The Center for American Progress (CAP) has issued an important new report saying that “new realities” dictate that we “reset button on the entire fiscal debate,” end the pursuit of a fiscal “grand bargain” with Republicans in Congress on deficit reduction, and replace the sequester (through 2016). One can only hope this signals a change in direction for the administration and others on the center-left who embarked on the grand bargain deficit reduction journey in late 2009 and early 2010 when their focus should have remained on job creation. That turn of events was one of the most consequential economic policymaking decisions in decades, because it derailed job creation (i.e., further stimulus) efforts thus ensuring that recovery from the Great Recession would be agonizingly slow. That, of course, has had a hugely adverse impact on the wages, benefits and employment of the vast majority of Americans, but has also had tremendous political fallout (i.e. 2010) and weakened the public’s faith in government’s ability to spur job growth. It was a clear unforced error by CAP and the administration to suggest the need for a grand bargain on deficit reduction, embodied in the appointment of the Simpson-Bowles commission. For these reasons it’s worth examining the argument CAP has made and compare it to the situation in late 2009 and early 2010 when CAP pushed for a grand bargain, praised the Simpson-Bowles effort and recommended a deficit plan that, if adopted, would have started to cut spending in October 2010 (when, it turns out, unemployment was still 9.5 percent). This is not an across-the-board indictment of CAP—they do lots of excellent work, including Michael Linden’s budget analyses. But it is important to highlight that there were two paths available to liberal and center-left policymakers over the course of this crisis, and many of today’s difficulties are with us because the wrong path was chosen. EPI, I am proud to say, was and remains resolutely focused on the ongoing jobs crisis.

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In the May issue of Educational Leadership, I attempt to show how our misunderstanding of the origins of racial segregation stands in the way of efforts to narrow the black-white academic achievement gap.

Socially and economically disadvantaged children perform, on average, at lower levels of achievement than advantaged children. The achievement gap primarily results from disadvantaged children coming to school unprepared to take advantage of what schools have to offer, not primarily from inadequate teachers or schools. Children who come to school from households with poor literacy levels, who are in poor health, whose housing is unstable, whose parents are suffering the stress of unemployment, and who are themselves stressed as well in neighborhoods with high levels of crime and violence, cannot be expected to achieve, on average, as well as middle class children, even if all have high quality instruction.

Disadvantaged children’s obstacles to achievement are exacerbated when these children are concentrated in racially and economically homogeneous and isolated schools. Meaningful narrowing of the achievement gap will not be possible without breaking down these barriers and integrating black children into middle-class schools.

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On May 1^st, I wrote a blog post pointing out that at a rate of 175,000 jobs per month we won’t get back to the December 2007 unemployment rate until 2020.  Apparently, I was looking into a depressing but very accurate crystal ball, since 175,000 jobs is exactly how many jobs we ended up getting in May.

It’s still true that at 175,000 jobs per month, we won’t close the jobs gap before the end of this decade.  To close the jobs gap by 2016, the year of the next presidential election, we have to add more than 300,000 jobs every month.

As we’ve discussed, the sequestration enacted March 1 cut federal spending by $85.3 billion for fiscal year 2013.  The sequester not only cut money allocated to federal programs, but also meant reductions for federal spending at the state and local level.  States and local governments depend on federal grants and loans to fund essential services and programs, helping them maintain infrastructure, provide education, administer health and social services and ensure public safety.  In 2011, federal grants to states and localities totaled $607 billion and accounted for approximately 25 percent of state and local government spending.

A report released by EPI last week finds that the sequestration decreased federal funding for state grants by $5.1 billion in the 2013 fiscal year.  Although the March 1 sequester reduced federal grant spending to all states (relative to the continuing resolution federal grant spending already in place),   some states were impacted more than others, ranging from a 0.68 percent cut in Tennessee, to a 3.36 percent cut in Wyoming (see Table 1 in the paper).

Following sequestration, the current continuing resolution was signed into law on March 26—less than a month after the budget sequestration began—setting funding levels for the remainder of the fiscal year, and thus impacting grant funding to programs at the state level.  The map below illustrates the changes in each state’s fiscal 2013 federal grant funding, compared to fiscal 2012 federal grant spending, as a result of sequestration and funding levels in the current continuing resolution.  Differences in how grant funding is distributed are dependent both on how programs function as well as which states participate in programs funded by federal grant money. After accounting for both sequestration and the current continuing resolution, grant funding for 26 states is estimated to increase, while grant funding for the remaining 25 states (including the District of Columbia) is estimated to decrease.

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My colleague Tom Hungerford has laid out why he’s not part of the alleged consensus cited by Dylan Matthews that cutting corporate tax rates would boost GDP growth, based on a skeptical look at the research and data. I’d just add a couple of extra points:

First, this is all kind of tangential to the live debate currently going on about corporate tax reform. This debate is sadly all about revenue-neutral reform. So, all research that has used effective average corporate tax rates as explanatory variables in growth regressions is irrelevant to this kind of debate. And the upshot of such reform is even unclear as to what it will do to effective marginal rates—some firms will see their taxes go down, while others will see them go up. So, even if one believed in a huge growth bonanza from significantly cutting corporate taxes—that’s not what the debate in DC is about.

Second, even if one believed the modest growth-spurring impacts of cutting corporate tax rates cited in much of the research that Dylan and Tom discuss, I still don’t think that  I’d fall all over myself trying to accomplish this as a high-priority policy goal.

Why?

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When I was a child, there were times when I wanted to go someplace with a group of friends and my mother would say no. I would then argue that I should be allowed to go “because all my friends are going.” As would be expected, my mother would respond with “suppose all your friends jumped off a cliff, would you?” I would always answer no, of course, but I gather that a number of people would answer “I’d be a damned fool not to.” In his Wonkblog post, Washington Post’s Dylan Matthews appears to be the latest to respond this way when he joins the “consensus around the idea that increases in the corporate tax rate hurt growth.” Before getting into why I am not part of the so-called consensus, I need to first correct a glaring error in Matthews’s blog.

The Error

He cites a Tax Notes article (and CRS report) I wrote with Jane Gravelle in 2008. He notes that we concluded: “The traditional concerns about the corporate tax appear valid. While many economists believe that the tax is still needed as a backstop to individual tax collections, it does result in economic distortions.” This conclusion, he claims, contradicts my new analysis of the corporate tax rate. There are two problems with his claim. First, he omitted the next sentence: “These economic distortions, however, have declined substantially over time as corporate rates and shares of output have fallen.”

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Read in isolation, the second verification assessment by the Fair Labor Association (FLA) of remediation steps at three Foxconn factories making Apple products might lead one to think that essentially all labor rights violations have been addressed.  The FLA’s report, for instance, features the claim that Foxconn has already completed “98.3 percent” of the necessary steps to correct the problems at its factories.  But while some of the steps taken – such as reducing work weeks to below 60 hours and certain safety and health improvements – do represent progress, the overall score given by the FLA as well as the accompanying rosy language about reforms are fundamentally deceptive.  Consider:

The FLA ignores crucial reforms promised by Apple and Foxconn, including increasing wages enough to offset reductions in work hours and providing back pay for uncompensated work time.  On March 29, 2012, the FLA described the basic remedial actions to be undertaken by Foxconn and Apple by July 2013.  Paragraph five of this announcement contained the promise that Foxconn would increase compensation enough to offset any reduction in overtime hours.  Paragraph six contained the promise that Foxconn and Apple would provide retroactive pay for the many circumstances in which workers had not been compensated for all their overtime hours.  Paragraph seven of the March 2012 announcement said a study would be undertaken to determine the amount of compensation necessary to provide for basic needs; according to the FLA’s own survey, 64 percent of workers said their compensation did not provide them enough to meet their basic needs.

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Matt Yglesias doesn’t think that Figure B in Tom Hungerford’s new paper on corporate tax rates and economic growth “proves” a non-relationship between the two. He’s right, of course, but then goes on to argue that including this chart specifically, and including charts in blogs generally, is a borderline shady practice. This I don’t really get.

So, I shall make the case for the use of charts with a chart, below.

But, first, a quick thought on another point in Matt’s post. He notes that we at EPI aren’t keen on seeing corporate tax rates cut reformed anytime soon because we like revenue and we “feel that the corporate income tax raises it in a distributionally progressive way.” We do like revenue, but our thoughts on the incidence of corporate tax rates are not “feelings”—they’re pretty evidence-based. The CBO, for example, used to assume that 100% of the corporate income tax fell on owners of capital (a very well-off bunch relative to the rest of the population). Now they assume that 3/4ths does. So our view that most of the incidence of the corporate income tax falls on capital is not some wild-eyed heterodox view.

We’d probably quibble even with the change to put some of the incidence on wages (though I’m not a huge expert in this one), and we know of the growing effort by some economists to claim that the incidence of the corporate income tax is actually borne by workers, but we’re convinced by the counter-evidence (see here (PDF) and here (PDF) for some of this evidence). A side-note—it’s always fun to see people who claim in one venue that corporate tax rates should be cut reformed because the incidence is actually borne by workers claim in another that the corporate income tax is bad because it “double-taxes” capital income. Really, you can’t have both claims.

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What we read today (and the rest of this week):

• From the Mouths of Babes (New York Times)
• Study: Tax Cuts Might Drive Income Inequality After All (The Atlantic)
• Disability, Social Security, and the missing context (Columbia Journalism Review)
• Joblessness Shortens Lifespan of Least Educated White Women, Research Says (New York Times)
• Discipline and Punish: The New Unemployment ‘Reform’ (Labor Notes)
• Low interest rates are the final straw for many company pensions (Washington Post)
• The Unemployed Need Bold, Creative Moves from the Fed (Fiscal Times)
• Report: More seniors are living in poverty (Politico)

Every year since 1941, the Social Security Trustees have issued a report on the long-term financial outlook of Social Security. The 2013 report is out today, along with the Medicare trustees report. The Social Security trust fund reserves increased by $54.4 billion in 2012, and this year’s surplus is projected to be $28 billion. Social Security will continue to run a surplus through the end of the decade, with the trust fund growing from $2.76 trillion in 2013 to a peak of $2.92 trillion in 2020.

Beginning in 2021, Social Security will begin drawing down the trust fund to provide a cushion to help pay for the Baby Boom retirement. This was anticipated. The trust fund was never meant to grow indefinitely and its drawdown should not be cause for concern, though the recession and weak recovery have accelerated the process.

If no policy changes are made to Social Security, the trust fund will reach exhaustion in 2033, unchanged from last year’s report. (See this interesting blog from CBPP looking at how trust fund exhaustion dates have fluctuated since 2000 due to demographic and economic uncertainties; note that the exhaustion date was the same in 2000 as it was during the recession in 2009.) Even in the unlikely event that nothing is done to prevent automatic benefit cuts when the trust fund runs out, Social Security would still be able to pay out 77 percent of promised benefits to recipients. Modest increases in revenue, however, could keep Social Security paying out full benefits for the foreseeable future. Even without any changes, Social Security will be able to keep paying full benefits for another two decades. So there is absolutely no reason why any action or “grand bargain” including Social Security reform must happen now, especially with a dysfunctional Congress.

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