Same old, same old: One quick test for what’s serious in job creation proposals

Jeff Madrick has a good review of Bill Clinton’s new book in the New York Times. The punchline of the review is that Clinton doesn’t offer much except for very cautious (Clintonesque?) proposals to combat the current jobs crisis and instead mostly highlights his own own efforts at bringing the federal budget deficit into balance in the 1990s while calling for this to again become a focus of economic policy.

This desire to return to the 1990s when the economy was generating much better (though bubble-fueled) outcomes is understandable, if misguided. But this desire helps illustrate a quick and dirty test that should be used to grade anybody’s policy prescriptions for combating the current jobs crisis: Are they just re-packaging policy ideas that they think would be a good idea anytime, or do they recognize that the economy’s exceptional troubles today require exceptional measures?

If it’s just re-packaging, you can generally discard them as serious solutions to the jobs crisis. So, when GOP members of Congress put out a “jobs plan” that relies on tax cuts and blocking regulation – it’s fair to ask when are they not in favor of tax cuts and deregulation? After all, if the exact same policies that they think are good ideas when the unemployment rate is 4 percent are also the only ones offered up to spur job creation when the unemployment rate is closer to 9 percent, doesn’t this imply that nothing special needs done about job creation today?

Take EPI, on the other hand. We don’t urge Congress every single year to pass hundreds of billions of dollars of debt-financed fiscal support. We do urge Congress to do this when the unemployment rate is historically high – because utterly boring textbook macroeconomics says that this is the proper medicine to treat an economy with very large amounts of productive slack, even after the Federal Reserve has exhausted traditional recession-fighting tools.

There are, obviously, more long-running policy debates that we have strong opinions on – we think the minimum wage should be raised and indexed to keep its value from eroding over time, and we think labor law should be reformed to allow willing workers to form unions. We don’t, however, claim that enacting these “perpetuals” are things that will yank down the overall unemployment rate in the next two to three years. They’re good policies for boosting the long-run economic performance of low- and moderate-income households, but they’re not serious job creators, per se. So, when simple job creation becomes a top priority, we put other things on top of that particular to-do list.

Also, we’re generally in favor of more public investment, in good times or bad. There’s a good reason for this – public investment has been lagging in recent decades and aids long-run economic performance. But even here we recognize different economic environments – when the unemployment rate is historically high and the economy needs spending power, we argue that public investments should be debt-financed. If the unemployment rate fell to very low levels even while the public capital stock needed upgrading, we’d argue that the case for financing these investments with taxes makes more sense (actually, for very high-return investments, one can imagine a case for debt-finance either way, but we wouldn’t argue for debt-finance on job creation grounds if the economy was performing well).

The figure below will help us recap: a good quick-and-dirty test for how sensible somebody’s top policy prescriptions for job creation are is  simply asking if they were arguing for the exact same policies at point A (i.e., before the Great Recession) and point B (i.e., at very high rates of unemployment). If so, these policies probably are not going to do much for jobs.

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Projected: Nearly 15% of the workforce will be unemployed at some point in 2012

The monthly unemployment rate published by the Bureau of Labor Statistics measures the number of workers who are not working and looking for work – that is, the unemployed – out of the total number of people who are either working or looking for work in a given month. But this understates the number of people who experience unemployment during any longer period, since someone who is employed in one month may become unemployed the next, and vice versa.

Yesterday, BLS released its report on “over-the-year” employment and unemployment in 2010, which measures (among other things) the share of the workforce who experienced unemployment at some point during 2010. The report finds that 15.9 percent of the workforce was unemployed at some point last year, much higher than the average monthly unemployment rate in 2010, which was 9.6 percent.

The figure shows the average monthly unemployment rate and the over-the-year unemployment rate. Using the ratio of the over-the-year unemployment rate to the average monthly unemployment rate in 2010 (the latest data available), the over-the-year unemployment rate for 2011 and 2012 are projected. According to the data, we can expect that 14.9 percent of the workforce – more than one in seven workers – will be unemployed at some point next year.

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It doesn’t have to be this way.  The number of people experiencing unemployment – and the scars this unemployment causes to careers, families, and communities – could be considerably reduced with substantial additional stimulus spending to generate jobs.

Seniors are STILL worse off than working-age adults

After adjusting  for household size, the income of households headed by adults 65 and older was 13 percent lower than that of households 35 and under, according to a new Pew report. (The gap is much larger when seniors are compared to households headed by adults in their peak earning years, which begs the question of why the authors chose to compare seniors with a group that includes not just young people starting their careers but also many students.)

What’s the title of this report? “The Old Prosper Relative to the Young: The Rising Age Gap in Economic Well-being.” That’s right, those oldsters are raking it in, once again.

How do the authors come up with a title like that, given the facts? In what’s become a familiar refrain, they focus on the fact that seniors, while they still have lower incomes, are not as far behind as they used to be, especially since the economic downturn walloped young people. O-kay! They also cite a lower official poverty rate for seniors, completely ignoring the fact that a new poverty measure that takes into account  higher out-of-pocket medical costs for seniors shows they have a poverty rate slightly higher than that of working-age adults, even with the help of Social Security and Medicare.

They also cite seniors’ higher net worth, implying that seniors who’ve paid off their homes and socked away some money in a 401(k) are better off than younger people, though the real story is that these savings aren’t nearly enough, even if they sucked every last penny out of their homes to pay for retirement. (In 2009, the median net worth of households aged 57-66 was roughly four times this group’s median annual income, according to the Federal Reserve’s Survey of Consumer Finances. Even with Social Security, pensions, and other income, that’s not enough to maintain the same standard of living through retirement.)

This is a familiar story, but in a new twist to the old ageist refrain, the Pew report also bops seniors for working longer. Well, that’s refreshing. We usually hear that older workers are lazy and retire too soon.

Vast majority of public supports a legalization program for unauthorized immigrants

I was shocked to discover today just how far the pendulum has swung in terms of American public opinion on immigration. The new United Technologies/National Journal Congressional Connection Poll revealed that 62 percent of Republicans – the group most likely to oppose “illegal” immigration and the presence of unauthorized migrants in the U.S. – now support allowing “those who have been here for many years and have broken no other laws to stay here legally.” Among Democrats, support is at 72 percent, which means a great majority of Americans from both major political parties are now strongly in favor of a legalization program to solve the problem of irregular migration. Among all respondents, support was 67 percent.

Of the 62 percent of Republican supporters, 43 percent want to deport those who have only been in the United States for a short period of time, and 19 percent favor allowing all unauthorized migrants to stay as long as they have broken no other laws and commit to learning English and U.S. history. With such vast bipartisan support, is now the time is to finally implement a legalization program for the unauthorized population?

Perhaps the American public has finally realized that deporting 11 million people – 8 million of whom are exploitable workers with no labor rights – is simply not rational or feasible. Such action would shrink the economy and tear families apart. And it would unfairly blame and punish the migrants themselves, when others share the blame. Just before 9/11, deportations were less than half as common as they are today (and six years before that, there were almost 90 percent fewer deportations), and employer sanctions were a rarity. For decades, employers lured unauthorized migrants to the U.S. with job offers, while Congress and the president looked the other way when it came to enforcement. Government policies also played a role. Enactment of the North American Free Trade Agreement (NAFTA) in 1994 was perhaps the single biggest factor causing the increase in irregular migration.

Thus, the government, employers and migrants should equally share the blame, and any solution must be rational and humane – but also deter future flows of unauthorized migrants. The necessary solution is clear, and really quite simple, and the language used in the UT/National Journal poll suggests some of what’s required.

First, the government can motivate unauthorized residents to come forward by offering legal status to those who can prove they have not committed crimes other than residing in the U.S. without proper authorization, and then require them to pay any unpaid taxes, learn English and take courses in U.S. history. The other key step in the process will be determining how long the unauthorized migrant has resided in the country, and their level of attachment to the labor market. I would argue if you’ve been working continuously in the country for three years, you’ve cemented your place in the U.S. labor market and should be allowed to stay. If a majority disagrees that three years is long enough, a compromise should be negotiated.

The UT/National Journal poll does not specify exactly how many years they meant when asking if respondents would support legalization for those who have been here for “many years.” A new report estimates the length of time the unauthorized population has resided in the country, which gives us an idea of how many people could qualify for this legalization program based on the number of years ultimately required. Only 15 percent of unauthorized migrants have been here less than five years, while 63 percent have been in the country for 10 years or more, and 35 percent have been here for at least 15 years. This tells us that the vast majority of unauthorized migrants are not recent arrivals, and are therefore likely to be well integrated into the labor market because they are unable to access almost any part of the social safety net (i.e., they have no other choice but to work).

Finally, once this program is in place, deport and strictly enforce immigration laws against those that do not qualify for legalization, and begin implementing a functional employment verification system to deter future flows of unauthorized migrants (this would need to include a PIN-based system to overcome some of the privacy concerns inherent in E-Verify, as discussed here).

Unfortunately, political decisions and public policy often fail to respond quickly to public opinion and the public’s desires. But this new polling data revealing broad support for a legalization program – when considered in conjunction with data showing the stock of unauthorized residents in the country has reduced by about one million since the recession, and a sharp decline in the annual flow of unauthorized migrants – suggests there hasn’t been a better time to fix this crucial part of our broken immigration system since 1986.

Eliminating Medicare epitomizes penny wise, pound foolish budgeting (it’s bad health policy, too)

Via Paul Krugman, I see that Politico honored House Budget Committee Chairman Paul Ryan (R—Wisc.) as health care policymaker of the year. Steven Benen nicely expounds the absurdity of this choice, namely that Ryan’s budget would repeal the Affordable Care Act, shift costs to families (rather than curb costs), end guaranteed Medicare coverage, and slash Medicaid funding. In fact, the Congressional Budget Office’s long-term analysis of Ryan’s fiscal year 2012 budget estimated that federal spending on Medicaid—healthcare for the disabled and poor children and seniors—would be roughly halved in the next two decades.

It’s worth adding that health policy experts widely agree the key objective for national health policy is slowing economy-wide health care cost growth. To this point, Ryan’s budget resolution would do more than shift costs—it would actually exacerbate the problem by increasing economy-wide costs. CBO’s analysis showed that Medicare is currently 11 percent cheaper than an equivalent private insurance plan. This efficiency premium compounds with time, as depicted in the figure below. By 2030, Medicare as we know it is projected to be at least 29 percent cheaper than an equivalent private sector plan (relative to CBO’s alternative fiscal scenario for the long-term budget outlook). Replacing Medicare with a voucher negates the economies of scale (and lack of a profit motive) afforded by Medicare.

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Ryan’s plan would accrue budgetary savings by ending guaranteed Medicare coverage, but at the expense of increasing total health costs and only by vastly increasing beneficiaries’ costs. By 2030, the Ryan budget would reduce government expenditure for the average beneficiary by 22 percent but push the beneficiary’s out-of-pocket costs up 127 percent. Extrapolating from CBO’s analysis, Dean Baker and David Rosnick calculate that the Ryan proposal would increase national health care expenditure by $30 trillion over the next 75 years, assuming households purchase Medicare-equivalent plans. A more likely scenario would involve an increase in national health care expenditure and a decrease in the number of Americans receiving adequate health care coverage.

Politico’s award choice cited Ryan’s influence over the Republican presidential candidates and credited him with producing a “starting point” for future health care reforms. Ryan’s budget (specifically its treatment of Medicare) has indeed served as a litmus test for conservative bona fides in the GOP field, but that should be cause for concern rather than celebration among health policy experts. Eliminating Medicare and its associated cost efficiency savings would be a lousy starting point for the next round of health care reform, as it epitomizes penny wise, pound foolish budgeting.

I still haven’t run a small business … but the case against regulation is still awfully weak

Yesterday on a panel at the Atlantic magazine’s “High-Growth Business Forum” an audience questioner brought out the “you’ve never run a small business” j’accuse again when I made the argument that today’s still-sluggish recovery was not being held-back by regulatory changes. I won’t rehash the argument here – check out this, this, and this to see why regulation has nothing to do with the poor economic performance since the Great Recession began (well, except for the role of financial deregulation in contributing to the policy non-response to the build-up of the housing bubble).

What was odd, though, were the specific examples of burdensome regulations that were brought up in response to some prodding. Nobody (in a very business-friendly audience and panel) seemed particularly eager to go after any specific financial regulations, health care regulations, or environmental regulations. These are clearly the ones that GOP congressional members have in mind when they scream about “job-killers,” but even this audience didn’t seem interested in arguing specifics on them. I guess it turns out that a stable financial system, fairer health system and clean air and water are all actually pretty popular.

Instead, Brink Lindsey of the Kauffman Foundation fingered zoning regulations and occupational licensing. Fair enough – smart people have said that some regulations in these realms seem to be more about rent-seeking than solving market failures. Further, I’m a sucker for arguments that zoning regulations often lead to some very undesirable outcomes. Maybe I just read too much Atrios.

On occupational licensing, though, it’s worth noting first that a group of incumbent business-owners, like many of those in audience, would very likely be against an abandonment of occupational licensing standards – which after all tend to shield incumbents from competitive pressure. And color me cynical, but I’d wager that a policy campaign aimed at reducing occupational licensing will find plenty of rationale for well-paid occupations (doctors, lawyers, accountants) to keep their licensing requirements while dismantling it for lower-paid ones.

Regardless of the specifics, it seems pretty clear that the effect of regulations like these on overall economic growth (as opposed to distribution) is tiny in a macroeconomic perspective. In short, it seems awfully hard to explain the high priority Washington policymakers have put on rolling back proposed regulations based on examples like these (which, by the way, are generally not federal regulations).

And then the anti-regulatory arguments got really silly – with a panel member singling out health inspections at restaurants as overly burdensome and arguing that they were unneeded because restaurants whose food-handling practices make people sick would go out of business as their reputation spread. This seems too obvious to have to say, but apparently it’s not so here goes: it is far from obvious that this “free market” solution is less costly than a regulatory one.

Many regulations are actually about increasing consumer choice by reducing their search costs – seeing a health inspection certificate on a restaurant’s wall is a signal that you don’t have to spend your own precious time researching their record on safety by yourself. And guess what – often just this sort of reasoning turns out to be supported by evidence – a study of a Los Angeles regulation that forced restaurants to display hygiene information to customers led to not just an improvement in restaurant hygiene but also to an increased sensitivity of consumers to differences in restaurant hygiene. In short, it offered information not previously available to consumers and this information led them to make different (and presumably better for them) choices. Oh, and it also led to a sharp drop in hospitalizations related to food-borne illnesses.

So, I still haven’t run a business – but broad-brush jeremiads against the regulatory burden stifling the U.S. economy still don’t really have much of a case.

Snapshot: Why the drop in the unemployment rate isn’t what you think

Unemployment in November dipped to 8.6 percent, its lowest point since March 2009, down from its 10.1 percent recession high in Oct. 2009. The unemployment rate fell because the share of the population seeking work or working—the labor force participation rate—has fallen considerably. We know this because the share of the population employed last month—58.5 percent—is the same as when the unemployment rate peaked. The lack of change in the share of the population employed—known as the employment-to-population ratio—indicates that the growth in employment has only kept pace with the growth of the working-age population. The figure shows the erosion in the labor force participation rate of people age 25 and older by education level over the last two years.

For the 8 percent of the labor force who have not completed high school, there was no real fall in labor force participation as the small decline from 2009–10 roughly offset the small increase from 2010–11. In contrast, labor force participation of those with a high school degree or some college declined by 1.6 percentage points, with the greatest decline occurring in the last year. There was a somewhat smaller but still sizeable 1.3 percentage-point decline in labor force participation of those with a college degree or further education (such as a master’s or professional degree). Thus, this deep recession led to a widespread shrinkage of the labor force that encompasses all but the least-educated workers.

President Obama got it right; Fox news gets it wrong

It was exciting to hear the president tell it like it is yesterday. After two years of trying to make nice with the interests that were most responsible for the financial collapse and which are responsible even now for the gridlock in Washington that keeps the economy from moving forward, President Obama told America’s middle class that its future is being threatened by the greed and self-interest of some of the wealthiest people in our nation.

The most important part of his speech in Kansas was probably his attack on the “collective amnesia” that allows some people to continue advocating the Bush administration’s tax cuts for the rich, despite their clear history of failure as a spur to job creation. Obama said:

“Remember in those years, in 2001 and 2003, Congress passed two of the most expensive tax cuts for the wealthy in history. And what did it get us? The slowest job growth in half a century. Massive deficits that have made it much harder to pay for the investments that built this country and provided the basic security that helped millions of Americans reach and stay in the middle class — things like education and infrastructure, science and technology, Medicare and Social Security.”

The president pointed out the folly of pursuing the same kinds of failed “you’re on your own” economic policies that got us into the worst recession in 75 years. Weak regulation helped cause the Great Recession. Why would anyone expect the same policies to get us out?

“Remember that in those same years, thanks to some of the same folks who are now running Congress, we had weak regulation, we had little oversight, and what did it get us? Insurance companies that jacked up people’s premiums with impunity and denied care to patients who were sick, mortgage lenders that tricked families into buying homes they couldn’t afford, a financial sector where irresponsibility and lack of basic oversight nearly destroyed our entire economy.

We simply cannot return to this brand of ‘you’re on your own’ economics if we’re serious about rebuilding the middle class in this country.”

Unsurprisingly, the right wing media, led by Fox News, wants to take us right back to the kind of Bushonomics that crashed the economy in 2007. Progressive taxation doesn’t sit well with Fox’s high-income anchors, let alone its billionaire owner, Rupert Murdoch. As our friends at Media Matters document nicely, Fox immediately launched a broadside against the president and the notion of tax fairness, misquoting him when it was convenient, and accusing him of class warfare and socialism.

I support raising the top marginal income tax rate to 45 percent — about half the 91 percent top rate under President Eisenhower. President Obama just wants to restore the top rate to its level under President Clinton – 39 percent. If that makes him a socialist, what was Dwight Eisenhower? Could it be that the Commander in Chief of Allied Forces during World War II and two-term Republican president from Kansas was a socialist and a class warrior? Uh… no.

Supply-side’s abject failure

In a speech Tuesday, President Obama issued a damning critique of trickle down economics and a stark defense of social insurance and public investments funded by progressive taxation. The president’s speech in Osawatomie, Kan., addressed the challenges of rebuilding the middle class and tempering income inequality, making the case that doubling down on the supply-side experiment of the last decade will fail the needs of the vast majority.

The president aptly characterized conservative economic policy as a two-pronged approach of cutting regulations and cutting taxes for the wealthy. (Note conservatives’ glaring lack of enthusiasm for refundable tax cuts or even an across-the-board payroll tax cut – tax cuts that would be pretty broad-based.) This is, of course, exactly the economic nostrum being preached by the GOP presidential field and Republican leadership on Capitol Hill. See, for instance, how the tax plans of presidential candidate Rick Perry or House Budget Committee Chairman Paul Ryan (R-Wisc.) belie any concern about income inequality, or how regulatory uncertainty is used as a phony explanation for the jobs crisis.

This supply-side snake oil is peddled on the premise that when the wealthy do well, income gains trickle down to the middle class and everyone benefits from a growing economy. But that hasn’t happened—real median income has sharply decoupled from productivity gains in recent decades (particularly since 2000) and income gains have been incredibly concentrated at the top of the earnings distribution. The president made the following salient point on the supply-side experiment:

“Now, it’s a simple theory… And that theory fits well on a bumper sticker. But here’s the problem: It doesn’t work. It has never worked. It didn’t work when it was tried in the decade before the Great Depression. It’s not what led to the incredible post-war booms of the ‘50s and ‘60s. And it didn’t work when we tried it during the last decade. I mean, understand, it’s not as if we haven’t tried this theory.” (Emphasis added.)

The record of the Bush-era tax cuts, also invoked by the president, indeed speaks volumes: “Remember in those years, in 2001 and 2003, Congress passed two of the most expensive tax cuts for the wealthy in history. And what did it get us? The slowest job growth in half a century.” That and the slowest economic growth, non-residential fixed investment growth, compensation growth, and wage and salary growth. Imagine if we had instead used the $2.6 trillion these tax cuts added to the public debt over 2001-2010 to undertake investments in areas like education, infrastructure, and scientific research—investments that would have produced much better job-growth and that have actually demonstrated high economic returns.

President Obama's speech in Kansas likely resonated with middle-class Americans.

Since the 2001 and 2003 tax cuts didn’t generate much in the way of jobs or incomes, they failed (by miles – or should we say trillions of dollars) to fulfill the mendacious claim often made by conservatives that tax cuts pay for themselves. (Note that this assertion continues to surface despite being flatly rejected by the Bush administration’s own economists.)

Based on this abject policy failure and the clear dysfunction of a tax code that allows a quarter of millionaires to pay lower effective tax rates than middle class families, President Obama made the case for tax reform – including allowing the top individual income tax rate to revert from 35 percent to the 39.6 percent rate implemented by President Clinton (which would still be well below tax rates for most of the post-World War II era).

Since most Republicans will clearly scream about the onerousness of this proposal, it’s worth noting that the optimal taxation literature calls for a steeper schedule of marginal tax rates and a considerably higher top rate than 39.6 percent. In their recent paper on the case for progressive taxation, economists Peter Diamond and Emmanuel Saez peg the optimal top income tax rate at 73 percent, up from 42.5 percent today (taking into account Medicare payroll taxes and average state income and sales taxes). This would imply a top federal marginal income tax rate of 65.5 percent—more than 25 percentage points higher than that proposed by the president. The current top tax rate is “is optimal only if the marginal consumption of very high income earners is highly valued,” note Diamond and Saez.

Of course, the value that policymakers put on the happiness of the very rich is exactly what stands behind the failure to enact job creation measures that would be financed by a surtax on millionaires and the repeated collapse of long-term deficit reduction negotiations because of conservative intransigence over raising more revenue from upper-income households.

I applaud the president for making the case for the progressive alternative against regressive tax cuts as the lodestar of economic policy. America’s low- and moderate income families should, too. As a nation, we cannot afford to double down on the failed, plutocratic pipe dream that is trickle down economics. Another round of tax cuts for the highest-income households will not restore full employment but will exacerbate widening income inequality, blow a bigger hole in the budget deficit, and defund needed public investments and economic security programs. Any policymaker genuinely concerned with the fate of the middle class, inequality and immobility, or the budget deficit, should be focused on rolling back the last round of inequitable and ineffective tax cuts rather than digging us deeper and deeper into a new Gilded Age.

What David Brooks gets right – regulations aren’t tanking the economy – and what he misses

The House of Representatives is poised to vote for the REINS (Regulations From the Executive in Need of Scrutiny) bill today; this would come on top of votes on two bills last week that would also upend the regulatory process.  These efforts are premised on assertions that regulations are greatly damaging the economy, and David Brooks’ op-ed today is another timely reminder that these assertions are inaccurate.  He opens with:

“Republicans have many strong arguments to make against the Obama administration, but one major criticism doesn’t square with the evidence. This is the charge that President Obama is running a virulently antibusiness administration that spews out a steady flow of job- and economy-crushing regulations.”

And closes with:

“They [regulations] are not tanking the economy.”

In between, he cites a few relevant facts to support his view that “regulations are not a big factor in our short-term [economic] problems.” These include the Bureau of Labor Statistics data which show that during the first half of 2011, just 0.18 percent of mass layoffs were due to regulations. EPI President Lawrence Mishel comprehensively addresses the role of regulation and regulatory uncertainty in the economy in Regulatory uncertainty:  A phony explanation for our jobs problems; he arrays a range of economic and survey indicators that demonstrate that it is a lack of demand, and not regulations or regulatory uncertainty, that is behind the painful state of the labor market.

I don’t agree with some of the information and characterizations in Brooks’ article; let me focus on the most glaring omission: he includes no discussion of the benefits of regulation. These can be large, not only in terms of health or safety benefits, but often in terms of economic benefits. Appropriate financial regulations are essential to an economy’s foundation.

Also, I’ve previously shown that two joint EPA/Department of Transportation rules which regulate greenhouse gas emissions from, and establish fuel standards for, various-size vehicles have particularly sizable economic benefits. They produce large savings to drivers in the form of reduced expenditures on gasoline. In 2010 dollars, a conservative estimate of the economic benefits from these two rules amounts from $6 billion to $20.6 billion a year. This range is above the range of estimated compliance costs for all 11 major rules finalized so far by the Obama EPA; that range is $5.9 billion to $12 billion a year.

When health benefits are also considered, the combined benefits of all EPA rules finalized so far under the Obama administration exceed their costs by tens of billions of dollars each year. In 2014, the Cross-State Air Pollution rule alone will save an estimated 13,000-34,000 lives and lead to 820,000 fewer cases of respiratory symptoms.

Brooks is right in concluding that concerns that regulations are behind the economy’s troubles are misplaced, and that’s a step towards a more reasoned and balanced discussion. Let’s hope that next time he goes a step further and discusses the benefits from regulations as well.

(Here is a summary of EPI’s research on the costs and benefits of regulation and a summary of our research on the relationship between employment and regulation.)

The J-1 and H-2B guest worker programs hurt young people’s employment prospects

Youth unemployment exploded during the Great Recession and now stands at 16.8 percent for 16-24 year olds. For those not enrolled in school and possessing only a high school diploma, the unemployment rate is 21.5 percent. For teenagers 16-19, it’s nearly 24 percent. In fact, the share of young people employed in the United States in July 2011 was 48.8 percent, the lowest level of summer employment in more than 60 years. This will have long-lasting, negative impacts on young workers. Some countries, like the United Kingdom, are proactively implementing programs to put young people to work (and investing £1 billion in public funds to do so). Others, like Spain – with its 46 percent youth unemployment rate – have done little.

It is concerning that the U.S. not only is doing little to create jobs for young people, but is actually keeping young people jobless through the J-1 and H-2B guest worker programs.

The J-1 Exchange Visitor Program was created more than a half-century ago to facilitate cultural and educational exchanges in the United States between young Americans and foreign visitors. But the program has evolved into a massive guest worker program, and most of the 320,000 J-1 participants come here primarily to work. Of the 16 J-1 sub-programs, the largest, the Summer Work Travel program, last year admitted 132,000 workers, down from 150,000 at its peak.

J-1 guest workers now fill many jobs that traditionally went to high school and college students or to recent grads during the summer, including at amusement parks on the Jersey Shore and in Ocean City, Md., and national parks like Yellowstone. J-1 workers have also taken what used to be unionized jobs with decent pay and fringe benefits, working, for example, in a Hershey plant packing candy bars. Most of these jobs cannot be offshored, and were the traditional avenues for young people to enter the labor market for the first time. But instead of providing our young people with their first taste of real work, these jobs are going to J-1 guest workers. Why? Because employers have tight control over guest workers, can pay them less than the prevailing wage, and aren’t required to pay Social Security, Medicare and unemployment taxes on their behalf.

The employer preference for guest workers is contributing to high unemployment for Americans. Consider this: In Worcester County, Md., where many J-1 amusement park jobs are located, the unemployment rate normally drops sharply when the summer tourists arrive, but this past July (when most J-1 workers there are employed) the unemployment rate was double its pre-recession level. And the county unemployment rate is in double digits during the rest of the year. In addition, as the New York Times reported, even older, recently unemployed Americans have been vying for summer jobs like these at amusement parks due to a lack of other opportunities.

So how can we find jobs for 132,000 young people? End the Summer Work Travel program.

Or if Congress rejects that option, then restrict the program only to jobs that have an obvious educational or cultural value, and link the program’s size to the national unemployment rate. For example, if the unemployment rate averaged more than 5 percent in the preceding year, the SWT program could only admit 30,000 foreign workers, but if it fell below 5 percent, then the SWT limit could be raised to 50,000.Read more

Why falling unemployment may not be making voters happy

The unemployment rate dropped in November to 8.6 percent from 9.0 percent in October and from 9.8 percent a year ago. This is clearly welcome news. However, the underlying dynamics of the drop-off in unemployment this last month and over the last year are disappointing and have clear implications for policy and for politicians.

The issue is a decline in labor force participation, a topic that both Jared Bernstein and Ezra Klein have picked up on. To be blunt, among groups with high voter turnout rates, the fall in unemployment has been driven by people leaving the labor force and not because of job gains: this applies to those 25 and older who have a high school credential, some college, or a college degree or further education. In contrast, job gains were responsible for falling unemployment among lighter voting groups: young people (ages 16-24) and the 8.0 percent of the labor force that lacks a high school credential. The only exception to this breakdown is that job gains lowered the unemployment rate of those 55 and older (but only 40 percent of this group is in the labor force). Among women, unemployment has fallen very little (0.3 percent) while employment has fallen as well, indicating that job growth has not driven their modest unemployment gains. Men, in contrast, have seen a large drop in unemployment (1.2 percent) but modest growth in employment, indicating a shrinking labor force as the major explanation.

Overall, the dynamics in the labor market do not point to people generally feeling happier or more prosperous because a great deal of the falloff in unemployment is not because people are earning money in newly found employment, but because people are no longer in the labor market. There are some analysts who point to demographic changes (e.g., the population aging) as a reason to expect labor force participation to not return to prior levels: however, such longer-term trends are not salient in explaining the trend over the last year because such demographic shifts occur gradually.

This morning’s news prompted me to do a bit of analysis on how much of the drop in unemployment over the last year is due to greater employment and how much is due to the shrinkage of the labor force. It is not easy to produce a clean decomposition, but simply displaying the trends in the unemployment rate, the employment rate (the share of the population employed), and the labor force participation rate (the share of the population in the labor force, meaning they are either employed or unemployed) certainly helps. The table below presents the data for key demographic groups along with the shares of the labor force of each group. The data are for the most recent three months compared to the comparable months a year ago (avoiding the volatility of one month’s data).

Labor Force Share* Unemployment rate Labor force/population Employment/population
Sept.-Nov. Sept.-Nov. Sept.-Nov.
2010 2011 Change 2010 2011 Change 2010 2011 Change
All 100.0% 9.7 8.9 -0.8 64.6 64.1 -0.4 58.3 58.4 0.1
Education, 25 years and older
Less Than High School 8% 15.5 13.7 -1.8 46.8 47.0 0.2 39.5 40.5 1.0
High School 24% 10.0 9.4 -0.7 61.5 60.5 -1.1 55.4 54.8 -0.5
Some College 24% 8.8 8.1 -0.7 70.1 69.0 -1.1 64.0 63.4 -0.6
College Degree or More 31% 4.8 4.3 -0.4 76.4 76.0 -0.4 72.8 72.7 -0.1
By Age
16-24 14% 18.3 17.0 -1.3 55.2 55.5 0.3 45.1 46.1 1.0
25-54 66% 8.6 7.9 -0.7 82.0 81.4 -0.6 74.9 74.9 0.0
55+ 20% 7.2 6.7 -0.5 40.2 40.4 0.2 37.3 37.7 0.4
By Race/Ethnicity
White 81.0% 8.8 7.9 -0.9 64.9 64.5 -0.5 59.2 59.4 0.2
Black 11.6% 15.9 15.5 -0.4 62.1 61.7 -0.4 52.3 52.1 -0.2
Hispanic 15.1% 12.8 11.4 -1.4 67.3 66.7 -0.6 58.7 59.1 0.4
By Gender
Male 53.5% 10.4 9.3 -1.2 71.0 70.5 -0.5 63.6 63.9 0.3
Female 46.5% 8.8 8.5 -0.3 58.5 58.1 -0.4 53.4 53.2 -0.2
* Labor Force in November 2011. Shares by race/ethnicity sum to greater than 100% because Hispanics can be of any race.


The top line tells a clear story that unemployment fell by 0.8 percentage points but the share of the population employed rose by just 0.1 percentage point. The share of the population in the labor force fell by 0.4 percentage points. This tells you that in the aggregate it was not greater employment driving the drop in unemployment.Read more


Public pension scourge is at it again

Here’s a quiz any undergrad business major should be able to ace: Assume you invest $10,000 in an asset with an expected return of 10 percent, and another $10,000 in an asset with an expected return of 4 percent. What’s the expected annual return on your portfolio over a 30-year period?

Answer: 8.1 percent (because $10,000 x 1.0430 + $10,000 x 1.1030 = $206,928, and $20,000 x 1.08130 = $206,928)

But in a new working paper, Rochester University finance professor Robert Novy-Marx asserts that a pension fund manager following accepted accounting rules for public pension funds would assume an expected portfolio return of 7 percent in this situation (which he gets by averaging 10 percent and 4 percent). From this false premise, Novy-Marx draws outlandish conclusions about pension fund accounting, such as the claim that a pension fund with just $10,000 invested in the higher-yielding asset would appear to be better funded, all else equal, than one with $20,000 split equally between the higher- and  lower-yielding asset (because $10,000 x 1.1030 > $20,000 x 1.0730). Novy-Marx concludes that these rules give public pension fund managers a perverse incentive to “burn” the low-yielding bonds in order to inflate their plan’s funding status.

If this sounds absurd, it’s because it is. To begin with, you can’t just average the two rates of return as Novy-Marx does, because over time the portfolio becomes more weighted toward the higher-yielding asset. In practice, pension funds periodically re-balance in order to prevent a portfolio from becoming too heavily weighted toward risky assets, but they would have to re-balance continuously in order to reduce returns to 7 percent, which is unrealistic. In any case, Novy-Marx doesn’t even mention re-balancing, nor any other realistic pension fund practices in his paper. If he did, he’d also have to acknowledge that public pension funds assume stable, long-run returns that vary little across plans, clustering around 8 percent—less than the roughly 9 percent these funds have averaged over the past quarter century. Thus, they wouldn’t be affected by the kind of gaming Novy-Marx conjures up in this paper.

Novy-Marx’s claims are exasperating because the accounting method he prefers would actually create perverse incentives. Novy-Marx et al. believe that since pension liabilities are guaranteed (only partially, but that’s another matter), pension funds should be required to assume a nearly “risk-free” rate of return no matter the fund’s actual asset allocation. Thus, in Novy-Marx’s example, the assumed rate of return would be the 4 percent yield on nearly risk-free Treasury bonds even if the entire portfolio were invested in stocks with an expected 10 percent return (Novy-Marx doesn’t deny the existence of an equity premium).

It’s important to note that this wouldn’t encourage prudent investment practices any more than the doctrine of predestination eliminated sin. If anything, it might have the opposite effect—incite a desperate hunt for yield—as all pension funds would immediately appear drastically underfunded. It would not guarantee that the fund would earn a 4 percent return or better, since it wouldn’t require funds to invest in Treasuries or other low-risk assets. All it would do is make pension funds look bad and cause required contributions to spike, inciting a taxpayer revolt. It would also cause funded ratios and required contributions to vary for no logical reason, since Treasury yields fluctuate with monetary policy and market conditions that may have little or no bearing on pension fund adequacy.

Elsewhere, Novy-Marx has actually suggested that state and local governments with shaky finances should be allowed to contribute less to their pension funds because their higher borrowing costs—and the greater likelihood that they renege on pension promises—should translate to a higher discount rate on future pension liabilities. Though this illustrates where his logic takes you, Novy-Marx isn’t trying to promote fiscal irresponsibility.

(However, allies like Andrew Biggs of the American Enterprise Institute want to be able to assume high expected returns on assets in 401(k)-style plans while requiring public pension funds to assume low returns on the same assets.)

Novy-Marx’s latest sally is more an effort to provoke than to persuade. But he and his allies have already had a significant impact in the policy arena. The Government Accounting Standards Board has proposed valuing some pension liabilities using low municipal bond yields, a change that will likely result in significantly lower funded ratios and higher required contributions.

More generally, Novy-Marx and a small group of other economists have succeeded in attacking public funds for supposedly engaging in aggressive accounting and ignoring risk, deflecting attention from the real problem (in states where there is one) of elected officials neglecting to make required pension contributions. Astonishingly, they have done so without presenting any actual evidence that public pensions take on too much risk or inflate expected returns, but have rather harped on arcane accounting issues until enough people have concluded that where there’s smoke there must be fire.

Stop digging us into an ever deeper hole! Or, how not to argue for the payroll tax holiday

President Obama and many Democrats are making the case for an expansion of the payroll tax holiday primarily on the grounds of protecting middle-class families from a tax hike. This is intrinsically problematic even if it seems politically expedient.

The one-year Social Security payroll tax holiday set to expire at the end of December reduced employees’ payroll taxes by 2.0 percentage points, increasing disposable income by $112 billion in 2011 and generating upwards of a million jobs. The Senate is expected to take up an expansion of the tax cut that would provide a 3.1 percentage-point reduction for employees and partially reduce employers’ payroll taxes. The largest component of Obama’s proposed American Jobs Act, the measure would do more for employment in 2012. But framing the argument instead as taxpayer protection digs proponents of progressive job-creation efforts into a deep hole in two ways.

First, if the measure is presented as anti-tax, we could never end the payroll tax reduction since any advocate would then be accused of favoring taxing the middle class! And if we do not end this measure, it eventually will lead to scaling back Social Security, which would deliver a long-sought conservative goal and further exacerbate our already growing retirement insecurity.

Second, presenting the measure as taxpayer protection advances a false narrative. For one thing, it further reinforces the misguided notion that economic policy is about whose tax cuts are better. This is a debate we don’t want to prolong, as its pursuit over the last several decades has been the recipe leading to a shrunken public sector. It also fails to articulate the real imperative behind it: to maintain consumer spending which supports jobs throughout the economy. We are neglecting the crucial narrative that Obama’s policies are pro jobs whereas his opponents’ are not.

Finally, we are failing to distinguish between the two types of tax cuts being offered. Conservatives claim that protecting lower tax rates for the wealthy creates jobs because those folks will work harder and invest with their extra cash. This policy is really not about generating jobs in the near term—trying to lower unemployment substantially in the next year—but, at best (if it is at all true, which I doubt), about more investment and jobs in the long term. In contrast, the payroll tax holiday is about temporarily infusing some spending into the economy which, in turn, keeps people working or adds jobs as families shop and spend, raising demand for goods and services.

Of course, the payroll tax holiday is a second-best approach: job-creation through spending is far more effective. Direct spending on infrastructure or even on government hiring people to perform useful public jobs (as was done by the Works Progress Administration and Civilian Conservation Corps) is more effective in raising demand and generating jobs. Seeing temporary tax cuts put in the category of competing tax cuts rather than that of job-generating efforts makes me want to recant my support for this measure. I understand the urge to find an allegedly effective argument and call out the hypocrisy of promoting tax cuts for the wealthy but not for low-earners and the broad middle class. But right now, this argument we are waging for the payroll tax cut is just digging us into a deeper hole, which is the way Democrats and liberals seem to fight every fight. Please stop digging!

Ryan’s budget proposals belie concerns about inequality

The Congressional Budget Office recently released a comprehensive report on income distribution and inequality trends of the last three decades. The report was widely viewed as an affirmation that the Occupy Wall Street movement’s concern with the distribution of economic rewards is well-founded.

Strikingly, House Budget Committee Chairman Paul Ryan (R-Wisc.) interpreted the report as an affirmation that his budget policy wish list is a panacea for the societal challenges of income inequality and economic mobility. The House Budget Committee Majority Staff’s 17-page rebuttal dodges the broad takeaway of CBO’s report by distinguishing between economic mobility and absolute well-being versus relative inequality, but Ryan’s own budget proposals belie this distinction.

As Ezra Klein points out, Ryan’s report presents a false dichotomy between closing the income gap (i.e., redistribution through a progressive tax) and growing the economic pie (i.e., regressive tax cuts for upper-income households). Implied is that redistributive policies increasing taxes on upper-income households would sharply reduce economic activity, making all households absolutely worse off. But this premise is contradicted by recent experience: President Bush cut taxes for upper-income households and we got the worst economic expansion since World War II, in which the ‘economic pie’ grew a meager 2.6 percent annually (and 65 percent of national income gains went to the highest-income 1 percent of households). The failure of the supply side experiment is unsurprising given ample evidence in the economics literature that the elasticity of taxable income is relatively low, changes in the top marginal tax rate have little impact on productive investment, and marginal tax rates are well below optimal rates.

Yet there is a more fundamental problem with Ryan’s analysis. Ryan is for redistribution, but the kind of redistribution that shifts the burden of taxation from upper-income households to the middle class. Just look at the Ryan Roadmap, his 2010 budget that served as a blueprint for the House Republican 2012 budget. The figure below depicts how the Roadmap would change shares of federal taxes paid and average federal tax rates paid by cash income levels, relative to current policy (from this Tax Policy Center table). Households with income above $1 million would see their average tax rate plummet from 29 percent to 13 percent, lowering their share of federal taxes paid by 10 percentage points. On average, households earning between $20,000 and $200,000 would see their taxes rise, subsidizing the upper-income tax cut. More than two-thirds of households would see a tax increase.

Click to enlarge

This redistribution will not close the income gap or foster economic mobility; this will merely confer a tax cut of $500,000 to households earning over $1 million annually. And for the reasons noted above, these tax changes are unlikely to spur long-term growth (any more than the public investments that Ryan’s budget would instead cut).

Finally, Ryan’s rhetorical support for economic mobility is contradicted by his oppositions to the very policies that promote mobility. Education and training provide a means by which low-income Americans can climb the socioeconomic ladder, and the social safety net helps that climb by lowering its risk. Yet Ryan supports massive cuts to these government functions and programs, such as Pell Grants helping low-income students pay for college.

Ryan’s acknowledgment that income inequality is a problem is certainly appreciated, but one wonders if the staffers who wrote this rebuttal are actually familiar with his policy positions.

Eurozone crisis: Dogs and cats living together! Mass hysteria!

The crisis in the eurozone, and the bizarre failure of the European Central Bank (ECB) to even try to manage it, has united strange bedfellows in arguing that the United States Federal Reserve should begin acting as in loco Responsible Central Bankis for the eurozone.

Brad DeLong argued a week ago for the Fed to begin buying up Italian and Greek debt to avoid a financial crisis potentially as big or bigger than the fallout from Lehman’s collapse in 2008. Dean Baker and Mark Weisbrot, often skeptical of finance-centric explanations of (and solutions to) the ongoing jobs crisis over the years since the Great Recession began … agree wholeheartedly.

Yes, as a general rule, economists agreeing with each other is usually a recipe for other people to begin reaching for their own wallets, but this group is both smart and (much) more importantly right on this specific issue. If the ECB won’t act like a central bank, and if the absence of a central bank in the eurozone threatens American economic growth (and it does – the eurozone is a crucial export market for the U.S. and fallout from U.S. banks holding eurozone could indeed be ugly), then it makes sense for the Fed to step in.

It would be really helpful, by the way, to have the two current vacancies on the Fed’s Board of Governors filled by people who were consistently arguing for aggressive actions to stem the economic crisis.

Getting the economic facts right during the House regulatory debate

This week, the House of Representatives is expected to vote on two regulatory reform bills: H.R. 3010, the Regulatory Accountability Act (RAA), and H.R. 527, the Regulatory Flexibility Improvements Act. These bills would alter the regulatory process significantly, likely severely restricting the adoption of new regulations. In advancing these bills, proponents argue that regulations have become exorbitantly costly and are a large threat to jobs. These claims do not hold up to scrutiny, and are frequently made in a greatly exaggerated or substantially misleading manner.

EPI has issued a series of reports this year that assess these claims.  The evidence we have compiled, which I summarized in two recent EPI publications, might be of particular interest this week.

A quick guide to EPI’s research on the costs and benefits of regulations” describes three main findings:

  • Government data show that over several decades, and during the Obama administration as well, the benefits of regulations have significantly and consistently exceeded their costs.
  • The much-scrutinized EPA regulations fare especially well according to cost-benefit criteria. The compliance costs of Obama EPA regulations are tiny relative to the size of the economy, are neutralized by their economic benefits, and are dwarfed by their health benefits.
  • Regulatory opponents often cite large cost estimates that are entirely unsupportable. This conclusion particularly applies to their repeated use of the Crain and Crain $1.75 trillion estimate of the costs of regulation, which our own research, the Congressional Research Service, the Administration’s Council of Economic Advisers, and the Center for Progressive Reform have found is unreliable and grossly overstated.

A quick guide to the evidence on regulations and jobs,” also has three main findings:

  • A huge shortfall in demand, not regulatory uncertainty, is what ails the economy.
  • New EPA regulations, in particular, can be expected to have a negligible effect on the overall economy. The largest EPA regulation proposed so far (the “air toxics” rule) would, in fact, likely create a modest number of jobs.
  • Academic studies of and data on the relationship between employment and regulations generally find they have a modestly positive or neutral effect on employment.

Throughout the past year, the case against regulations has been driven by inaccurate overestimates of the economic damage they cause. As Congressional debate over sweeping regulatory reform bills proceeds this week, these erroneous claims are likely to be repeated, potentially contributing to the adoption of legislation damaging to the rules necessary to promote public health and safety, as well as economic stability.  It is an important time to compare these claims to the facts documented by EPI research this year.


Video: Where’s the outrage?

EPI President Larry Mishel recently participated in The Economist‘s Buttonwood Gathering in New York City. In its third year, Buttonwood is a flagship event for the magazine that attracts leading financial and economic experts.

Mishel served as a panelist during the session “The backlash: Zuccotti Park and beyond.” He was joined by Jeff Madrick, senior fellow at the Schwartz Center for Economic Policy Analysis at The New School, and Terra Lawson-Remer, fellow at the Council on Foreign Relations and assistant professor of International Affairs at The New School.

Mishel used the forum to lament the lack of urgency being shown by Buttonwood attendees toward the unemployment crisis. Watch Mishel’s full remarks below:

Mishel also recently conducted a virtual teach-in with Occupied Media, where he talked about the need for a more decent and more equal society:

As Thanksgiving nears, some “perspective” on poverty

Before Thanksgiving dinner each year, my stepfather likes to say a prayer imploring all of us to “try to keep things in perspective.” Despite it being more than a bit stale at this point (sorry, dad), I can already hear him delivering this refrain yet again this year. So in that spirit, I think it is worthwhile—especially at a time of frustrating congressional inaction and worrisome missed opportunities—to take stock of what some government programs do achieve, while being mindful of all that still needs to be done.

As I have written previously, the Census Bureau’s new Supplemental Poverty Measure (SPM) is an attempt to better identify America’s poor, by accounting for many of the additional expenses that families face and the resources that government programs provide. As the figure below illustrates, the effect of many of these programs is significant.  While the percentage of people below the SPM poverty line is already a woeful 16 percent, it would increase to 18 percent without the Earned Income Tax Credit (EITC). That would be an additional 6 million people living in poverty. If you consider the EITC’s effect on those under 18, the benefit is even more striking: from 18.2 percent in poverty with the EITC to 22.4 percent without it. That’s roughly 3.1 million children kept above the poverty line.

The Supplemental Nutritional Assistance Program (SNAP, formerly the Food Stamp Program) shows a similar impact. The overall poverty rate would be 17.7 percent versus 16 percent without accounting for SNAP, a difference of about 5.2 million people. For children, the poverty rate goes from 21.2 percent without SNAP down to 18.2 percent – roughly 2.2 million children.

Click to enlarge

These are nontrivial differences, to be sure.  Yet even with these programs, the picture of America described by the SPM is one of substantial unmet need: 49 million people living in poverty, including almost 14 million children. We are the richest nation in the world, yet one-sixth of our nation is considered poor, and almost half (47.9 percent) are within 200 percent of the poverty line – what some might call “near poor.” That strikes me as a potentially “perspective altering” statistic. Maybe my stepfather is on to something.

Garbage in, garbage out at Heritage and AEI?

Jason Richwine of the Heritage Foundation and Andrew Biggs of the American Enterprise Institute are at it again (following up on an earlier study for the Business Roundtable), claiming that government workers—in this case teachers—are grossly overpaid. EPI  and others have expended much ink on this topic, and forthcoming EPI research will address some of the latest claims in greater detail (though maybe Jon Stewart said it all in his message to teachers about “the greed that led you into the teaching profession”).

But one of the key arguments Richwine and Biggs make is so sloppy, it should only take a blog post to rebut: the claim that “teachers exhibit low cognitive abilities compared to other college graduates” and that once you take this into account teachers suffer no wage penalty. Since all employers would love to be able to accurately assess the skills of prospective employees, it’s amazing that such a tool, if it exists, isn’t in widespread use. The miracle tool turns out to be the Armed Forces Qualification Test, which Richwine and Biggs refer to as an IQ test. Here’s what the AFQT actually tests:

  • general science
  • arithmetic reasoning
  • word knowledge
  • paragraph comprehension
  • numerical operations
  • coding speed
  • auto and shop information
  • mathematics knowledge
  • mechanical comprehension
  • electronics information

Is it really surprising that a future kindergarten or high school history teacher would score lower on this test than a future engineer or army officer?  There are many other issues one can raise about the AFQT score, but that will have to wait for a later time.

But even if the AFQT score contained important information about teaching ability, Richwine and Biggs aren’t content to add this measure to their statistical model to explain wages as economists normally do.

Teacher wage regressions with education and Armed Forces Qualification Test (AFQT)
Key controls included Teacher wage effect (%) R-Squared
Row Education AFQT
1 Yes No -12.6* 0.31
2 Yes Yes -10.2* 0.33
3 No Yes 0.6 0.29
*Significant at 95 percent level

That’s because adding this variable doesn’t change the basic story, which is that teachers’ earnings are significantly lower than those of similar college grads, even those with the same AFQT scores.

See the results in their table. In regressions with the traditional specification (i.e., the variables included as controls) they find teachers earn 12.6 percent less than comparable workers (see row 1). In their next specification, they add the AFQT score, thus controlling for comparable education and AFQT score (which they mistakenly refer to as IQ). Their results show that teachers earn 10.7 percent less than other workers with comparable education and AFQT scores. That means that including the AFQT score seems to reduce the teacher penalty (actually, they do not provide the statistical information to judge whether there is a statistically significant difference between these two estimates) but in no way eliminates it. So, how do Richwine and Biggs reach the conclusion that there is no teacher wage penalty? They say:

“The wage gap between teachers and non-teachers disappears when both groups are matched on an objective measure of cognitive ability rather than on years of education.”

Richwine and Biggs take this as their most important bottom-line finding and it is based on a regression, row 3, with no control for education. This is JUNK science plain and simple. If you asked any labor market economist if they could have only one predictor of wages available to them, the overwhelming choice would be to use the education level of a worker. Ask yourself, do you expect two people with the same AFQT score to earn the same amount if one has a college degree and the other has not completed high school? If not, then one needs to control for education level. That is, there is every theoretical/conceptual reason why education should be included in these wage regressions and there is no basis for excluding it just because you include another variable representing a test score. There certainly was not any empirical test offered, such as showing that education was not statistically significant once you included the AFQT score. Richwine and Biggs do not present the basic details of their regressions, such as the coefficients and standard error for each of the variables, but it is almost certainly the case that the education controls in row 2 are economically and statistically significant in a regression that also includes the AFQT measure.

Their claim that the teaching wage penalty is zero should be discounted completely. Their “evidence” only shows that teachers do not make more, or less, than others with the same test scores when the “others” being compared to have much lower education (since teachers have much higher education than the average worker). That’s not much of a compliment to the wages teachers earn. This exercise by Richwine and Biggs is nothing more than generating a result you wish to find even though you violate basic economic thinking and avoid the empirical testing (as in the removal of the education controls) that is the norm in professional analysis.

Check out EPI research on the teacher pay penalty and the updated analysis and watch this space for an upcoming blog on teacher benefits, which Richwine and Biggs claim are worth as much as teacher salaries. In the meantime, you may want to read this DailyKos blog from a teacher inviting Richwine and Biggs to join him in the public schools. We can give Richwine and Biggs a pass on the value of their research if they want to enjoy these lavish perks themselves.

The supercommittee’s real failure

Yesterday, the congressional supercommittee announced that it failed to come to an agreement to reduce the deficit by at least $1.2 trillion over 10 years. The committee’s failure automatically triggers $1.2 trillion in cuts to domestic and defense spending starting in 2013, along with the expiration of the Bush tax cuts. The failure of the committee is no surprise to observers, given the failure of past commissions, negotiations, and various other initiatives. This is especially true since congressional Republicans continue to rule out reversing Bush-era tax cuts for high-income individuals, effectively insisting that the burden of deficit reduction be borne primarily by low- and moderate-income Americans.

The commission has not only failed to address medium-term deficits, but it has passed up an opportunity to address the immediate crisis: jobs. With unemployment and underemployment remaining high and job creation remaining weak, we cannot continue to let the wounds to the labor markets fester.

Looking forward, Congress needs to immediately turn to jobs. This means continuing emergency measures to boost consumer demand by extending support for unemployed workers and preserving tax cuts targeted to low-income taxpayers (by extending the payroll tax holiday or enacting a more targeted credit). It also means providing federal assistance to prevent further pullbacks by state and local governments. Finally, this means investing in America’s future by boosting infrastructure spending, supporting our children’s education, and creating work opportunities for all.

Congress can still address the jobs crisis, and should do so immediately.

From left, supercommittee members Sen. Max Baucus (D-Mont.), Rep. Rob Portman (R-Ohio), and Sen. John Kerry (D-Mass.). (Image from Flickr Creative Commons by sunlightfoundation)

America’s infrastructure — ticking time bombs in every state

Later today, I will pass through two of our nation’s airports, where I will see ample evidence suggesting that we collectively place a very high priority on protecting our transportation infrastructure from harm. On my way through security, I will dutifully remove my shoes, and will remove from my pockets such benign items as a marker, an extra paper napkin from lunch, and the keys to my bike lock.

Yet throughout this same country, there are nearly 70,000 bridges that the U.S. Department of Transportation has identified as “structurally deficient.” We all recall with horror the 2007 collapse of the bridge in Minneapolis, yet there are thousands of such ticking time bombs throughout America today. In three states — Iowa, Oklahoma, and Pennsylvania — there are over 5,000 bridges deemed to be structurally deficient. While not every one of those bridges is in imminent danger of collapse, these remain alarming numbers.

Fixing America’s crumbling infrastructure should be a top priority for every national, state, and local official throughout the nation. It’s easier than often is the case in public policy debates to connect the dots on this one:

  • Crumbling infrastucture + alarmingly high rates of unemployment (particularly amongst construction workers) + interest rates at rates that remain at unprecedented low levels = jobs plan that helps put Americans back to work today, while laying the foundation for future economic growth and prosperity.

While there’s certainly room for debate about how to proceed with infrastructure investment at this time, there really shouldn’t be any debate about whether to do this. My colleague, John Irons, testified this week before the Congressional Progressive Caucus Ad Hoc Hearing on Job Creation. In his testimony, he noted, “Congress should immediately reauthorize the Surface Transportation Act at the higher spending levels requested by President Obama … increase[ing] transportation investments by $213 billion over the next decade [thereby] add[ing] 350,000 job-years of employment over 2012-2014.”

Michael Likosky has written at length about the need to create an infrastructure bank, leveraging both public and private sector money to strengthen America’s infrastructure, and noting that, “If we don’t find a way to build a sound foundation for growth, the American dream will survive only in our heads and history books.”

American workers understand the importance of investing in infrastructure — last Thursday, tens of thousands of workers rallied in cities and towns throughout America for bridge repairs and job repair, as part of the AFL-CIO’s Infrastructure Investment Day of Action.

For state governments, investing in infrastructure through bonding is one of the few (and most effective) tools at their disposal to help spark a real economic recovery that helps working families today, while making investments that will contribute to future prosperity. Friday’s “Smart Brief” from the American Society of Civil Engineers highlights Massachusetts Gov. Deval Patrick’s plan to invest $10 billion over the next five years in capital spending, “focus[ing] on job creation through transportation projects, smart growth and construction and improvement of public higher-education facilities.” This is the sort of initiative that other states should emulate. Only through such aggressive investment in infrastructure will Americans in every state be confident that they are safe crossing today’s bridges, and that the road ahead leads to shared prosperity.

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House votes down BBA measure that would’ve harmed the economy even further

The House of Representatives voted today on H.J. Res 2, a Balanced Budget Amendment (BBA). Because it would have amended the Constitution, the BBA would have needed a two-thirds majority vote to pass. The final vote count was 261-165, with four Republicans voting against the bill (though some cast their votes because it wasn’t strict enough) and 25 Democrats voting for the bill.

This vote came about directly as a result of the August debt limit agreement, in which conservatives demanded a vote on a balanced budget amendment before the end of the year. Besides requiring the president to submit a balanced budget to Congress each year, this amendment would have required a three-fifths majority vote in order to raise the nation’s debt limit (which, in layman’s terms, would mean more playing chicken with the U.S. credit rating). A number of House Republicans would have preferred to vote on an amendment that included both a spending cap at 18 percent and a two-thirds majority vote requirement in order to raise revenue; this amendment did not include those measures seemingly in an effort to gain more Democratic support.

The term “balanced” budget amendment is misleading – it fools people into thinking it may be a responsible policy to support. This is anything but the case – a BBA would in fact be a gravely irresponsible way to go about addressing our nation’s fiscal issues. Bob Greenstein of the Center on Budget and Policy Priorities sums it up nicely:

“The amendment would raise serious risks of tipping weak economies into recession and making recessions longer and deeper, causing very large job losses. That’s because the amendment would force policymakers to cut spending, raise taxes, or both just when the economy is weak or already in recession — the exact opposite of what good economic policy would advise.”

When recessions hit, spending on unemployment insurance and various other safety net programs, like food stamps, increases as more people fall on hard times (these are called automatic stabilizers). At the same time, revenues fall due to fewer people working and paying taxes. This leads to natural deficits during recessionary times. These deficits then shrink as spending on automatic stabilizers eventually falls and revenue streams eventually pick up. A BBA would not allow this excess spending, and would instead force spending to fall along with revenues. This would be disastrous during economic downturns both macroeconomically and for millions of Americans’ living standards. The Macroeconomic Advisers, an economic forecasting firm, recently provided interesting detail in a blog post regarding what might have happened had a BBA been passed and ratified, and taken effect in 2012. They say:

“The effect on the economy would be catastrophic. Our current forecast shows a Unified Budget deficit of about $1 trillion for FY 2012. Suppose this fall the federal government enacted a budget for FY 2012 showing discretionary spending $1 trillion below our forecast, resulting in a “static” projection of a balanced budget for next year. $1 trillion is roughly two-thirds of all discretionary spending, and about 7% of GDP. Our short-run multiplier for discretionary spending is about 2, and let’s assume a simple textbook version of Okun’s law in which the unemployment gap varies inversely with, but by half as much as, the percentage output gap. Then, instead of forecasting real GDP growth of 2% or so for FY 2012, we’d mark that projection down to perhaps -12% and raise our forecast of the unemployment rate from 9% to 16%, or roughly 11 million fewer jobs. With interest rates already close to zero, the Fed would be near powerless to offset this huge fiscal drag.”

In sum, if a BBA had been in place, it would have resulted in catastrophically lower GDP growth for FY 2012 and catastrophically higher unemployment. A BBA is a bad idea that does not deserve the falsely positive term “balance” in its title.

Labor-HHS spending bill would make terrible changes in labor law and regulation

Representative Denny Rehberg (R-MT), Chairman of the Labor-HHS-Education Appropriations Subcommittee, recently launched a massive attack on the federal government’s efforts to improve the labor standards, job prospects, wages and bargaining rights of American workers. His numerous amendments to a major bill to fund the Labor Department and other agencies would block the government’s efforts to improve enforcement of wage laws, make construction work safer, protect the jobs of U.S. workers, reduce the levels of respirable coal dust that causes black lung disease, and give workers a fair chance to have a union if they want one. And where the law is already working to ensure contractors don’t compete for federal construction projects by driving down wages, Rehberg’s amendments would undermine the existing law.

Given that a decent job is the ticket to the middle class, Rehberg’s attack looks like the 1 percent trying to slam the door on the 99 percent.

Rehberg is going after important protections that don’t cost a lot of money. One of his targets is a Labor Department program – Bridge to Justice — that does nothing more than refer workers who’ve been cheated out of wages through the American Bar Association to attorneys with relevant experience. Obviously, Rehberg isn’t trying to save the taxpayers money, he’s simply trying to protect unscrupulous employers.

Rehberg’s legislation fits neatly into the business lobby’s campaign to weaken the National Labor Relations Board, the agency created to protect the right of workers to join unions and exercise their collective bargaining rights. His bill cuts NLRB funding by $49 million and targets rules that inform workers of their rights, enable workers to communicate with each other during union election campaigns, and ensure that union elections are conducted efficiently.

The employer campaign to prevent reforms at the NLRB depends upon misinformation and the fact that the public is largely unaware that union elections look more like those in a one-party state than in a true democracy. The last thing Rep. Rehberg’s corporate allies want is a system that gives full expression to employees’ desires to join together and improve their wages, job security, and working conditions.

Finally, the bill undoes recent rule changes from the Labor Department in the H-2A and H-2B programs that favor the hiring of U.S. workers at prevailing wages over foreign guestworkers for relatively low-skilled jobs as farmworkers, hotel maids, and landscapers. The bill would thus make it harder for U.S. workers to find jobs and would depress wages.

Every one of the two dozen or so labor-related provisions in the bill is bad policy, and one can only hope that Senate Labor-HHS Appropriations Subcommittee Chairman Tom Harkin (D-Iowa) and his Senate colleagues reject them all.

Progressive Caucus hearing on jobs a welcome relief from budget cuts mania

Wednesday, the Congressional Progressive Caucus (CPC) held an ad hoc hearing on job creation. Ten members of the CPC, including co-chairs Raul Grijalva (D-Ariz.) and Keith Ellison (D-Minn.), listened to testimony from five economists and experts, including EPI Research and Policy Director John Irons, EPI board members Rob Johnson and Julianne Malveaux, and Jeff Sachs and Bob Borosage. They also heard from Garrett Gruener, representing the “Patriotic Millionaires.”

All agreed that the supercommittee is headed in the wrong direction. Bob Borosage, co-director of the Campaign for America’s Future, compared the supercommittee to a bus headed straight toward a cliff, with the bus driver fretting about which lane to be in. In his testimony, John Irons hit back against the notion that the supercommittee needs to “go big,” stating there is no indication that markets are worried about U.S. debt or that they would respond any more favorably to a plan that goes beyond $1.2 trillion in deficit reduction. Not only are interest rates low, but Moody’s Investor Services, one of the ratings agencies with the power to downgrade the U.S. rating outlook, stated recently that “failure by the committee to reach agreement would not by itself lead to a rating change.” Irons stated, however, that he believed the market would react if Congress fails to do anything on jobs.

The hearing concluded with Gruener, representing the Patriotic Millionaires, which are a group of very wealthy people who want to see taxes raised on those making over $1 million – people like themselves – for the good of the nation. They lobbied on Capitol Hill Wednesday, urging Congress to raise taxes on those who can most afford it. Gruener, a businessman, testified that not one of his business decisions has been a function of marginal tax rates. He said:

“Not once, and I literally mean not once, have any of my decisions – my personal investment decisions or any of the investment decisions I’ve ever seen in the venture community – been a function of marginal taxes. … We’re not trying to grow companies in which the change of a few percentage points one way or the other is going to make a big difference.”

The supercommittee would be wise to pay more attention to hearings such as these. But though the CPC invited members of the supercommittee to attend, none did.

Bad regulatory diagnosis leads to wrong legislative cure

The Judiciary Committee press release unveiling the Regulatory Accountability Act paints an alarming picture about the relationship between jobs and the economy. House Judiciary Committee Chairman Lamar Smith (R-Texas) states: “The current regulatory system has become a barrier to economic growth and job creation. Federal regulations cost our economy $1.75 trillion each year. Employers are rightly concerned about the costs these regulations will impose on their businesses. So they stop hiring, stop spending and start saving for a bill from Big Brother.”

If this picture were accurate, one might appropriately support legislation that a just-released Coalition on Sensible Safeguards study found would “grind to a halt the rulemaking process.” But it is not.

The chairman’s statement incorporates two oft-repeated but fundamentally inaccurate claims. The first is the cost of regulation finding from a study by Crain and Crain conducted for the Small Business Administration. Their $1.75 trillion estimate is a gross exaggeration. It has been debunked by the Congressional Research Service, Obama administration officials, and the Center for Progressive Reform.

A study by EPI’s John Irons and Andrew Green is especially telling. It examines Crain and Crain’s estimate of the costs of economic regulation, which accounts for 70 percent of the overall estimate. The economic regression model used to determine these costs contains a series of fundamental flaws, including reliance on an international data set rife with holes (spotty data typically produces spotty findings), as well as a misspecified regression that confuses regulatory stringency with regulatory quality. The Crain and Crain regression also produces the counterintuitive finding that increased education in a country leads to less economic growth, reason alone to be skeptical of the overall estimate.

Irons and Green correct for just one of the problems with the regression – they fill in the spotty data set – and find no statistically significant relationship between Crain and Crain’s measure of regulation and economic outcomes. This implies that the economic costs of regulation cannot be distinguished from zero, an unsurprising result since certain regulations, such as financial regulations that stabilize the economy, promote economic growth.

The second inaccurate claim of Smith’s is that the specter of additional regulation is what’s causing companies to hold back on additional hiring. EPI has released a series of reports on the relationship between regulations and jobs; one of the clearest findings is that it is a huge shortfall in demand, not regulatory uncertainty, which ails the economy.

In this report, EPI President Larry Mishel finds that data suggesting a significant role for regulatory uncertainty is altogether absent. In fact, investment in equipment and software has grown faster than during the previous three recoveries, and private sector employment has grown much faster than during the last recovery. There are no mysterious lags that might be explained by regulatory uncertainty.

In fact, Labor Department data show that in 2011, just 0.2 percent of mass layoffs have been due to regulation, while 29.7 percent have reflected the lack of demand. (This data is summarized by Bruce Bartlett.)

Of further interest, companies are not using a substantial amount of resources they already have at their fingertips; presumably, they would use these resources more fully before they would increase investment or hiring. The capacity utilization rate (the degree to which current factories and equipment are being used) is still well below its average from 1979 to 2007. Similarly, the average number of hours employed individuals are working each week is still below the pre-recession level. Substantial unused capacity is another indicator that lack of demand, not regulatory uncertainty, explains why economic trends have not been stronger.

Turning to what businesses themselves are saying, Mishel found that the percent of small businesses reporting that regulations are the single most important problem they face has not been out of its historical range during the Obama administration. For instance, the proportion reporting this concern is lower than it was during the Clinton years, when employment growth was rapid. What is unusual now is that the most common problem cited by far is “poor sales (an indicator of the lack of demand);” during the Obama administration, the average share of small businesses citing “poor sales” as the most important problem they face is more than double the average cited in the eight other presidential terms examined.

This Congress has seen many examples of unwarranted economic concerns about regulations driving legislation likely to prove damaging to the regulatory process, thereby undermining essential health, safety, and economic safeguards. The thinking behind the Regulatory Accounting Act is a case in point; bad diagnoses tend to lead to the wrong cures.


Democrats’ counter-offer to big domestic spending cuts is… big domestic spending cuts?

As Paul van de Water recently pointed out, some of the plans floated by supercommittee members cut non-defense discretionary spending by about the same amount as the sequestration trigger would. This is because the proposals to cut discretionary spending do not include a firewall between defense and non-defense, so it is likely that a large cut to the entire discretionary budget—such as the Democratic offer to cut $400 billion—would all end up falling on the non-defense side. Remember, the trigger was supposed to be so bad and disastrous that it would scare Congress into striking a deal. But apparently it’s just scaring Congress into making pretty much the same cuts to non-defense discretionary and just sparing defense.

Why should we care about non-defense discretionary? There are a lot of reasons to care about this portion of the budget, which includes just about every federal government function outside of Social Security, Medicare/Medicaid, defense, and net interest, despite only representing less than 20 percent of the budget. But one of my main concerns is public investments such as infrastructure, education, and research and development. Economists across the board—even presidential candidate Mitt Romney’s economic advisor!—recognize that these investments must be sustained and even expanded to ensure long-run economic growth and global competitiveness. But according to Office of Management and Budget account-level data, these investments make up 1.7 percent of GDP, or about 40 percent of non-defense discretionary. This means that it would be extremely difficult to hit the budget targets proposed without taking a decent-sized hunk of flesh from these accounts.

Second, non-defense discretionary has been on a downward path as a share of the economy since the late 1970s (about the time that income inequality really started taking off, hmmm…). The discretionary caps enacted into law as part of the debt ceiling deal would force non-defense discretionary to record lows: to just 2.7 percent of GDP, far lower than the levels of the 1990s and 2000s, and a 29 percent reduction relative to the funding in the 2000s. And both the sequestration trigger and the $400 billion cut—were it all to fall on domestic discretionary—would cut these services even further.

In the Beltway, the answer is always “faster deficit reduction!”

Mayor Michael Bloomberg of New York is in the news today for shutting down the Occupy Wall Street protests in Zuccotti Park. This reminds me that he spoke last week at a forum co-hosted by the Center for American Progress and the American Action Forum. Besides a couple of truly novel twists (comparing Social Security to OPEC?!) it’s actually useful bringing up his speech because it perfectly crystallized the dominant economic narrative that far too many policy-making (and media) elites tell themselves these days. The punchline of that narrative, presented with no evidence at all,  is simply that we need to urgently move to cut the budget deficit.

Bloomberg is sure that providing more fiscal support (i.e., using larger near-term deficits to finance spending and investments) to the economy won’t work to reduce unemployment. How is he sure? Because we gave some already and unemployment remains high. This is like a fire chief claiming that pouring water on a fire won’t quench it because once there was a really big fire and his crew poured more water on it than they’ve ever poured before … but it kept burning. So, apparently we’re going to move to pouring gasoline on it. Really, it says so right in the press release – “the best stimulus is fiscal responsibility (where “fiscal responsibility” is nearly always Beltway speak for quick reduction of budget deficits through large spending cuts leavened with some tax increases).”

I know that my harping on this may be getting old, but people haven’t stopped doing it yet, so here we go again: the failure of fiscal support would leave clear footprints in economic data. The textbook case for why debt-financed fiscal support does not lead to net new jobs and economic activity in some cases is that the first-round effect of spending and tax cuts are counter-balanced by rising interest rates that “crowd-out” private investment. There has been no rise in interest rates, hence there is no crowding-out.

Bloomberg is also sure that businesses aren’t spending enough – and that their failure to spend is because of vague uncertainty:

“But as important, and the subject for today, is the broader uncertainty that exists about the country’s long-term fiscal stability… . Nearly every CEO I talk with says the same thing: If the Federal government passed a real deficit reduction plan – and we’ll talk about what ‘real’ means in a minute – business leaders would respond just as they did in the 1990s, when President Clinton and Congress adopted a long-term deficit reduction plan that gave businesses more certainty about the market.”

But businesses are spending. Actually much, much more than they did during the first two-and-a-half years of the early 1990s expansion.

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And there is no actual evidence that uncertainty is constraining them. And if businesses are uncertain about the future, aren’t they at least happy enough with today’s record-high profit margins?

I guess this is the quality of fiscal policy analysis I should expect from somebody who seems to think that Congress forced banks to finance the housing bubble.

Enough for now – suffice to say that this speech could’ve been generated by a Ye Olde Beltway Centrist Cred-Producing software package from the mid-1990s. With this mindless invocation of “smaller deficits will fix everything,” is it really so hard to figure out why countries respond so poorly to financial crises?

How will the market react to a supercommittee “failure?”

As the deadline looms for the supercommittee to report back to Congress, some have raised the specter that “failure” would lead to a collapse in financial markets. For example, Massachusetts Sen. John Kerry has expressed concerns that a failure to reach an agreement would send a dangerous signal to markets, and the Committee for a Responsible Federal Budget has said that a “go big” agreement is needed to “reassure markets about our ability to repay our creditors.”

These concerns are misplaced.

First, even if the supercommittee fails to find an agreement, there would still be a $1.2 trillion 10-year spending reduction put onto the books via a process called sequestration that would limit annual appropriations by Congress. From a pure deficit-reduction perspective, a $1.2 trillion agreement would be no different than a so-called failure. Congress can of course revisit those cuts, but they could also revisit any other kind of spending agreement too.

Second, remember that financial markets are forward looking and respond primarily to unexpected news. Does the market believe that Democrats and Republicans will come together in a Kumbaya moment to pass $3 trillion in tax increases and/or cuts to spending? I wouldn’t bet on it. Goldman Sachs noted in a recent Q&A on the supercommittee that, “a ‘grand bargain’ to resolve this imbalance appears to be a low probability this year. Instead, the politically realistic outcomes range from no agreement to a deal reaching $1.2 trillion in deficit reduction over 10 years.” They also note that just “32% of economists polled in the November Blue Chip financial survey expected a super committee agreement to become law.” Thus a failure would merely confirm market expectations, and there should be little reaction in the markets.

Third, as I noted in an earlier post, real interest rates on federal debt are negative for some maturities, and very low for longer term bonds. There is no indication that markets are worried about U.S. debt and need to be reassured. For example, Moody’s rating agency recently stated that, “failure by the committee to reach agreement would not by itself lead to a rating change.”

Finally, the main worry for businesses is the lack of demand for their goods and services and the main worry for individuals is the lack of jobs. The markets would react if Congress fails to continue a payroll tax holiday or fails to continue unemployment insurance payments. The real, immediate crisis is jobs and economic growth – Congress needs to focus on getting people back to work. A jobs-first focus would, more than anything else, reassure markets that the U.S. economy is poised for growth, and not slipping into premature, job-killing austerity.

New evidence that the chained CPI is unfair to seniors

The Social Security benefit cut the supercommittee is most likely to make is a reduced COLA, the inflation adjustment that protects the purchasing power of recipients’ benefit checks from rising prices. Alice Rivlin, Alan Simpson, Erskine Bowles, and most pundits argue that the COLA overstates price growth facing the elderly and hence provides them a mounting windfall over time , fattening the retirement checks of the elderly at the expense of everyone who’s still working. They are wrong.

In fact, as economists have pointed out, it is likelier that the current Social Security COLA is insufficient to fully protect Social Security beneficiaries from the effects of inflation, because it doesn’t take into account the large amounts of money the elderly pay out-of-pocket for health care. It’s probably true that the chained CPI-U better accounts for price changes affecting the general population, but it simply measures the wrong market basket for the elderly. The chained CPI-U not only understates the effect of health care cost inflation on the elderly, but it may also overstate their ability to change their buying habits in response to price increases since a greater share of their incomes is spent on necessities.

New evidence that the elderly have very different consumption patterns than the general population comes from the federal Interagency Technical Working Group that just reported on a new Supplemental Poverty Measure (SPM), a new methodology for determining the extent of poverty in the United States. The study group confirmed that medical out-of-pocket expenses for the elderly are a disproportionate part of their consumption. When the study group measured poverty based on the actual spending of Americans over the age of 65, they discovered that the poverty rate jumped from 9 percent to 15.9 percent. More than 6 million Americans aged 65 or over are living in poverty, according to the SPM. The view that the elderly are doing better than everyone else and living well at the expense of the working population is contradicted by this new evidence.

No supercommittee member should be allowed to pretend that using the chained CPI to determine Social Security COLAs is a “technical” change to increase their accuracy. It is a benefit cut, pure and simple, and it will do the greatest harm to the oldest of the elderly. Under the proposed COLA, an average-wage worker retiring this year would, in 2031, receive $1,754 less in annual benefits.