Over the last six years, the labor force participation rate dropped by several percentage points. There is a debate over how much of that drop is a direct result of the lack of job opportunities in the Great Recession and its aftermath (changes that are generally labeled cyclical), and how much is instead a result of long-run trends, such as baby boomers beginning to retire (changes that are generally labeled structural). A recent blog post in the Wall Street Journal said that among Federal Reserve officials, the view that much of the decline is structural is gaining traction. If true, that’s a problem. My read of the data shows that most of the decline is cyclical, so if the Fed believes it’s structural, it means they believe there’s less slack in the economy than there really is.

Part of the misunderstanding is that there are two components of structural change. First, there are population shifts. Age groups that tend to have lower labor force participation rates are now a larger share of the population (think retiring boomers). These are called “compositional” shifts. Accounting for purely compositional changes by gender and age, more than 40 percent of the decline in the labor force participation rate over the last six years can be accounted for. Many people doing a quick analysis on this topic tend to stop there.

However, the other component of structural change is made up of long-run trends in labor force participation within age/gender groups. The labor force participation rate among people under age 25 has been declining since the 1980s, in part due to increasing college and university enrollment. The continuation of that long-run trend accounts for an additional structural decline in the overall labor force participation rate over the last six years. The projected trend in labor force participation rate of workers age 25-54 was virtually flat, so that trend did not meaningfully contribute to structural changes over the last six years. The trend labor force participation of workers age 55+, however, was expected to rise significantly over this period, particularly for women, as cohorts with much stronger labor force attachment throughout their 20’s, 30’s, and 40’s than the cohorts that preceded them began aging into this age bracket. In other words, that’s a structural change that should have substantially contributed to an increase in labor force participation over this period.

Putting these factors together—the compositional changes between gender/age groups and the structural trends within gender/age groups—the result is that only around a quarter of the total drop in labor force participation over the last six years is structural. This means that around 75 percent of it is cyclical. In other words, there are now around 5.8 million workers who are not in the labor force but who would be if job opportunities were strong. If these workers were in the labor market looking for work, the unemployment rate right now would be 10.0 percent instead of 6.6 percent. That is a lot of additional slack in the labor market.

It has been pointed out that it is likely that at least some of the workers who are out of the labor force due to cyclical factors are people who gave up and decided to retire early. Given that retirees are less likely to reenter the labor force when job opportunities improve, improving economic conditions may not draw these workers back in. This means that labeling them as being out of the labor force due to cyclical factors may not be very useful. However, it is important to note that there are large participation gaps for workers age 54 or younger, who are unlikely to be early retirees. In fact, more than 70 percent of the 5.8 million missing workers are under age 55. These missing workers under age 55—4.2 million of them—are therefore unlikely to be deterred from entering or re-entering the labor force when job opportunities strengthen.

While much of the reaction to the most recent CBO Budget and Economic Outlook (released earlier this month) focused on the labor market impacts of the Affordable Care Act, it’s important to note that this report actually contained a multitude of interesting findings and updated projections. Among the most important is CBO’s revised projection of the costs of federal health care programs—Medicare, Medicaid, ACA subsidies, and some smaller programs as well—over the next decade. For the fourth year in a row, CBO revised these cost projections downward. The figure below shows CBO’s projections of these costs in the decade following each Budget and Economic Outlook published since 2011.

While health care costs remain the fastest growing portion of the federal budget, and are still projected by CBO to grow significantly faster than the overall economy over the next decade, the downward revisions of the past three years are quite significant. Put simply, since 2011, CBO’s projection of what the level of federal health spending will be in 2021 has dropped by $183 billion, or about 10.4 percent.

To put this in perspective, when lawmakers passed the counterproductive, indiscriminate sequestration spending cuts as part of 2011’s Budget Control Act (BCA), they were looking at projections of federal health spending over the following decade that the latest estimates indicate were $900 billion too high. The $1.2 trillion in “sequestration” cuts over the decade, with their damaging effect to public investment and to the still-incomplete economic recovery, look even more unnecessary in this light.

Genuinely informed budget wonks know that the BCA cuts were particularly perverse because they took an ax to the portion of the budget— discretionary spending—that is not projected to grow in coming years, relative to the economy. To the extent that long-run budget projections highlight a need for restraining spending, this is entirely driven by the rapid rise in health care costs—both public and private. And these health care costs have rapidly decelerated in recent years. This deceleration began even before the provisions of the Affordable Care Act (ACA) meant to restrain cost-growth went into effect. Health care costs are so important in driving long-run budget trends that if the cost-growth slowdown of the past five years continues, there will be no long-run budget deficit problem. Lawmakers who actually cared about long-run budget deficits, not to mention living standards of typical Americans, would reverse the damaging cuts to discretionary spending and instead continue to press for efficiencies that further slow health care cost growth.

Mark Price and Estelle Sommeiller’s new paper traces the trajectory of top incomes in American states and regions from 1917 through 2011. Mapping this data across the continental United States and over the last century suggests both important similarities across states, and some key differences.

On the map below, the states tip from green to red when the top 10 percent’s share of income exceeds one-third. In the early years, inequality (as measured by the high income share of top earners), is starkest in the Northeast. This inequality is generalized by the impact of depression and war in the 1930s and 1940s, but once the policy innovations of the New Deal (collective bargaining, retirement security, labor standards, and financial regulation) take hold, inequality eases: by the middle 1950s, only New York and the Deep South are still colored red.

The pattern across the last generation is just as telling. Of the sixteen states to top this threshold in 1972, the only ones outside the South were the tri-state home of big finance—New York, New Jersey, and Connecticut. As we scroll forward from there, the states in which the top 10 percent claim less than a third of total income gradually diminish, disappearing entirely by 1989. By 2011, the top 10 percent are claiming almost 60 percent of income in New York and Connecticut, and over 40 percent in all but three states (Iowa, Nebraska, and South Dakota).

2014 is shaping up to be a much better year for Social Security than any in the recent past. People seem to finally be recognizing that Social Security is the one leg of the retirement stool that’s working well and providing genuine, much-needed retirement security. And they’re realizing that given this, kicking away at it doesn’t make a lot of sense.

Today provides another welcome bit of news in this regard, with the Obama administration announcing that the cut to the Social Security cost of living adjustment (COLA) that was in their fiscal 2014 budget proposal will not show up again this year.

This is good news. The oft-repeated claim that using the “chained” consumer price index for urban consumers (C-CPI-U) was simply a technical improvement to the Social Security COLA was always flat-wrong. Given that Social Security is the bedrock pillar of retirement income security for so many Americans, paring benefits back is a terrible idea.

Politically, this announcement amounts to yet another confirmation that the pursuit of a budget “Grand Bargain” is dead. Even the best versions of this bargain—near-term stimulus to boost the recovery combined with a mix of tax increases and cuts to Social Security, Medicare, and Medicaid to reduce projected long-run budget deficits—were pretty bad (after all, why would boosting recovery and lowering unemployment be something that only one party cared about and would have to sacrifice something else for?). But given that Republicans in Congress refused to accept stimulus (and instead have demanded, and gotten, extreme anti-stimulus in recent years) or any tax increases, this left only cuts to the social insurance programs that have provided the majority of income growth for low- and moderate-income households over the past generation. Even more bizarrely, these same Republicans refused to actually support any specific cut to these programs and would even attack the president for offering them.

In a nutshell, cuts to Social Security, including the adoption of the C-CPI-U to cut the COLA, are bad policy and bad politics. This makes dropping it from the president’s latest budget a wise move.

So, efforts to cut Social Security are in retreat. Even more hopefully, the case for expanding it has gone from something only liberal bloggers would dare write about to something that a handful of U.S. Senators have started discussing.

Yes, the public debate on Social Security looks to be getting a lot smarter these days, which is awfully welcome.

Tuesday’s CBO report on the effects of increasing the minimum wage has generated a lot of discussion. While some of the CBO’s findings are consistent with our own analysis, we have some serious disagreements. Here’s our take on the report, particularly CBO’s estimates on employment and income (we focus on their estimates of the effects of increasing the minimum wage to $10.10 by 2016).

The report finds that 16.5 million workers who make below $10.10 would get a raise, and an additional 8 million workers who make slightly above $10.10 would also likely get a bump (since employers like to preserve internal wage ladders). This is right in line with our estimates of the likely impact.

They found that the increase in the minimum wage would benefit mostly adults who need the earnings from their minimum wage job to make ends meet: less than 12 percent of the people who would get a raise are under age 20 and more than 70 percent of the total earnings would go to workers in families whose income is less than three times the poverty threshold. For context, in 2013, three times the poverty threshold for a family of three was around $55,700. This too is right in line with our analysis.

CBO also found that 900,000 people would be lifted out of poverty. We agree that raising the minimum will lift a significant number of people out of poverty, and if anything, CBO’s estimate here seems conservative. CBO is a bit vague on how they came to their conclusion about the effect on poverty levels, but from what we can tell, it seems that they looked at current income levels, expected poverty levels in 2016, simulated how peoples’ incomes would change following the minimum wage hike, and estimated the change in the number of people in poverty. This is a perfectly reasonable approach; however, there’s a good body of research that has looked at the real-world experience of how minimum wage hikes have affected poverty levels. A recent paper by Arin Dube looks specifically at this question and estimates that in the past, for every 10 percent increase in the minimum wage, we’ve seen a 2.4 percent decrease in the number of people in poverty. This implies that increasing the minimum wage to $10.10 could reduce the number of people in poverty by as much as 4.5 million.

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In The Increasingly Unequal States of America: Income Inequality by State, Mark Price and Estelle Sommeiller develop estimates for top income shares, from 1917 through 2011, for American states and regions. The national version of this story is now quite familiar: the iconic Piketty and Saez curve that starts high in the early years of the twentieth century (with the top 10 percent claiming about half of all income and the top 1 percent claiming about one-fifth), drops with the political innovations of the New Deal, and then climbs again—returning, by 2012, to its early-century heights—as those innovations are dismantled. So what does the state and regional breakdown tell us?

The full results are plotted below. For each year, the states (the light blue dots) are plotted by top income shares. The middle of the shaded box marks the median state (half are lower on the chosen measure, half are higher), and then the states are broken into quartiles: the middle quartiles (marked by the boxes) surround the median, the outer quartiles run along the lines between the boxes and the outer tick marks.

A few patterns stand out. First, the general sweep of the graph echoes the national story. The arc of inequality from Gilded Age to New Deal and back again is experienced across every state, not just in a few of them. Second, the policy innovations that dampened inequality—collective bargaining, retirement and unemployment security, labor standards, financial regulation, progressive taxation—also narrowed the variation across states. In the middle years of the last century strong federal policies trumped (or overcame) the economic and political differences among the states.  And third, the erosion of those policies, beginning in the 1970s, saw both inequality and the variation across states widen again.

The United States clearly does not have a short-term federal budget deficit problem—unless that problem is that it is closing too quickly to support rapid recovery. To the degree we do have a fiscal challenge requiring some sacrifice, it is in long-term projections of federal debt. The primary sources of the long-term projected problem are simply insufficient revenues and excessive national health expenditures. Under the “extended baseline” projection included in CBO’s last long-term budget outlook, federal outlays relative to GDP increase by 5.4 percentage points between 2013 and 2038, while federal revenues relative to GDP increase by only 2.7 percentage points; outlays and revenues are projected to diverge thereafter. Revenues have not been keeping up with spending and are not likely to keep up as far as the eye can see.

Most of the growth in outlays is due to increased spending on health care programs, primarily Medicare and Medicaid. However, what is happening with Medicare and Medicaid is just a symptom of what is happening to total national health care expenditures—the growth in Medicare and Medicaid outlays just reflect this growth in health care spending. These total expenditures rose extraordinarily fast over most of the past three decades, and this has led CBO to project they will rise significantly faster than overall economic growth for the foreseeable future. As a matter of fact, spending on Medicare and Medicaid has increased at a slower rate than private health care expenditures over the past 40 years.

None of this is news to anybody closely following budget policy. What was news is that in CBO’s most recent (and now-infamous) Budget and Economic Outlook, released last week, there was an increase in the projected accumulated deficits over the next decade. It’s worth examining the reason for this deterioration in a little detail, since too many will reflexively interpret it as a failure to contain spending. But in fact, it’s really a failure to lay the conditions for economic growth, and a resulting hemorrhaging of projected tax revenues.

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At the National Academy of Social Insurance conference earlier this month, keynote speaker Michael Lind of the New America Foundation called for reducing tax subsidies for 401(k)s and other employer-based plans to help pay for expanded Social Security benefits, a view I share. Lind said it was time to move Social Security expansion to the realm of serious discussion and relegate privatization to the political fringe.

Lind is part of a growing movement that supports expanding Social Security to fill a hole caused by past benefit cuts as well as what Paul Krugman has called the “gigantic failure” of the 401(k) experiment. A bill introduced last year by Senator Tom Harkin and Representative Linda Sanchez, for example, would provide a modest across-the-board increase in benefits as well as a higher cost-of-living adjustment in recognition of the fact that seniors are more affected by rising health costs. The movement got a boost last November when Senator Elizabeth Warren made a speech on the Senate floor on the need to increase benefits to avert a retirement crisis. In her speech, Warren cited a $6.6 trillion gap between what Americans under 65 were on track to save and what they needed to maintain their standard of living in retirement.

The counterargument was presented at the conference by Edward Ferrigno of the Plan Sponsor Council of America, an industry trade association. Ferrigno argued that the current system has worked for most Americans, and that the retirement crisis is an illusion created by incomplete data. Ferrigno cited an article by Social Security Administration researchers that pointed out that Census data on senior incomes often cited as evidence that most seniors live modestly and rely heavily on Social Security benefits underreports distributions from defined contribution (DC) plans and IRAs because it doesn’t include lump sum distributions. The same issue was raised by at least two other conference participants: Andrew Biggs of the American Enterprise Institute and Karen Smith of the Urban Institute. Biggs recently coauthored a Wall Street Journal op-ed on the subject with former Social Security Advisory Board Chair Sylvester Schieber. The op-ed included the eye-popping claim that “the most commonly cited measure of retirement income ignores at least 60% of the money that seniors receive.”

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Today marks the fifth anniversary of the signing of the American Recovery and Reinvestment Act (ARRA, or simply the Recovery Act). Passed after a six-month stretch during which the economy lost an average of 750,000 jobs each month, ARRA was the single biggest contributor to stopping the economic freefall that followed the bursting of the housing bubble. To be clear, the assessment that the ARRA contributed significantly to ending the Great Recession is not a contested opinion among macroeconomists, or at least not among those macroeconomists whose paycheck depends on correctly predicting what will impact economic activity. (For example, figure C in this briefing paper shows a set of estimates from both private and public macroeconomic forecasters of ARRA’s impact on gross domestic product during its peak quarter of effectiveness.)

Further, ARRA’s overall impact was significantly blunted by the fact that a significant portion of its overall cost was absorbed by tax cuts for business and higher-income households (see tables 1 and 2 in this White House factsheet, for example)—a significantly less effective form of stimulus than either direct government spending or safety net programs. Research since ARRA has confirmed that the effective parts of ARRA—aid to state and local governments to finance Medicaid payments or build infrastructure projects—provided even better stimulus than ex ante estimates indicated.

Why is it important to remember this history? Because in a reasonable policymaking environment we would be trying to enact more fiscal stimulus today, to complete the road to full recovery from the Great Recession.

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Janet Yellen testified before Congress for the first time Tuesday as the Federal Reserve Chair. Besides the excruciatingly long time that the House Financial Services Committee extended the hearing, a couple of other things stood out.

First, in terms of having a Fed chair display good judgment about the real problems facing the economy, yesterday’s testimony was awfully encouraging. Previously, the Fed had highlighted a 6.5 percent unemployment rate as a threshold (not an automatic trigger) indicating that the economy was recovering well, and hence short-term interest rates might be raised. But over the past year, the overall unemployment rate has improved much faster than other labor market indicators, and may well be painting too rosy a picture about the overall health of the economy.

Yellen made it clear that she thinks one needs to look at a wide range of indicators—particularly wage and price inflation—to assess the underlying degree of slack. And this wider range of indicators argues pretty strongly against monetary tightening anytime soon, and she seemed pretty upfront about this. By the way, for those wanting a look at some of these alternative indicators, you can check out this page on our State of Working America site. We think the employment to population ratio for prime-age workers is about as good as a single indicator gets in assessing the overall degree of labor market slack. And while it has started moving encouragingly up in recent months, it remains very far away from its pre-recession peak.

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