The sequester (pdf) cut approximately $85 billon from Fiscal Year 2013 spending—half from reductions in defense spending and half from elsewhere in the budget. OMB calculated (pdf) that it would result in a 5 percent reduction in nondefense discretionary spending—funding for programs like education and housing assistance, veterans’ benefits and services, medical and scientific research, and health and safety regulations.
I have long argued that cuts to government spending are uncalled for, given the lack of a robust economic recovery. However, if you are searching for sensible ways to shrink the deficit, there are better alternatives to sequestration. For example, we could eliminate the nondefense discretionary spending cuts in the sequester and shave $26 billion annually from the deficit by eliminating or closing a handful of tax loopholes.
Tax loopholes, formally known as tax expenditures, reduce tax revenues by over $1 trillion every year. There are many reasons to keep tax loopholes in the tax code: some are very popular (e.g., the mortgage interest deduction), some provide incentives to socially beneficial behaviors (e.g., the earned income tax credit), and some are technically difficult to change (e.g., the exclusion for employer retirement plans).
Recent reports from The Heritage Foundation and the American Action Forum claim that Americans (particularly young Americans) will pay more for health insurance in the new exchanges set up as part of the Affordable Care Act (ACA, or, Obamacare if you like) than they do currently. The question of how much prices differ between the current non-group market and the new health insurance exchanges is awfully interesting, but very difficult, if not impossible, to answer. And to be very clear—neither the Heritage nor the AAF studies do much to shed light on it.
Transparent prices are now widely available in the new health insurance exchanges.1 There are advertised prices for a variety of policies, for consumers in different age groups, and, similarly, subsidies can be calculated for a continuum of income levels. And these are the prices that people will actually end up paying.
Now, let’s contrast that with the non-group market before the ACA. First, the insurance policies often compared to the exchanges do not line up in terms of benefits. Policies in the individual market often have higher deductibles and exclude various conditions from what’s covered by the policy. The policies offered in the exchanges generally offer more comprehensive coverage, and hence should be more expensive on average for this reason. Second, in the pre-reform non-group market, list prices don’t reflect the true prices people will actually end up paying. The individual market, in most states, does individual risk rating. This means the insurance company (often on a website) will give a price, but then they will do an individual risk assessment, for instance, by sending someone to measure an applicant’s blood pressure, weight, etc. At that point, the true price is given. Not surprisingly, it can turn out to be higher than the price listed. This price can be effectively infinity, by the way (more on this below).
The Luddites the headline is speaking of, of course, are those of the deficit hawk industrial complex, ably personified yesterday by Erskine Bowles on MSNBC’s Morning Joe and today by Thomas Friedman’s NYT column. This is a group of people who are routinely given prominent platforms (and often paid very well) to warn that budget deficits are a clear and present danger to American living standards. They are re-emerging in force now that the current fiscal showdown seems to be moving away from repealing/defunding/undermining the Affordable Care Act (ACA) and into the traditional stage of hand-wringing about budget deficits.
Officially sanctioned hand-wringing about budget deficits as a part of deals solving fiscal showdowns has become a routine part of fiscal policy debates in recent years. And this hand-wringing has been increasingly damaging to the U.S. economy. The first instance of this phenomenon was the creation of the National Commission on Fiscal Responsibility and Reform (or, the “Simpson-Bowles Commission”) in 2010. The SB plan (not an official plan, just one forwarded by the Commission co-chairs) called for a roughly balanced mix of tax increases and spending cuts to get deficit savings over the next decade.
Even in 2010, the urgency to cut longer-run deficits was misplaced—the laser focus should have been on ensuring full recovery from the Great Recession. This failure to focus on recovery has been the primary contributor to the recovery’s dismal rate of progress between the first quarter of 2010 and the second quarter of 2013. For example, the employment rate of prime-age adults has risen by less than a percentage point, leaving intact well over 80 percent of the Great Recession-induced decline in this key measure of labor market slack.
The current fiscal showdown was actually a little different in that the House GOP and Senator Ted Cruz largely did not claim to be engaging in obstructionism in the name of reducing budget deficits. Indeed, their central demand—the wholesale rollback of the Affordable Care Act (ACA) would actually increase long-run deficits substantially.
But those days seem over and discussion after any short-term cease-fire on the continuing resolution (CR) and debt ceiling seems set to snap back to the Washington perennial of obsessing over long-run budget deficits. A clear sign that the nation’s political debate has shifted back to budget deficits is always that Erskine Bowles and Alan Simpson have launched a campaign calling on policy-makers to reduce deficits and are invited on talk shows and fawned over. Looks like we’re here again.
As comfortable as this makes Beltway pundits, it’s a disaster, since previous episodes where fiscal showdowns focused on budget deficits led to the radical austerity that has been so damaging to recovery from the Great Recession. Let’s recap.
The budget deals being talked about in the Senate and the House suggest that the government shutdown will end soon and that the debt ceiling will be raised, at least for a while. This cease-fire looks like the Tea Party has snatched a possible victory from the jaws of defeat.
Helaine Olen, author of Pound Foolish, appropriately calls this a ‘cease-fire’ because nothing got settled and hostilities are bound to resume in a few months. It seems that no hostages (like the health care law) will be taken this time but the situation is set so hostages may be taken again in February. The extortion threat remains the same but now the ransom demand is the Democrats’ assurance that the so-called grand budget deal goes according to the House Tea Party caucus’ wishes: cuts in Social Security and Medicare. This is unfortunate since the President and Senator Reid have clearly articulated that they wanted to end the hostage-taking, where either the government or the economy is a hostage. After all, the setup is to trade entitlement cuts, meaning unpopular reductions in Medicare (like raising the eligibility age) or in Social Security (cutting cost-of-living increases and/or raising the full retirement age), for revenue. That’s a tried and failed deal. So, if the President does not agree to Social Security and Medicare cuts there won’t be an increase in the debt ceiling? A government shutdown again? I wonder, is this setup meant to pressure the Tea Party into granting more revenue or is it meant to pressure Democrats into accepting Social Security and Medicare cuts they do not want or think are necessary?
NPR recently published a story that gives undue credence to a Cato Institute study lamenting the generosity of US safety net programs. In reality, welfare benefits are not nearly as generous or accessible as the study claims. The NPR piece provides useful stories from actual welfare recipients, whose experiences more faithfully represent reality.
An important part of Cato’s assertion is that these programs offer a higher level of income than do many low-wage jobs. The real problem here is that wages for the vast majority of Americans are too low, and haven’t kept up with the increased productivity of the labor force.
When the study was first released, we pointed out some of the problems with their analysis. Here’s a quick summary of why their study was so misleading:
The Cato Institute recently released a wildly misleading report by Michael Tanner and Charles Hughes, which essentially claims that what low-wage workers and their families can expect to receive from “welfare” dwarfs the wages they can expect from working. Using state-level figures, their paper implies that single mothers with two children are living pretty well relying just on government assistance, with Cato’s “total welfare benefit package” ranging from $16,984 in Mississippi to $49,175 in Hawaii. They then calculate the pretax wage equivalents in annual and hourly terms and compare them to the median salaries in each state and to the official federal poverty level. Tanner and Hughes find that welfare benefits exceed what a minimum wage job would provide in 35 states, and suggest that welfare pays more than the salary for a first year teacher or the starting wage for a secretary in many states.
So what makes this so misleading?
For one, Tanner and Hughes make the assumption that these families receive simultaneous assistance from all of the following programs: Temporary Assistance for Needy Families (TANF), Supplement Nutrition Assistance Program (SNAP), Medicaid, Housing Assistance Payments, Low Income Home Energy Assistance Program (LIHEAP), Women, Infants, and Children Program (WIC), and The Emergency Food Assistance Program (TEFAP). It is this simultaneous assistance from multiple sources that lets the entire “welfare benefits package” identified by Cato add up to serious money. But it’s absurd to assume that someone would receive every one of these benefits, simultaneously, and it ignores the fact that some programs have time limits.
The smart Austin Frakt tweeted today that “reprioritization is just a word for stiffing Social Security and Medicare beneficiaries.” My first thought was “well, yeah.” My second thought was that most people surely don’t realize that. In fact, given the intentional mystification swirling around the debt ceiling (and most other financial topics), most people probably don’t really understand much at all about the implications of the United States running into the statutory debt ceiling. So here’s an attempt (offered too late in the game, I know) to aid public understanding of this, at least a little bit.
We should start by being really clear what the problem posed by the debt ceiling is. Currently, government spending—everything from Social Security benefits to Medicare reimbursements to unemployment insurance to Federal government salaries to interest payments on holders of Treasury bills (also known as government debt)—is financed in two ways: current revenues (taxes), or, by borrowing.*
Here are some numbers for 2013. Spending by the federal government will amount to about 20.8 percent of total GDP. Taxes will account for 17.0 percent of GDP (and will hence cover 81 percent of total spending). This means we’ll borrow 3.9 percent of GDP to cover the rest of our spending.
The “True” Unemployment Rate Is the One BLS Releases Every Month*, But It’s Not the One “True” Measure of Labor Market Slack
Yesterday we released a new monthly labor market indicator, an estimate of the number of “missing workers” (potential workers who are not working or looking for work because the job market is currently so weak). We also generated another new measure—what the unemployment rate would be if these missing workers were classified by the Bureau of Labor Statistics as actively looking for work (see below figure). As of the latest data available, August 2013, there were nearly 5 million missing workers. If these workers were actively looking for work, the unemployment rate would be 10.1 percent, not 7.3 percent.
Many have asked me if I think this augmented unemployment rate is the “true” or “real” unemployment rate, so I thought it’d be useful to clarify: The unemployment rate that BLS puts out is the true unemployment rate, and there are good reasons for the BLS to use the definitions it does. But the official unemployment rate is not currently the best measure of changes in the health of the labor market.
In other words, no, I don’t think my new measure is the “true” unemployment rate, but in today’s economy, I do think it’s a better measure than the unemployment rate for gauging trends in job opportunities and the overall health of the labor market
Technically speaking, my measure is the unemployment rate plus the “participation gap” (the participation gap is the cyclical decline in the labor force participation rate, i.e. the decline in participation that is due to the weak labor market, not other trends like retiring baby boomers). In other words, unlike the unemployment rate, this measure accounts for a key component of slack in today’s labor market—the fact that many workers have dropped out of, or never entered, the labor force primarily because job opportunities are so weak. The unemployment rate misses this piece entirely because jobless workers are only counted as unemployed if they are actively seeking work. If policymakers or commentators want the best gauge of trends in the health of today’s labor market and how much productive slack exists in the economy, they should not be looking at the unemployment rate, they should be looking at this (or some other measure uninfected by cyclical changes in participation, like the employment to population ratio of prime-aged workers).
* Potential workers who, due to weak job opportunities, are neither employed nor actively seeking work Source: EPI analysis of Mitra Toossi, “Labor Force Projections to 2016: More Workers in Their Golden Years,” Bureau of Labor Statistics Monthly Labor Review, November 2007; and Current Population Survey public data series
The unemployment rate is vastly understating weakness in today’s labor market: Unemployment rate, actual and if missing workers* were looking for work, January 2006–March 2014
If missing workers were looking for work
* Potential workers who, due to weak job opportunities, are neither employed nor actively seeking work
Source: EPI analysis of Mitra Toossi, “Labor Force Projections to 2016: More Workers in Their Golden Years,” Bureau of Labor Statistics Monthly Labor Review, November 2007; and Current Population Survey public data series
*That is, every month the federal government is not shut down.
New EPI Economic Indicator: Monthly Updates of the Number of “Missing Workers” and What the Unemployment Rate Would Be If They Were Looking for Work
More than four years since the Great Recession officially ended in June 2009, the unemployment rate stands at 7.3 percent. This is still a percentage point above the highest unemployment rate of the early 2000s downturn, 6.3 percent. However, 7.3 percent is a big improvement from the high of 10.0 percent in the fall of 2009. Unfortunately, most of that improvement was for all the wrong reasons.
In today’s labor market, the unemployment rate drastically understates the weakness of job opportunities. This is because in the weak labor market of the aftermath of the Great Recession, there are a huge number of “missing workers”—potential workers who are neither employed nor actively seeking work simply because job opportunities remain so scarce. Because jobless workers are only counted as unemployed if they are actively seeking work, these missing workers are not reflected in the unemployment rate.
As part of its ongoing effort to create the metrics needed to assess how well the economy is working for America’s broad middle class, EPI is introducing its “missing workers” estimate. Our estimate shows there are currently nearly 5 million missing workers. These are workers who would be in the labor force if job opportunities were significantly expanded but, given the state of the labor market, are sidelined.
Exactly how many missing workers macroeconomic policymakers believe there are has enormous implications for their assessment of the strength of the job market, and therefore for their policy decisions. For example, if they underestimate the number of missing workers, they will overstate the strength of the labor market, and be less likely to provide the economy with the support it needs. As shown in the figure below, if the nearly 5 million missing workers were looking for work and thus counted as unemployed, the unemployment rate in August would have been 10.1 percent instead of 7.3 percent.
The unemployment rate is vastly understating weakness in today’s labor market: Unemployment rate, actual and if missing workers* were looking for work, January 2006–March 2014
|Date||Actual||If missing workers were looking for work|
* Potential workers who, due to weak job opportunities, are neither employed nor actively seeking work
Source: EPI analysis of Mitra Toossi, “Labor Force Projections to 2016: More Workers in Their Golden Years,” Bureau of Labor Statistics Monthly Labor Review, November 2007; and Current Population Survey public data series
Estimating the number of missing workers is not straightforward because some changes in labor force participation over the last five years have nothing at all to do with the weak labor market (for example, baby boomers beginning to reach retirement age). Our estimate of the number of missing workers isolates the cyclical component of the decline in the labor force participation rate since the start of the Great Recession. In other words, it counts just those missing workers who would be in the labor force if job opportunities were strong. It doesn’t count, for example, those retiring baby boomers who would have left the labor force whether or not the Great Recession happened.1
We will update these estimates on the first Friday of every month immediately after the Bureau of Labor Statistics releases the monthly jobs numbers. In particular, we will update the following three figures each month at EPI’s Missing Workers page:
1. The trend in the total number of missing workers, currently nearly 5 million:
Millions of potential workers sidelined: Missing workers,* January 2006–March 2014
Note: Volatility in the number of missing workers in 2006–2008, including cases of negative numbers of missing workers, is simply the result of month-to-month variability in the sample. The Great Recession–induced pool of missing workers began to form and grow starting in late 2008.
2. The breakdown of missing workers by gender and age, showing most missing workers are of prime working age:
Roughly half of missing workers are of prime working age: Missing workers,* by age and gender, March 2014
|Men under 25||580,000|
|Women under 25||370,000|
3. The earlier figure depicting what the unemployment rate would be if the missing workers were looking for jobs.
1. How do we estimate the number of missing workers? Labor force participation rate projections published by the Bureau of Labor Statistics in November 2007—before the start of the Great Recession—are available in Table 3 of Mitra Toossi, “Labor Force Projections to 2016: More Workers in Their Golden Years,” Bureau of Labor Statistics Monthly Labor Review, November 2007. The projections assumed a healthy labor market over the period in question, 2006–2016, so the participation rate changes it forecasts reflect purely non-cyclical factors (e.g., the impact of retiring baby boomers). The difference between these projections and the actual labor force participation rate is thus a good measure of the cyclical change in the labor force participation rate, i.e., the change that is a direct result of the weak labor market in the Great Recession and its aftermath. Based on this logic, missing workers are estimated in the following way: The labor force participation rate projections for 2016 by gender and age group (age groups 16–19, 20–24, 25–34, 35–44, 45–54, 55+) available in Table 3 of Toossi (2007) are assumed to be structural rates. The current month’s structural rates (by gender and age group) are calculated by linearly interpolating between 2006 and 2016. The size of the potential labor force is calculated by multiplying the current month’s structural rates by actual population numbers (available by gender and age group from the Current Population Survey public data series). The difference between the size of the potential labor force and size of the actual labor force (also available by gender and age group from the Current Population Survey public data series) is the number of missing workers.
Just a few weeks ago, budget deliberations centered around a “grand bargain,” in which Democrats would get some loosening of the austere discretionary budget caps (ie, the “sequester”) and an increase in the nation’s statutory debt ceiling in exchange for cuts to mandatory spending programs (such as Social Security and Medicare). While objectionable, this script at least made some logical sense in a debate over budgets. But as the beginning of the new fiscal year approached with no budget and a breach of the debt ceiling not far behind, House Republicans decided to force a government shutdown “to get something out of this,” though as Rep. Marlin Stutzman (R-Ind.) acknowledged, it’s unclear “what that even is.” At first, it appeared they were going to demand mandatory spending cuts as the condition to pass a continuing resolution (CR) and demand some changes to Obamacare as the condition for raising the debt ceiling. In the end, the Tea Party pressured the House Republican leadership to tie defunding Obamacare to passing even a 2-month CR. As a result, the government has been shut down since October 1.
On her “Bridging Differences” blog, educator Deborah Meier began a discussion with Mike Petrilli of the Thomas B. Fordham Institute, on whether urging disadvantaged women to defer childbearing until they had sufficient income (whether from work or marriage) to adequately support their offspring would result in better outcomes for those children. This, in turn, led to an extended discussion (not on the blog, but widely circulated among some education policy experts and commentators by e-mail) about whether alleviating poverty would raise student achievement, whether alleviating poverty through tax reform or income redistribution might be effective for that purpose, whether poor children in the United States have worse outcomes than poor children in other countries, what the best way might be to calculate poverty levels across countries, and whether school reform in the absence of alleviating poverty can be significantly effective.
The shortcoming of this discussion is that because Americans are averse to acknowledging the concept of social class and hold to a widely shared myth of unrestricted mobility (that is less and less reflective of reality), we tend to use the term “poverty” as a proxy for lower social class status. This shortcut causes great mischief in educational policy. Lower class children are not only characterized by having families with low current money income; they also have a collection of interacting characteristics, each of which affects the ability to learn.
Years ago, the Heritage Foundation published a report called No Excuses, by Samuel Casey Carter. Among others, one school it found enrolled a majority of children who were eligible for subsidized lunches yet who still had high achievement. According to the report, this (along with other, equally flawed examples) proved that poverty is no bar to high achievement. The school in question was in Cambridge, Massachusetts, and it turned out that the students mostly had parents who were graduate students at Harvard or MIT, whose stipends were low enough that their children were eligible for the lunch program.
In a New York Times article about a drive led by the United Automobile Workers (UAW) to unionize Nissan’s workforce at a factory in Canton, Mississippi, various local businessmen are quoted extolling the value to Mississippi of being a “right-to-work state” and maintaining a “non-union environment.” Given the economic condition of Mississippi, one has to wonder who, exactly, has benefited from Mississippi’s anti-unionism.
Mississippi has been a “right-to-work” state for nearly 60 years, plenty of time to benefit from its non-union environment, but its per capita income in 2012 was the lowest in the United States—not just low, but dead last.
Mississippi has the highest poverty rate in the nation, as well. 1 out of 5 Mississippi households has income beneath the official poverty line. (“Right-to-work” seems to be associated with high poverty since 9 of the 10 highest poverty states are “right-to-work.”)
Does the future look brighter? Not much. In terms of education, Mississippi is at the bottom again, ranking last in test scores on the gold standard National Assessment of Education Progress. Mississippi is the only state in which fewer than 1 out of 5 eight graders is proficient in math and reading.
Mississippi’s low rate of unionization has not led to prosperity. It might be time to try something new.
In an op-ed in today’s New York Times Stephen King, chief economist for HSBC, writes a deeply confused column that seems designed solely to sound serious and informed while scaring readers into thinking the U.S. economy cannot “afford” decent living standards for most Americans. Dean Baker notes a bunch of problems with the column here, but there are a couple of other things worth pointing out.
King lists globalization as the first influence that allowed rapid living standards growth in the past. He contends, however, that the pace of global integration will begin slowing and will provide less of a spur to growth in the future. I’m not sure what it is about international economics that makes people think they can make wild claims and no evidence must ever be brought to bear, but, there is a deep literature on the gains from international trade, and it’s just not true that they were a first-order driver of (aggregate) American income growth in recent decades. Further, while growing trade has likely (slightly) boosted aggregate U.S. incomes, it has (especially in recent decades) also led to significant changes in the distribution of income, outright lowering wages for most American workers. To put it simply, a reduction in the pace of American integration through trade and investment into the global economy would actually be good for most workers’ living standards (if not good for aggregate U.S. income).
Hitting the Debt Ceiling: An Anti-Stimulus at Least Twice as Large as the Stimulus in the Recovery Act
This blog post has been updated.
Several days ago Paul Krugman made a good point—while it’s really hard to be precise about how much it would hurt to slam into the constraint of the debt ceiling, we do know clearly that it would indeed hurt.
Say that Treasury decided to prioritize debt payments (and even say that interest on the debt doesn’t increase at all, which is unlikely), and cutback on other spending to levels that can be supported by incoming revenues rather than borrowing. This would by itself lead to a shock to GDP of well over 5 percent of GDP (annualized) when accounting for both the decline in spending (about 4 percent of GDP) and a modest multiplier.
In a previous post and economic snapshot, I and others noted the historical symmetry of the rise and fall of union density across the last century and its uncanny mirror image—the fall and rise of the share of income going to the top ten percent. The juxtaposition of the two lines suggests less a direct causal relationship than an emblematic one—between the trajectory of the workers’ bargaining power on the one hand, and trajectory of rent-padded top incomes on the other.
Updating this data through 2012 only confirms this dismal pattern. Union membership fell to 11.3 percent in 2012, and to a measly 6.6 percent in the private sector. As the last business cycle battered working Americans, the very rich just got richer—hoarding all of the income gains of the recovery, and reaching income shares unseen in the last century (19.3% for the top one percent, 35.8 percent for the top five percent, and 48.2 percent for the top ten percent).
Union membership and share of income going to the top 10%
|Year||Union membership||Share of income going to the top 10 percent|
Data on union density follows the composite series found in Historical Statistics of the United States; updated to 2012 from unionstats.com. Income inequality (share of income to top 10%) from Piketty and Saez, “Income Inequality in the United States, 1913-1998, Quarterly Journal of Economics, 118(1), 2003, 1-39. Updated and downloadable data, for this series and other countries, is available at the Top Income Database. Updated September 2013.
Here’s what we read today. Share what you’re reading in the comments.
- Will work for free: How unpaid internships cheapen workers of all ages (PBS Newshour)
- Looting the Pension Funds (Rolling Stone)
- I worked all week for free?!: The horrifying, true story of $0 paychecks (Salon)
- Why I Miss Pork-Barrel Politics (Slate)
- Government Shutdown Jeopardizes WIC Program (Huffington Post)
- Mr. Zuckerberg Goes to Washington (Dissent)
- Rep. Jeff Denham: U.S. must provide a ‘pathway to citizenship’ (Modesto Bee)
The September release of the Census Bureau’s income and poverty numbers (and I link to them here only to remind us all that the federal shutdown has made the unavailable) add one more data point to a lost decade punctuated by the recessions of 2001 and 2007, and also to a longer trajectory—stretching back to the 1970s—of starkly unequal income growth.
That growing inequality is underscored by plotting the Census data (reporting average family income by income percentiles) alongside the top incomes estimates of Thomas Piketty and Emmanuel Saez (recently updated through 2012).
There are some bumps in the “crosswalk” between these data sources1 and, for this reason, I include the “top 5 percent” estimate from both. That aside, the big picture is at once familiar and depressing. Over the long postwar era (1947-2012), we see steady and shared income growth running into the 1970s—and then suddenly fanning out as the top incomes (in green) take off. Over that long half-century, incomes (in real, inflation adjusted 2012 dollars) at the 20th percentile do not quite double; those for the top .01 percent of earners grow almost tenfold.
EPI has posted items recently on both the individual mandate and the employer mandate contained in the Affordable Care Act (or the ACA, or Obamacare). The summary version of these posts is simply: individual mandate, good; employer mandate, potentially flawed, not operative yet.
The longer versions follow.
On the individual mandate, we noted that it makes health reform more efficient than it would be without any such anti free-rider provision. And since the GOP hates efficient health reform, they have predictably made attacking it a center-piece of their, um, “strategy” in the most recent fiscal showdown.
On the employer mandate we noted two things. First, the claim that there has been a large shift towards part-time work since the passage of the ACA is just not true. Sure, some employers have cut hours in recent years, but the overall trend is toward a decline in the share of workers who are involuntarily part-time. Second, this failure to see any discernible shift towards part-time work makes sense given that the employer mandate in the ACA has been delayed for a year—meaning that employers will pay no penalty before 2015.1 Of course, this fact doesn’t mean that no employers are cutting hours while falsely blaming the ACA.
A stunning reminder that elite opinion is far from where it needs to be on wages is a Washington Post editorial from last month recommending a minimum wage of just $8.00 in 2015, up from the $7.25 level set in 2009. The Post’s editorial board, in fact, argued that a full-time, full-year worker should earn an income that is two-thirds of the poverty line for a family of four—a level set in 1959. The poverty line, however, is fixed only by inflation and does not reflect any general improvements in overall living standard. So, while economic productivity has more than doubled since 1959 (it rose 150 percent in fact), what we consider a poverty income has remained the same. In effect, the Washington Post’s editorial board is saying a low-wage worker should earn one-third less than a poverty-level income based on living standards two-thirds of a century earlier. Note that $8.00 in 2015 is a wage roughly nine percent less (inflation-adjusted) than what a low-wage worker (at 10th percentile) earned in 1973, despite the fact that low wage workers are far more educated and productive now than then.
Given the shutdown of the federal government, the September employment and unemployment figures were not released as scheduled. With no new data, it is useful to step back and look at the broader employment situation.
Regardless of what happened in September, we know roughly where the labor market is based on prior months’ data, and it’s not good. The labor market needs to add more than 8 million jobs to get back to the pre-recession unemployment rate, and at the growth rate we’ve seen for the last few months, we won’t fill that gap before the end of the decade. The unemployment rate has decreased substantially since its peak of 10% in the fall of 2009, but the vast majority of that decrease has not been because unemployed workers have found work. Instead, the unemployment rate declined because millions of jobless workers simply stopped looking for work, or never even started, because job opportunities are so weak (and if a jobless worker is not actively seeking work, they are not counted as unemployed). The weak employment situation has translated into very weak wage growth, since employers simply do not have to pay sizeable wage increases to get and keep the workers they need when workers do not have other options. In other words, we have an anemic recovery due to an ongoing shortfall in demand, and the US labor market remains depressed.
For more on the effects of the shutdown, a blog post from EPI Policy and Research Director Josh Bivens provides some useful perspective on its macroeconomic impact in the context of a weak, fragile recovery.
Most Americans can be forgiven if they have lost the thread of today’s debate over the government shutdown—it has shifted radically in a pretty short time. Just a few weeks ago, the budget debate was primarily over the automatic spending reductions, known as sequestration. The administration and most congressional Democrats want to cancel the sequester for the next two or three years to keep fiscal policy from dragging too heavily on the still-fragile recovery. The Congressional Budget Office projects that canceling the sequester for 2014 could increase GDP by 0.2 percent to 1.2 percent, and employment could be 300,000 to 1.6 million higher. Republicans, on the other hand, want the sequester to remain in place (though they do want a special carve-out to keep it from cutting defense as heavily as its projected to in 2014). They also want to reduce mandatory spending (a category dominated by Social Security, Medicare and Medicaid, though which also includes a number of other income support programs like unemployment insurance). House Republicans have already voted for a five percent reduction in spending on SNAP, the nation’s most important nutrition program for low-income adults and children.
As the end of the 2013 fiscal year approached not a single appropriations bill had been passed. While both the House and the Senate passed budget resolutions this year, the Republican leadership in the House refused to allow a conference committee to reconcile differences between the two to proceed. Given the failure to pass an appropriations bill, a continuing resolution (CR) was needed to temporarily fund the government or the government would shut down. On the first day of the new fiscal year, the government shut down because no CR had been enacted.
One of the more baffling messages in the current debate over the economy and “Obamacare” is the hue and cry over the trend in part-time employment. The fact is that since the end of the Great Recession, the trend in part-time employment has been down, not up. The black line in the chart below shows the share of part-time workers in the labor force. The light blue region shows the level of workers who are part-time due to economic reasons. The navy blue region show the level of workers who are part time due to “non-economic” reasons (health, child care responsibilities, etc.). The vertical bars denote recessions, from peak to trough.
During the past two recessions part-time employment clearly increased, while such employment was either flat or falling after the end of the recessions. (Note that the official end date of a recession is the point at which the economy stops getting worse. It does not mean the economy has recovered yet, and the current economy clearly has not.)
In a post on Wonkblog from yesterday morning, Dylan Matthews has an excellent interview with Michael Linden, a budget expert at the Center for American Progress. It’s definitely worth reading—not least for Linden’s correct (and therefore deeply depressing) point that in terms of discretionary spending, “We’ve already essentially adopted the Ryan budget.”
But, the simplistic Keynesian in me demands I disagree with something Dylan says about the influence of fiscal policy in the current economy:
“In 2009 it was easy to see how the multiplier on government spending, the GDP bang for the buck, would be pretty high. There were a lot of unused resources in the economy that government spending could spring into action. But during good economic times, the multiplier should be around 0. Obviously, we’re somewhere in between now, but where on the spectrum do you think we are?”
This is actually all pretty correct until that last sentence, particularly the “somewhere in between now”. Linden makes a very good empirical rebuttal to this by noting that today’s output gap is much, much closer to where it was in 2009 than zero, and, even this current output gap may well understate how much slack actually exists, since CBO has been steadily marking down potential output for reasons that may reverse if the economy recovered (see figure below from the famous DeLong/Summers fiscal policy paper).
I suspect Dylan knew he was heaving a softball question here, because he certainly knows there’s a lot of slack remaining in the economy. But it is important to note that the larger economic logic in his question isn’t quite right. Values of the multiplier really aren’t linear like that. If the multiplier on UI benefits in an economy with an output gap (a measure of economic slack) of 7 percent is 1.5 and the multiplier on these benefits in an economy with an output gap of zero is zero, this does not imply that the multiplier on these when the output gap is 3.5 percent is 0.75. I wish it did work like this, as it would make macroeconomic projections much easier.
Last year’s U.S. Supreme Court’s decision in Arizona v. U.S. left only a narrow opening for states to pass and enforce immigration-related legislation. Nevertheless, the enactment of immigration-related state laws and resolutions in 2013 increased by 83 percent compared with the first half of 2012. California has been a leader, passing numerous laws that would benefit immigrant workers and protect labor standards for U.S. workers. Despite extensive media coverage of the TRUST Act and two other bills—one that would grant “domestic workers” overtime pay (which became law last week) and another permitting unauthorized immigrants to obtain drivers’ licenses—four others would protect the labor and employment rights of California’s unauthorized immigrant workers and temporary foreign workers (“guestworkers”). If Governor Jerry Brown signs these four bills, the new laws will ameliorate some of the worst abuses immigrants suffer, including human trafficking, wage theft, and employer retaliation against workers who organize or report illegal acts to authorities. Comprehensive federal immigration reform that protects vulnerable foreign workers from abuse remains a longshot in the near-term, so these are welcome developments for the state with the largest population of immigrants.
An estimated 1.85 million unauthorized immigrants work in California, meaning a tenth of the workforce is particularly vulnerable to exploitation on the basis of immigration status. It is difficult for unauthorized workers to enforce minimum wage and overtime laws because employers use the threat of deportation to prevent labor organizing and to keep workers from complaining. Employers can report the undocumented to Immigration and Customs Enforcement, or require them to update or provide documentation for their “I-9” file, or run their name through E-Verify, the government’s electronic employment verification system. This increases the likelihood they’ll be fired and/or deported.
I have been getting versions of this question a lot. It is very hard to answer with any precision, so, below are some very imprecise thoughts.
First, the shutdown would have to go on for quite a long-time (say at least a month) to affect the trajectory of aggregate macroeconomic statistics like gross domestic product (GDP) or employment growth. For one, the majority of what the federal government spends money on (including the health insurance coverage expansions contained in the ACA!) will not be affected by the shutdown. Transfers payments like Social Security, Medicare, Medicaid, Food Stamps, etc…will continue to flow, as will essential discretionary spending.
Given the relatively restricted scope of the shutdown in terms of government spending, it stands to reason that it would have to go on for a a month or so before there would be enough of a mechanical fiscal drag to start significantly affecting the path of macroeconomic aggregates. A very, very rough back-of-the-envelope estimate would be that the strictly mechanical impact of a month of the shutdown would subtract 0.1-0.2 percentage points off of GDP growth for (fiscal) 2014.* So, if the government shutdown lasts a month and the economy was set to grow 3 percent in 2014 without the shutdown, the mechanical drag from the shutdown would result in actual growth of 2.8-2.9 percent. Of course, if one focused on the effect of the shutdown only in the fourth quarter of (calendar) 2013, it will matter quite a bit more (multiply that 0.1-0.2 by 4, so, a one-month shutdown would reduce fourth quarter GDP growth by about 0.4-0.8 percent, which is not peanuts for a quarterly growth number).
People wrongly think the economy is like the weather, a natural force outside of our control. So thinking about problems like high unemployment and declining wages leave people feeling hopeless because they seem to result from large historic forces that we can’t affect like globalization.
The truth, however, is that the economy isn’t like the weather: It’s entirely man-made and the rules are set by politics, not God or nature. Globalization is real, but the terms of globalization—the rules for how the internationalization of trade and production operates and affects workers and companies—are set by politicians and the organizations they’ve created through international treaties. We can change those rules and shape globalization so it does less harm to working people in the United States and around the world.
One of those rules changes would prevent companies from manipulating their currencies to make their exports cheaper while simultaneously making goods imported from other countries more expensive. China, Japan, and other countries have done this for years, buying hundreds of billions of U.S. dollars to weaken their own currencies and making it cheaper and easier to export goods to the United States. This strategy has been very successful, and together, China, Singapore, Taiwan and several other countries, including Japan, export hundreds of billions of dollars more to the United States in manufactured goods than we send to them, leaving us with a huge trade deficit that costs jobs and undermines wages here. The Peterson Institute for International Economics estimates that foreign currency manipulation has cost the United States between one million and five million jobs.
The core argument of the hysterical Republican diatribe against Obamacare is that it will push Americans down a slippery slope into the nightmare of, gasp, SOCIALIZED MEDICINE!! The phrase regularly trips from the lips of GOP reactionaries. Here’s Texas Senator Ted Cruz in his recent 22-hour speech: “Socialized medicine is—and has been everywhere it has been implemented in the world—a disaster. Obamacare–its intended purpose is to lead us unavoidably down that path.” Congressman Marlin Stutzman (R-IND) tells us, “Obamacare is a perfect tool to crush free enterprise and force all Americans into a socialist health care system.”
These mantras are not really about health care. They are conversation-stoppers. They are designed to flood the mind with murky images of indifferent bureaucratic sloth, incompetent if not sadistic doctors and nurses, dingy overcrowded waiting rooms and other grim scenes from a dystopian medical horror movie. The purpose is to convince the public that as bad as our health care system is, real change would make it worse.
The National Parks–Yellowstone, Yosemite, Great Smokey Mountains and all the rest—are shutting down, along with much of the government, because what Politico called a “hard-line faction of House GOP lawmakers” can’t accept the results of the last election or the fact that Congress enacted the Affordable Care Act. They are carrying obstructionism to a disastrous new low.
This is a personal nuisance, since my wife and I planned a seven-night stay in Yellowstone that would have started Saturday night. Luckily, we checked ahead and learned that, as this Q and A from Bloomberg News recounts, everyone will be kicked out of the park, vacation be damned!
“Q. What about my trip to Yellowstone?
A. You’re out of luck. According to the Interior Department’s shutdown contingency plan: “All areas of the National Park and National Wildlife Refuge Systems would be closed and public access would be restricted.”
GOP Members of Congress Use Fiscal Showdown as Leverage to Damage Middle-Class Economic Security, One More Time
At the beginning of the year, Andrew Fieldhouse and I tried to document lots of the ways that the GOP House had managed to smother a full recovery from the Great Recession. The list was pretty impressive, but a key theme was that the GOP kept using the leverage of various fiscal decision points (reaching the debt ceiling, the expiration of tax cuts, the drawdown of the Recovery Act, etc…) to push for austerity on the spending side of government. And their tactic worked—the current economic recovery has seen historically slow growth in public spending, and by now the entire gap between today’s economy and a healthy one can be attributed to this austerity, full stop.
When we wrote our list, I had hoped any strategic gain to the GOP Congress stemming from throttling the recovery was over—the 2012 election had come and gone, and going forward from there it is not exactly obvious why slow economic growth is damaging to just one party or the other.
Obviously, I was wrong.
The new exploitation of external fiscal deadlines (the need for a “continuing resolution” to fund federal governmental operations after October 1 and reaching the debt ceiling in mid-October) concerns both a further ratcheting down of spending, but also the delay of the Affordable Care Act (ACA).
Paul Krugman and Mark Thoma have been discussing (see here and here) the views of the (increasingly influential) very rich on this fall’s fiscal debate. They hypothesize that rising inequality has led to exorbitantly large incomes for a select few, and that these select few don’t understand the value of social insurance because they reap little-to-no benefits from programs like Medicaid, and SNAP, for example. The top 1 percent, after all, rarely realize the benefits of social insurance, since the likelihood that they experience unexpected income losses to the extent that they fall below the middle class living standards is slim. More often, social insurance benefits those who may be in the middle and lower classes, and experience unexpected income losses (like a lay off). Complaining about insurance simply because you don’t think you will need it is a pretty pithy argument, but let’s ignore that for now.
Thoma and Krugman go further, noting that rising inequality seems to have confirmed the top one percent’s notion that they are the indispensable economic engine of the U.S. economy, who take risks and work the hardest and should justly reap the benefits. They push for lower taxes (even though their current tax rate is one of the lowest in history) because they don’t think anything should impede their productivity, and they demand respect for being the “job creators” in society. In the context of this fall’s showdowns over the federal budget and the debt ceiling, not only is this take wrong, but it is totally divorced from the reality the broad middle-class faces—a reality of high joblessness from an anemic recovery, and meager wage growth over the last 30 years.