs showing the unemployment rates in the 11 states with the highest current unemployment rates (from Illinois’ 9.9 percent unemployment rate to Nevada’s crippling 13.4 percent unemployment rate).

There are several noteworthy stories to highlight in these maps and graphs, and some important caveats that may not be readily apparent from these visual aids. The first story is that for most states, there has been very little change – positive or negative, since the end of the recession over two years ago. This simple fact alone highlights the fact that the “recovery” has been very weak, and from the perspective of working families, essentially non-existent. As one would expect given that national unemployment rates have improved very little since the end of the recession (from 9.5 percent in June 2009 to 9.1 percent in Aug. 2011), some states are doing slightly better, others slightly worse than in June 2009.

Of the 11 states with the highest current unemployment rates, Michigan alone has a generally positive story to tell (and even that story comes with a cautionary footnote).  Since June 2009, Michigan’s unemployment rate has fallen from 13.8 percent to 11.2 percent (still two percentage points above the national average). What accounts for this relatively positive news for Michigan, transitioning from being the state hardest hit by the recession to a state experiencing a relatively successful recovery? The successful bailout of the auto industry by the Obama administration and specifically, the turnaround by General Motors, which deserves considerable credit for boosting the Michigan economy while showing that government intervention, and even dabbling in what could properly be considered industrial policy, actually works to improve the well-being of working Americans.

Unfortunately, even Michigan’s story is tainted by a recent, though widespread upward blip in unemployment rates. Of the 11 states highlighted in the Times piece, eight show a clear recent increase, in most cases erasing much of the progress made since the end of the recession. In approximately half of the 11 states, unemployment rates in Aug. 2011 were clearly higher than they had been in June 2009. Among the 11 states, only Michigan’s rate is clearly an improvement over the June 2009 rate (the balance showing little change).

The focus on unemployment rates rather than job growth in the Times piece is a wise one, discouraging political grandstanding based on selective cherry-picking of economic data. Texas Governor Rick Perry has been outspoken, touting the so-called Texas Miracle.  State unemployment data show one way in which this mythical economic tale is misleading. In Aug. 2011, Texas’ unemployment rate of 8.5 percent stands nearly double the Dec. 2007 rate of 4.4 percent, and also above the June 2009 rate of 7.7 percent. While it’s true that over this time period the Texas economy has added many new jobs, the rate of job growth has only just begun to keep up with the growth in population over this time. The Texas based Center on Public Policy Priorities notes that the Aug. 2011 unemployment rate of 8.5 percent marks the 24th consecutive month of unemployment at 8 percent or higher. Moreover, they provide data showing a jobs shortfall – the number of jobs needed to return to pre-recession unemployment rates – of over 633,000.

The other dimension lacking from the story of job creation concerns the quality of jobs created, a topic on which I’ll focus greater attention in my next post.

Click figure to enlarge

Nine reasons to invest more in the nation’s infrastructure

Last week, President Obama spoke in Ohio and pressed Congress to boost federal investment in the nation’s infrastructure. This serves as a great time to reiterate all the reasons why boosting infrastructure investments is a no-brainer:

1)  Our infrastructure is terrible. More than one in four bridges are structurally deficient or functionally obsolete, indicating that the Minnesota bridge collapse wasn’t an isolated event. The American Society of Civil Engineers conclude that we need to double our investment in surface transportation infrastructure just to keep it from literally crumbling beneath our feet.

2)  Win the future. Public investments such as infrastructure are vital to long-run economic growth and fuel higher incomes and living standards for decades. A recent and comprehensive review of the literature on this topic finds that a sustained 1 percent increase in public capital growth rate translates into a 0.6 percentage-point increase in the private-sector GDP growth rate.

There’s an even stronger case for doing it now:

3)  It creates jobs. Regular readers of this blog won’t need to be reminded that millions of Americans are still suffering under the worst jobs crisis since the Great Depression. Job creationh as become an economic, political, and moral imperative. Infrastructure investments create jobs now, when we need them most.

4)  A LOT of jobs. Infrastructure creates 16 percent more than a payroll tax holiday, nearly 40 percent more than an across-the-board tax cut, and over five times as many as temporary business tax cuts. We need to squeeze as much job creation out of each dollar of cost, and infrastructure certainly passes the test.

5)  It’s targeted. The construction industry has been disproportionately hammered by the recession and has even greater unemployment levels than the economy as a whole.

6)  We’ve got cheap financing. The recession has precipitated a capital flight to safety, with the safest assets being U.S. government bonds. That has made the cost of borrowing insanely cheap (10-year Treasuries hit a record-low last week), with real interest rates actually negative. Capital markets are actually paying us to borrow their money.

7)  We’re getting great deals. During economic downturns, infrastructure projects are less costly as many contractors are competing for work amidst slack labor and capital markets. Many states actually had difficulty getting Recovery Act infrastructure funds out the door because contract bids kept coming in below the states’ original estimates.

8)  Delay costs money. Deferring maintenance of our infrastructure saves money in the short run, but costs much more in the long run. It’s certainly cheaper to repair a bridge than to rebuild it after its collapse.

9)  There’s no one else. States governments are facing nearly $150 billion in shortfalls in this fiscal year and the next, and, unlike the federal government, states generally cannot run deficits. Adding to this situation, fiscal relief from the Recovery Act has petered out, falling from $127 billion over the last two years to only $6 billion over the next two years. Local governments face equally difficult fiscal challenges. At this point in time, only the federal government can make these needed investments.

Economic policy tends to be pretty complex stuff, but this is a BIG exception. We need infrastructure work, we need jobs, the price is low, and we’re being given nearly free money to do it. All we lack is the political will.

A bet over No Child Left Behind

Diane Ravitch is a glass half-empty kind of gal, while I suffer from excessive Panglossian tendencies. In the spring of 2007, we made a bet. The payoff is dinner at the River Café, at the foot of Brooklyn Heights, overlooking New York harbor and the Manhattan skyline, tucked neatly under the lights of the Brooklyn Bridge.

Four and a half years ago, we surveyed the damage being done to American education by NCLB, the “No Child Left Behind” iteration of the Elementary and Secondary Education Act:

  • conversion of struggling elementary schools into test-prep factories;
  • narrowing of curriculum so that disadvantaged children who most need enrichment would be denied lessons in social studies, the sciences, the arts and music, even recess and exercise, so that every available minute of the school day could be devoted to drill for tests of basic skills in math and reading;
  • demoralization of the best teachers, now prohibited from engaging children in discovery and instead required to follow pre-set instructional scripts aligned with low-quality tests;
  • and the boredom and terror of young children who no longer looked forward to school but instead anticipated another day of rote exercises and practice testing designed to increase scores by a point or two.

Diane morosely predicted that, despite this evident disaster, NCLB would certainly be reauthorized with its destructive testing and accountability provisions intact. After all, she moaned, it had the support of elites from both parties, the Washington think tanks, the big foundations, and the editorial boards of the New York Times, Washington Post, and other influential media outlets. No serious opposition was visible. How could the law not be continued? Indeed, she worried, its supporters were so removed from the reality of classrooms, so impervious to evidence, they could well decide to intensify requirements that schools chase phony test score gains to the exclusion of all else.

I smugly responded, “not a chance.” The NCLB accountability system is so self-evidently calamitous that its principles will never survive congressional reauthorization. Don’t pay attention to elite opinion, I said. The internal contradictions of a law that orders all children nationwide to perform above-average are so explosive that any attempts to “fix” them (as policymakers were then vowing to do) would never be able to claim a congressional majority, no matter how obstinate NCLB’s supporters might be.

For example, I said to Diane, consider the law’s absurd demand to prohibit the normal variability of human ability so that all children, from the unusually gifted to the mentally retarded, must achieve above the same “challenging” level of proficiency by 2014. The only way states could fulfill this requirement would be to define “challenging proficiency” at such a low level that even the least talented of students could meet it. NCLB enthusiasts would then cry “foul” and insist that a reauthorized law allow Congress to dictate a national proficiency standard. But this, in turn, would make the law unacceptable to supporters who had gone along in 2002 only because they felt assured that federal intrusion into state control of education would be limited. Or if, instead, NCLB proponents attempted to mollify critics by giving schools more flexibility – for example, by permitting them to escape condemnation for not meeting impossible academic benchmarks by citing other measures, like attendance rates or parent satisfaction – the NCLB enthusiasts would balk at this backdoor way of “leaving children behind.”

There is no way out of this impasse, I assured Diane. NCLB will limp along past its 2007 expiration date, with no possible map for reauthorization, with temporary annual continuing resolutions while proponents fruitlessly attempt to conceive of ways to climb out of the holes into which they had dug themselves. Eventually, I told Diane, by 2016 we’ll still be requiring all children to be proficient by 2014, and declaring virtually every school in the country to be failing. At some point, I predicted, some Secretary of Education will have no choice but to issue waivers from the law’s requirements to every state in the country while the law itself remained on the books, an embarrassing monument to policy foolishness.

Everything I predicted has now come to pass, and I should be able to call Diane’s hand and collect my dinner at the River Café. But I’m afraid I must concede. I won the bet on technical points, but Diane won on the merits. The glass really is half-empty, maybe more so.

What I had not anticipated was that a Secretary of Education (Arne Duncan, it turned out to be) would use his authority to grant waivers to states (now all of them) unable to meet NCLB’s requirements, conditioning the waivers on states’ agreements to adopt accountability conditions that are even more absurd, more unworkable, more fanciful than those in the law itself. Mr. Duncan’s philosophy has been revealed: if a policy fails, the solution should be to do more of it.

So the secretary is now kicking the ball down the road. States will be excused from making all children proficient by 2014 if they agree instead to make all children “college-ready” by 2020. If NCLB’s testing obsession didn’t suffice to distinguish good schools from failing ones, states can be excused from loss of funds if they instead use student test scores to distinguish good teachers from bad ones. Without any reauthorization of NCLB, Mr. Duncan will now use his waiver authority to demand, in effect, even more test-prep, more drill, more unbalanced curricula, more misidentification of success and failure, more demoralization of good teachers, and more needless stress for young children.

The Obama administration is presenting its waiver proposal as the grant of new “flexibility” to states. Yes, perhaps. If states agree to implement Mr. Duncan’s favored reforms of evaluating teachers by student test scores and expanding charter schools, and if states promise to meet even more impossible “college ready” standards established by the federal government, the secretary will let them figure out on their own how to do it.

Some Republicans have complained. The secretary, they say, cannot do an end run around Congress by implementing his own more extreme version of No Child Left Behind, when he has been unsuccessful in getting Congress to enact these very same proposals into the law itself. But these critics, most of whom supported NCLB in 2002, have only themselves to blame. They initially wrote into the law the right of a secretary to issue waivers based only on his or her own personal fantasies about what constitutes a state pledge to “increase (sic) the quality of instruction … and … improve academic achievement” – to be precise, in NCLB‘s Title IX, Part D, Sections 9401(b)(1)(i) and (ii).

And Arne Duncan has gotten away with this before. Here, Democrats should be ashamed. In Feb. 2009, when the American Recovery and Reinvestment Act (the ARRA, or “stimulus” bill) was enacted, Republicans charged that the law had little to do with job creation or economic growth, but was only a subterfuge for the Obama administration to make social policy without congressional debate. Mostly, the Republican charge had no merit but in the case of education policy, it hits the mark. The secretary has been distributing $5 billion in ARRA grants only to states that entered and won his “Race to the Top” competition by promising to raise standards even higher than those unachievable under NCLB. These so-called stimulus funds are not distributed to states with the highest unemployment rates but to those that outbid others by promising to establish data systems to evaluate teachers based on students’ math and reading scores, be most ruthless in firing teachers and principals in schools with low scores, and replace them with the most rapid expansion of charter schools.

The Duncan policies, like NCLB, will eventually implode. But the damage being done to American public education has now gone on for so long that it will have enduring effects. Schools will not soon be able to implement a holistic education to disadvantaged children. Disillusioned and demoralized teachers who have abandoned the profession or have retired are now being rapidly replaced by a new generation of drill sergeants, well-trained in the techniques of “data-driven instruction.” This cannot easily be undone.

Some state education officials have murmured intents to refuse the Duncan waiver conditions, and dare him then to withhold federal education dollars. But there is little indication that these officials will follow through, or that others will join the resistance. Most states will meekly apply for the Duncan waivers. Courage is in short supply among education and policy leaders.

So Diane, start perusing the menu. My victory on points is to no avail. I owe you dinner.


State Department’s review of J-1 program sponsors leaves much to be desired

The State Department announced today in the Federal Register that its Bureau of Educational and Cultural Affairs (ECA) will be conducting “on-site reviews” of 14 of the biggest sponsors involved in the Summer Work Travel (SWT) program, the largest category in the J-1 visa Exchange Visitor Program. “Sponsors” are the private sector entities to whom the State Department has outsourced the management functions of the J-1 program. Sponsors profit from fees paid by the student participants, and then contract with employers and staffing companies across the country that ultimately hire the J-1 students in a variety of industries, for example at national parks, amusement parks, restaurants, drug stores, canneries and factories. Last year, 132,000 foreign students from around the world came to the U.S. to work for four months in the Summer Work Travel program, making it one of the largest guestworker programs in the U.S.

EPI has previously detailed the numerous problems inherent in the entire J-1 program. The allegations that led to the recent strike by J-1 student workers at the Hershey Chocolate Company in Pennsylvania are clear examples – and have resulted in a handful of federal investigations. Thus, I welcome any review or evaluation of the program and the entities involved. Nevertheless, I am puzzled by today’s notice.

The Department claims that it will conduct these on-site reviews in order to “enhance its continued oversight and monitoring of designated sponsors” because it intends “to evaluate regulatory compliance” with the new regulations that went into effect in July. If that were truly what the Department intended to accomplish – then this notice in the Federal Register, and this type of “review” instead of an actual investigation – is far from the best way to determine whether the program is functioning properly.

Why issue a public notice that affords all sponsors one-to-three months to prepare for an impending on-site review? Is this just a PR stunt?

And then there’s the substance of the on-site reviews, which is baffling. Before the actual on-site review takes place, which will last two business days, each sponsor will be notified in writing, and will have 10 business days to respond to requests for documents, and to prepare for the visit. If the State Department is supposed to be the cop on the J-1 beat (which it should be), then this is an odd way to uncover misbehavior. Giving the sponsors two full weeks to cover up, delete or destroy any evidence of wrongdoing will not help the State Department get to the bottom of it.

Also, many of the serious problems that occur in the program happen at the workplace – not the sponsor’s corporate headquarters – and are potential violations of labor and employment laws. The administrative functions and roles of the sponsors are less important than whether the J-1 student has been paid the minimum wage or was working in a safe environment. Thus, it would make much more sense to conduct surprise, on-site reviews of the employers where the J-1s are actually employed. That way the State Department could evaluate whether the students are safe and are being treated fairly – and if they’re not, the ultimate responsibility would fall on the sponsors, whose job it is to oversee and ensure that the employers are flying straight. If they’re not, then both the employer and sponsor should be kicked out of the program.

Another problem with State’s review is that officials will not be speaking with or interviewing the actual J-1 student participants about any problems they may have had with the program or their particular sponsor. As I’ve learned anecdotally from some colleagues who advocate on behalf of J-1 student workers, when State conducts an investigation regarding a particular complaint, its investigators almost never speak with the J-1 worker or the employer. Instead, they only speak with the sponsor, who has a financial interest in avoiding sanctions by State. This conflict of interest makes it highly unlikely that the sponsor will be a zealous advocate for the J-1 worker who may have suffered abuse, or that the sponsor will be forthcoming with any evidence that would make it look bad. Officials of well-established sponsors which have been in business for decades also have established relationships with the State Department staff, which can create inappropriate expectations between the investigator and the subject of the investigation.  Ideally, the investigation would be at arms length. These visits will give sponsors an opportunity to personally lobby the Department about the final regulations, which have not yet been issued, and indeed on page 3, the Department admits as much, saying that these on-site reviews are “an opportunity for sponsors to provide feedback” about the rules generally.

The State Department’s review of some of the sponsors in the J-1 Summer Work Travel program could have been a step in the right direction, but by publicly notifying and giving sponsors time to prepare for it, and by not reviewing work sites or interviewing employers and J-1 student workers, the actual value of this action might prove to be negligible.

All workers—including black youth—benefit from a tight labor market

I was asked by the Congressional Black Caucus for their “For the People” Jobs Commission to discuss the needs of and challenges confronting groups such as the chronically unemployed, the underemployed, new labor force entrants, and formerly-incarcerated individuals in the current labor market. One point I made was that a tight labor market—a labor market with strong job growth and low unemployment—benefits all groups.

I illustrated this point with the example of black youth—new labor force entrants—over the 1989-2000 and 2000-2007 business cycles. The business cycle from 1989 to 2000 had strong job growth; the business cycle from 2000 to 2007 had weak job growth.

For black 16-to-24 year olds who were not enrolled in school, the strong job growth over the 1989-2000 business cycle shaved 3.7 percentage points off their unemployment rate. This decline in the black youth unemployment rate was three times as large as the 1.2 percent decline in unemployment for white youth.

Click figure to enlarge

In contrast, the weak job growth of the 2000-2007 business cycle added 1.5 percentage points to the black youth unemployment rate. While the 1989-2000 business cycle put 72,000 black youth into jobs, the weak 2000-2007 business cycle reduced the number of black youth employed by 29,000. These comparisons provide an important reminder that macroeconomic policy strongly affects disadvantaged groups. Robust job creation not only benefits Americans generally, it also provides benefits specifically for black youth and other groups with challenges finding work.

While the country faces a jobs deficit of over 11 million jobs and a national unemployment rate of 9.1 percent, it will be difficult to improve employment outcomes for the chronically unemployed, the underemployed, new labor force entrants, and formerly-incarcerated individuals. We need strong job creation to put us in the best position to help these groups.

Signs of health reform success on anniversary of provisions for young adults

Today marks the one-year anniversary of several elements of the Patient Protection and Affordable Care Act, notably the provision allowing young adults up to age 26 to stay on or join their parents’ employer-sponsored health insurance policy.

Several folks blogged about this last week, notably Health and Human Services Secretary Kathleen Sebelius, Sara Collins, Tracy Garber, and Karen Davis of the Commonwealth Fund, and writer Jonathan Cohn. They all cited the newly released Census data on health insurance, which detailed how  the uninsured rate for young adults, 18-24, fell between 2009 and 2010 and, in fact, this was the only age group with a statistically significant decline in their uninsurance rate. They argued that the health insurance provision allowing young adults to stay on or join their parents’ employer-sponsored health insurance policy is to credit for this up-tick in coverage.

This week, Kevin Sack of the New York Times, wrote a piece reiterating their points, with more recent data through March 2011 from the National Health Interview Survey. While there’s much hand-waving about how we can credit health reform for the increase in health insurance coverage among young adults, it’s relatively easy to compare health insurance numbers with labor market statistics to find compelling evidence of initial signs of health reform success.

In this figure, I compare changes in the employment rates and the rate of employer-sponsored health insurance for various age groups between 2008 and 2009. As you can see, employment rates fell for each group as did employer-sponsored health insurance.  This is not surprising given the fact that most people find health insurance on their own job.

Click figures to enlarge

Next, I compare these same changes in employment rates and health insurance rates for various age groups between 2009 and 2010. As you can see, the job-market didn’t do young adults any favors. In fact, their employment rate actually fell further than any other age group. Given the close relationship between labor market outcomes and employer-sponsored insurance, we would expect declines in coverage for all groups.  What we see instead is that employer-sponsored health insurance actually rose among young adults, while it fell for all other groups.

So, how many young adults took advantage of this new provision? A back of the envelope estimate of what young adult coverage rates would have been if the 2008-09 relationship between employment and insurance had held for 2009-10 would be a 1.1 percentage point drop in insurance rates for young adults in 2010. Instead, we see here that insurance rates actually rose by 0.6 percentage points instead of falling by 1.1 percentage points — basically, this means that up to 490,000 young adults may have obtained coverage in 2010 because of the health reform provision.

Given the fact that the labor market continued to decline for young adults, my guess is that a closer look at the Census micro-data would confirm the fact that a greater number of young adults are gaining dependent coverage through their parents’ policies.  Even without that added analysis, these figures alone are compelling evidence in support of the argument that health reform is beginning to work.

Effective tax rates, now in color!

UPDATE 9/26: Looks like the TPC has “retracted” the estimates below citing an error “which involved rollover distributions from 401(k)s and similar retirement plans, caused us to significantly overstate the income of some high-income taxpayers and thus understate the tax rates they paid.” I don’t know how much of a difference this will make, but I suspect that the overall distribution will only be moderately effected, and only at the very top. I’ll post the new results when the TPC makes their correction.


The table below, adapted from a Tax Policy Center table here, shows the effective federal tax rate people pay in different income categories. (The “effective” rate is simply the total taxes paid divided by income, and will be lower than the statutory marginal rate because there are a variety of deductions, credits, and tax preferences in the code.)

See below as I’ve added some color to the table to help show how rates vary with income levels. Darker reds represent lower effective rates, and darker greens represent higher rates.

Paul Krugman (and others) have used this data to demonstrate that even though, on average, millionaires pay a higher effective rate than the average of those in the middle, there are still many millionaires that pay less than most in the middle class. For example, at least 25 percent of millionaires pay a lower effective rate (12.6 percent or below) than most people making between $40,000 and $50,000 (13.1 percent or higher).

When interpreting the Buffet principle, we need to decide what rate to use to set as a minimum rate for millionaires. For example, do we want millionaires to pay on average more than the middle on average? If so, we’re already there.

Click figure to enlarge

Or do we want to ensure that all millionaires pay more than the middle-class pays on average? If so, then we need to change the tax code so that millionaires pay something like a minimum of 13 percent, if we set the “middle-class” at the $30,000-$75,000 range. This would mean an increase for about a quarter of millionaires.

Or do we want to ensure that all millionaires pay at least as much as just about anyone in the middle class? In this case, the target would be closer to  a 25 percent effective tax rate, increasing taxes on about half of millionaires.

The spirit of the Buffet rule is clearly not the first category – the outrage stems from the fact that some significant fraction of millionaires do indeed pay less than a large share of the middle. This points to policy changes that would indeed increase revenue from many of those at the top (at least a quarter, and perhaps as much as half or more) that have found ways to lower their tax share to levels that are below many in the middle class.