Extending Bad Fiscal Policy with Tax Extenders
As we near the end of the calendar year, we’ve once again reached tax extender season—the time of year when senators and representatives set aside their differences to hand out tax breaks, loopholes, credits, and deductions as if they got them at a Black Friday sale. For the uninitiated, “tax extenders” refers to a whole package of supposedly temporary tax breaks that are lumped together and passed into law every year or two, like clockwork.
Tax extender packages are genetically designed to sail through even the most acrimonious Congress. For one thing, there’s something for everyone. Supporters of schoolteachers will vote for the package because it includes a deduction for teachers to buy items for their classrooms, even if it includes tax breaks they don’t like at all, like those that benefit thoroughbred racehorse owners and NASCAR racetrack developers. (Policymakers that like watching fast things race in circles, but don’t care much for teachers, are also happy to vote for the package.) Moreover, the temporary nature of extenders packages allows Congress to simultaneously pretend that the tax breaks will actually expire soon (so as to deflate the budgetary cost of the legislation) while telling key constituencies—most of whom happen to be big businesses—that their cherished tax breaks are effectively permanent because they have always been extended before.
This week, Congress appears to be zeroing on a tax extender deal to be voted on when lawmakers return to Washington after Thanksgiving—and somehow, the biannual tax-cut fest is worse than normal.
Another Holiday Tradition: Arguing Economics at the Dinner Table
The holidays are coming, and this means dealing with the stereotypical uncle or brother-in-law who will make for a tense dinnertime by (among other things) loudly spouting conservative talking points on the economy.
There’s not time to detail the full Bingo board of silly views on the economy, but we can go over five themes that regularly recur, along with some detail on why they’re wrong.
1) The government’s spending too much—they should tighten their belts the same way households had to following the Great Recession
This “tighten the belts” line is perhaps the worst analogy ever. And yes, it’s bipartisan silliness. Simply put, if everybody (households, businesses, and governments) tightens their belts together (i.e., stops spending money) then the result is just a steep recession. Even with increased federal government spending, tightened household and business spending in 2008-2009 led to a savage economic downturn. Actively cutting government spending would’ve made it worse. Much worse. There really is tons of evidence that the increases in government spending during and right after the Great Recession (the Recovery Act, mostly) made the recession much lighter and the recovery come faster.
But, say you continue to disbelieve the overwhelming evidence that spending cuts slow growth and worsen recessions. Let’s just look at the data on federal spending in the recovery since the Great Recession versus recovery from the previous three recessions (in the early 1980s, early 1990s, and early 2000s) to see if even the premise of “exploding spending” in recent years is right. The figure below shows (inflation adjusted) federal government spending over the full business cycle (centered on the recession’s trough in the middle of 2009.
CPI Shows Real Wages Continue to be Flat
While the economy continues to create jobs, we’ve been tracking nominal wages as well as job growth, and it’s clear from this that continued slack in the labor market has left workers without bargaining power to bid up their wages. And it may be some time before wage growth gets anywhere near 3.5 to 4 percent, a growth rate that would be consistent with the Fed’s 2 percent inflation target and assumption of 1.5 percent productivity. Eventually, wage growth at that rate could even begin to claw back labor share of corporate-sector income, which has not even started moving in the right direction since the recession began.
This week, the Bureau of Labor Statistics released the Consumer Price Index for October 2014. These data allow us to look at real (inflation-adjusted) wages. The figure below shows real average hourly earnings of all private employees (top line) and production/nonsupervisory workers (bottom line) since the recession began in December 2007. For both series, you can see that real wages fell during the recession, then jumped up in late 2008 in direct response to a drop in inflation. When inflation falls and nominal wages hold steady, the mathematical result is a rise in inflation-adjusted wags. After the deflation leading up to 2009 stopped boosting real wages, wage growth has been flat.
Real average hourly earnings, December 2007– November 2014
| All private employees | Production/Nonsupervisory | |
|---|---|---|
| Dec-2007 | $23.84 | $19.90 |
| Jan-2008 | $23.79 | $19.88 |
| Feb-2008 | $23.81 | $19.89 |
| Mar-2008 | $23.83 | $19.90 |
| Apr-2008 | $23.79 | $19.90 |
| May-2008 | $23.76 | $19.86 |
| Jun-2008 | $23.56 | $19.72 |
| Jul-2008 | $23.47 | $19.65 |
| Aug-2008 | $23.62 | $19.76 |
| Sep-2008 | $23.63 | $19.77 |
| Oct-2008 | $23.89 | $20.01 |
| Nov-2008 | $24.44 | $20.43 |
| Dec-2008 | $24.71 | $20.67 |
| Jan-2009 | $24.65 | $20.64 |
| Feb-2009 | $24.62 | $20.60 |
| Mar-2009 | $24.69 | $20.69 |
| Apr-2009 | $24.71 | $20.69 |
| May-2009 | $24.69 | $20.68 |
| Jun-2009 | $24.51 | $20.55 |
| Jul-2009 | $24.56 | $20.59 |
| Aug-2009 | $24.56 | $20.59 |
| Sep-2009 | $24.51 | $20.60 |
| Oct-2009 | $24.50 | $20.58 |
| Nov-2009 | $24.48 | $20.58 |
| Dec-2009 | $24.47 | $20.60 |
| Jan-2010 | $24.50 | $20.64 |
| Feb-2010 | $24.55 | $20.68 |
| Mar-2010 | $24.57 | $20.68 |
| Apr-2010 | $24.61 | $20.74 |
| May-2010 | $24.66 | $20.80 |
| Jun-2010 | $24.65 | $20.81 |
| Jul-2010 | $24.68 | $20.81 |
| Aug-2010 | $24.68 | $20.83 |
| Sep-2010 | $24.69 | $20.82 |
| Oct-2010 | $24.68 | $20.86 |
| Nov-2010 | $24.63 | $20.81 |
| Dec-2010 | $24.54 | $20.72 |
| Jan-2011 | $24.58 | $20.76 |
| Feb-2011 | $24.48 | $20.68 |
| Mar-2011 | $24.37 | $20.58 |
| Apr-2011 | $24.34 | $20.55 |
| May-2011 | $24.32 | $20.53 |
| Jun-2011 | $24.31 | $20.50 |
| Jul-2011 | $24.34 | $20.53 |
| Aug-2011 | $24.25 | $20.48 |
| Sep-2011 | $24.23 | $20.45 |
| Oct-2011 | $24.34 | $20.49 |
| Nov-2011 | $24.29 | $20.49 |
| Dec-2011 | $24.30 | $20.48 |
| Jan-2012 | $24.27 | $20.44 |
| Feb-2012 | $24.26 | $20.41 |
| Mar-2012 | $24.26 | $20.40 |
| Apr-2012 | $24.29 | $20.45 |
| May-2012 | $24.33 | $20.47 |
| Jun-2012 | $24.37 | $20.47 |
| Jul-2012 | $24.43 | $20.52 |
| Aug-2012 | $24.29 | $20.41 |
| Sep-2012 | $24.24 | $20.33 |
| Oct-2012 | $24.17 | $20.32 |
| Nov-2012 | $24.31 | $20.42 |
| Dec-2012 | $24.38 | $20.45 |
| Jan-2013 | $24.40 | $20.50 |
| Feb-2013 | $24.31 | $20.43 |
| Mar-2013 | $24.38 | $20.50 |
| Apr-2013 | $24.47 | $20.55 |
| May-2013 | $24.46 | $20.54 |
| Jun-2013 | $24.47 | $20.53 |
| Jul-2013 | $24.42 | $20.53 |
| Aug-2013 | $24.46 | $20.53 |
| Sep-2013 | $24.46 | $20.55 |
| Oct-2013 | $24.49 | $20.58 |
| Nov-2013 | $24.52 | $20.61 |
| Dec-2013 | $24.48 | $20.61 |
| Jan-2014 | $24.50 | $20.63 |
| Feb-2014 | $24.55 | $20.71 |
| Mar-2014 | $24.53 | $20.65 |
| Apr-2014 | $24.47 | $20.62 |
| May-2014 | $24.44 | $20.59 |
| Jun-2014 | $24.44 | $20.58 |
| Jul-2014 | $24.43 | $20.59 |
| Aug-2014 | $24.56 | $20.69 |
| Sep-2014 | $24.54 | $20.66 |
| Oct-2014 | $24.57 | $20.70 |
| Nov-2014 | $24.66 | $20.74 |
Note: Earnings are adjusted to November 2014 dollars.
Source: Author analysis of Bureau of Labor Statistics's Current Employment Statistics and Consumer Price Index, public data series.
The second figure below charts the year over year change in real hourly earnings for both series over the last four years, notably after the spikes in real wages associated with a brief deflationary period. From the figure, it is obvious that wages for both series—all private sector and production/nonsupervisory workers—have stayed close to zero over the entire period. Both the nominal wage series and the real wage series tell a consistent story. Wages are continuing to flat line far into the so-called recovery.
Year-over-year change in real average hourly earnings of all private nonfarm employees and private production/ nonsupervisory employees, November 2009– November 2014
| All Private Employees | Production/Nonsupervisory | |
|---|---|---|
| Nov-2009 | 0.15% | 0.76% |
| Dec-2009 | -0.98% | -0.31% |
| Jan-2010 | -0.62% | 0.01% |
| Feb-2010 | -0.32% | 0.35% |
| Mar-2010 | -0.50% | -0.01% |
| Apr-2010 | -0.40% | 0.25% |
| May-2010 | -0.10% | 0.57% |
| Jun-2010 | 0.55% | 1.26% |
| Jul-2010 | 0.46% | 1.08% |
| Aug-2010 | 0.49% | 1.18% |
| Sep-2010 | 0.73% | 1.08% |
| Oct-2010 | 0.72% | 1.34% |
| Nov-2010 | 0.60% | 1.12% |
| Dec-2010 | 0.29% | 0.56% |
| Jan-2011 | 0.30% | 0.56% |
| Feb-2011 | -0.26% | 0.02% |
| Mar-2011 | -0.80% | -0.52% |
| Apr-2011 | -1.13% | -0.94% |
| May-2011 | -1.36% | -1.30% |
| Jun-2011 | -1.39% | -1.46% |
| Jul-2011 | -1.35% | -1.35% |
| Aug-2011 | -1.74% | -1.70% |
| Sep-2011 | -1.85% | -1.80% |
| Oct-2011 | -1.36% | -1.75% |
| Nov-2011 | -1.38% | -1.58% |
| Dec-2011 | -1.01% | -1.16% |
| Jan-2012 | -1.23% | -1.53% |
| Feb-2012 | -0.90% | -1.31% |
| Mar-2012 | -0.47% | -0.89% |
| Apr-2012 | -0.19% | -0.48% |
| May-2012 | 0.03% | -0.30% |
| Jun-2012 | 0.24% | -0.16% |
| Jul-2012 | 0.35% | -0.03% |
| Aug-2012 | 0.17% | -0.35% |
| Sep-2012 | 0.03% | -0.57% |
| Oct-2012 | -0.68% | -0.86% |
| Nov-2012 | 0.11% | -0.35% |
| Dec-2012 | 0.33% | -0.13% |
| Jan-2013 | 0.51% | 0.26% |
| Feb-2013 | 0.18% | 0.12% |
| Mar-2013 | 0.51% | 0.51% |
| Apr-2013 | 0.75% | 0.51% |
| May-2013 | 0.52% | 0.35% |
| Jun-2013 | 0.44% | 0.30% |
| Jul-2013 | -0.04% | 0.02% |
| Aug-2013 | 0.71% | 0.62% |
| Sep-2013 | 0.92% | 1.06% |
| Oct-2013 | 1.30% | 1.32% |
| Nov-2013 | 0.86% | 0.97% |
| Dec-2013 | 0.44% | 0.81% |
| Jan-2014 | 0.41% | 0.63% |
| Feb-2014 | 0.99% | 1.33% |
| Mar-2014 | 0.60% | 0.75% |
| Apr-2014 | 0.01% | 0.33% |
| May-2014 | -0.08% | 0.25% |
| Jun-2014 | -0.11% | 0.21% |
| Jul-2014 | 0.05% | 0.28% |
| Aug-2014 | 0.40% | 0.75% |
| Sep-2014 | 0.33% | 0.55% |
| Oct-2014 | 0.34% | 0.56% |
| Nov-2014 | 0.82% | 0.87% |
Note: Earnings are adjusted to November 2014 dollars. Light shaded area denotes recession.
Source: Author analysis of Bureau of Labor Statistics's Current Employment Statistics and Consumer Price Index, public data series.
Amazing Black Friday Deals, Brought to You by the American Taxpayer
As retailers and consumers gear up for the holiday shopping season, it’s a good time to take a closer look at what things are like for the person on the other side of the cash register. Over the past year, there have been an increasing number of retail strikes as workers in the industry call for higher pay and better working conditions. Why should this matter to the ordinary shopper just out looking for the perfect gift? Because poor wages in retail may be shrinking your paycheck as well, and in more ways than one.
Retail workers tend to be paid significantly lower than workers in other industries. As the graphic below shows, the median hourly wage for workers in the retail sector is 32.4% lower than the median hourly wage for all other industries.1 Importantly, the lower wages in retail are not simply the result of demographic factors that might contribute to lower wages, such as the age or education levels of typical retail workers. Using a regression approach to control for demographic and regional factors, the data show that wages in retail are 18% lower than in other industries.2 This is the “wage penalty” of working in retail.
The prevalence of low-wage work in the retail sector leads to lower annual incomes and higher concentrations of poverty among retail workers. In 2013, the average annual weekly earnings of nonsupervisory retail workers was $423—that’s less than $23,000 per year, and more than $500 below the federal poverty line for a family of four. It should come as no surprise then that poverty rates for retail workers are significantly higher than for workers in other industries. The poverty rate for workers in retail was 10.1 percent, compared with 6.6 percent of workers outside of retail.3
The President’s Actions on Immigration Will Make America Better
I can’t for the life of me understand what all the noise is about over the president’s plan to issue an executive order on immigration this evening. I remember many years ago when Ronald Reagan issued an executive order that gave many immigrants “amnesty.” At that time, Democrats did not threaten to sue him, because everyone said that it was the right thing to do. So why is it wrong now?
When President Reagan issued his executive order, many people from all around the world benefited. They had lived here for many years, working and living under false pretense, making minimum wage, and taking any job just to be employed—even though many were highly educated and had college degrees obtained right here in America. The same situation applies to those affected immigrants today. So why was it right to give those people under Ronald Reagan’s signature an opportunity, and wrong for Obama to do the same for the millions of immigrants who have lived—many for ten years or more—worked, paid taxes, and received an education in this country?
The Republicans have many immigrants in their ranks, and they must know that the president is doing the right thing but, because he is taking the initiative to make things right for these undocumented immigrants—just like he took the initiative to give health care to millions of Americans—they’re once again foaming at the mouth about it.
The president’s actions tonight will go a long way to make America better, both socially and economically.
Alyce Anderson is a Liberian American and the Executive Assistant to EPI President Larry Mishel.
Why Tax Cuts Aren’t the Answer to Wage Problems
This post originally ran on the Wall Street Journal‘s Think Tank blog.
The New York Times David Leonhardt is a sharp observer of American economic trends, but I think he took a wrong turn in his Monday piece on wages—and data released Wednesday by the Congressional Budget Office helps show why.
Mr. Leonhardt pointed out the dismal wage trends for the vast majority of American workers in recent decades and how it would be a heavy policy lift to reverse them. This seems right to me. But then he wrote:
“Washington could definitely do more to help growth: better infrastructure, a less burdensome tax code, a less wasteful health care system, more bargaining power for workers and, above all, stronger schools and colleges, to lift the skills of the nation’s work force.”
As they might say on “Seinfeld,” you can’t “yada yada” more bargaining power for workers. It’s the most important part of the story.
The root of the U.S. wage problem (which is, in turn, the root of America’s inequality problem) is that most workers aren’t seeing their wages keep pace with overall productivity growth. The policies on Mr. Leonhardt’s list are worthy, but most would not reliably close this gap between productivity and pay. Boosting the bargaining power of workers would.
President Obama’s Executive Action on Immigration Will Improve the Wages and Working Conditions of Unauthorized Immigrants and U.S.-Born Workers Alike
The internet and Twitter have virtually exploded over President Obama’s scheduled announcement tonight at 8 p.m. EST, regarding the actions he will take to reform the immigration system without Congress, relying on the legal authority he has to execute the laws of the United States. Most of the discussion surrounding this has focused on: 1) what the substance of the reforms will be and, regarding the most important reform—shielding unauthorized immigrants from deportation—estimating the share of the unauthorized population that will be eligible; 2) whether the executive reforms are lawful without a legislative directive from Congress; and 3) how the reforms will impact American politics (including whether there will be a government shutdown and if the reforms will “poison the well” for cooperation between Republicans and Democrats on other topics).
Tonight we’ll find out the exact substance of the reforms. And I’ve already discussed at length here and here how temporarily removing the threat of deportation (also known as “deferred action”) for up to four or five million unauthorized immigrants who have resided in the United States for at least five or ten years, and granting them employment authorization—is well within the bounds of the president’s legal authority to act. The Constitution allows the president prosecutorial discretion to enforce the law selectively when he has limited resources available to him, and he’ll be targeting those resources more effectively if he focuses the government’s immigration enforcement machinery on criminals and terrorists, rather than otherwise law-abiding immigrants who have deep ties to the nation and U.S. citizen children and spouses. Regarding the political impacts of the action, I’ll leave that up to the political analysts and prognosticators. But the one aspect that receives too little attention is the positive impact that deferred action and work authorization will have on the wages and workplace bargaining power of the unauthorized immigrant workers in our labor market who might qualify for the president’s new deferred action.
Fair Work Scheduling: Real Solutions and Phony Ones
American workers are increasingly concerned about how their employers schedule their work time, and for good reason. The spread of just-in-time scheduling, facilitated by computer programs that match employee shifts with customer traffic, is making life harder for the employees whose schedules are constantly changed, who report for work after long commutes only to find their hours have been cut—say from an expected eight that day, down to only one or two—and right at the last minute. That can make it close to impossible for workers to plan arrangements for child care, class schedules, or even transportation to and from work. Other employees are taken advantage of by employers who schedule them for long hours without advance notice, disrupting the same child care, education, and transportation schedules(though at least the excessive hours result in higher pay, if they’re covered by overtime protections and entitled to time-and-a-half for hours in excess of 40 in a week).
Politicians have two kinds of responses to these problems. Some are interested in real solutions, like the San Francisco Predictable Scheduling ordinance approved yesterday, which outlaws unpredictable scheduling practices at retail chain stores and promotes equal treatment of part-time workers. State law in California already requires employers to compensate employees who report to work but are given less than half their scheduled hours, and requires employers to pay for an extra hour of work when there are unpaid interruptions of the work day longer than a bona fide meal period.
Other politicians only pretend to do something for workers without doing it—or even make matters worse. A perfect example of that kind of fraudulent response is H.R. 1406, the House Republicans’ perennial answer to demands for improvements in the work-family balance. They call their bill the “Working Families Flexibility Act,” but the only flexibility it provides is to employers, rather than to employees. It gives employers the right not to pay anything for overtime hours in the week in which they are worked, but to instead consider giving time-and-a-half off with pay at some later point in the year. If it never turns out to be convenient, the employer has to repay the employee for her overtime at the end of 12 months. In effect, the bill authorizes an interest-free loan of the employees’ overtime pay with no guarantee of any time off.
The Fortunes of the Top 1 Percent
Pity the top 1 percent in America. At the end of 2012, their taxes went up. First, Congress allowed the top tax rates on ordinary income and capital gains to increase back to 2001 levels (39.6 percent and 20 percent respectively), and the top tax rate on dividends increased to 20 percent (which is lower than the 2001 rate of 39.6 percent). Second, the Affordable Care Act net investment income tax of 3.8 percent and the additional Medicare tax of 0.9 percent took effect for high income taxpayers. Third, the limitation on itemized deductions and the personal exemption phase-out were reinstated for taxpayers with income over $250,000 (basically the top 3 percent). Lastly, the temporary payroll tax holiday, which reduced the Social Security payroll tax rate to 4.2 percent, expired (the tax rate is back to 6.2 percent for all workers).
With all these new (and old) taxes, how are the 1 percent doing? The Congressional Budget Office recently released a report on the distribution of household income and taxes for 2011, which may provide an answer.
CBO’s analysis shows trends in the average tax rate and income between 1979 and 2011, for various income groups. Between 1979 and 2011, the inflation-adjusted before-tax income of the top 1 percent grew by 175 percent; the income of the middle 60 percent grew by 29 percent. Over the same period, the inflation-adjusted after-tax income of the top 1 percent increased by 200 percent, compared to 40 percent for the middle 60 percent of the income distribution. At least in 2011, the top 1 percent was doing very well—especially compared to everyone else.
Of course, this information does not answer our question. CBO also estimated taxes under the 2013 tax law (assuming the 2011 distribution of income) and showed that average tax rates would indeed be higher across the income distribution. The average tax rate of the top 1 percent would be 33 percent under the 2013 tax code rather than the 29 percent under the 2011 tax code—a whopping 4 percentage point increase. However, even with this increase, the average tax rate of the top 1 percent is lower than it was in 1979, 1980, 1993, 1994, 1995, 1996, and 1997!
With the tax increase after 2012, the inflation-adjusted after-tax income of the top 1 percent increased by over 180 percent since 1979; income for the middle 60 percent increased by less than 40 percent since 1979. Even with the additional taxes, the folks in the top 1 percent are doing much better than they were in 1979 and much better than everyone else; they don’t need pity.
Washington Post “Wage Freeze” Brain Freeze
The Washington Post published an editorial on the “wage freeze” on Sunday, revealing the emptiness of its analysis and offering no recommendations for generating wage growth. At least there was acknowledgment of the problem, that “middle-class family incomes are still not growing very much” and “average income for the bottom 90 percent of households has barely grown at all, in real terms, over the last four decades.”
Why care is answered with:
“If you believe that democracy’s social foundation is a strong middle class, this trend is worrisome not only for its human cost, but also for the threat it poses to U.S. political health.”
So far so good, the problem is widespread (the entire bottom 90 percent), it is long-term (last four decades) and it matters (for our democracy). I agree.
What shall we do? The editorial says we need to acknowledge how “difficult it will be to reverse middle-class income stagnation” and offers no suggestions whatsoever. I guess that’s better than bad suggestions, such as tax cuts, either temporary or permanent, or that sending more people to college is the answer (it is not: the wages of college graduates are stagnant, especially young college grads many of whom are working in jobs that don’t require a college degree. Remember, the problem afflicts the bottom 90 percent!).Read more