Secretary of State John Kerry bought into the hype around trade in a speech this week in Paris when he claimed that the proposed U.S.–EU trade and investment agreement could help Europe emerge from the economic crisis. Kerry claimed that the proposed U.S.–EU trade agreement “may be one of the best ways of helping Europe to break out of this cycle [and] have growth.” As I’ve explained before, trade agreements do not create jobs. This is not some proprietary EPI view on trade – it is a standard view straight out of economics text books.

The issue is simple: it is trade balances—the net of exports and imports—that can affect jobs. Unless trade agreements promise to reduce our too-high trade deficit, they will have no positive effect on jobs. Even worse, past trade agreements have actually been associated with larger trade deficits in their aftermath.

This is mainstream (neo-classical) trade theory, as explained by Paul Krugman in “Trade Does Not Equal Jobs.” Responding (in 2010) specifically to claims that the Korea–U.S. trade agreement could be a driver of recovery, he pointed out that in macroeconomic terms, the United Sates had too little spending on domestically-produced goods and services, with spending defined by:

Y = C + I + G + X –M

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It’s clear that the sequester will do plenty of damage to domestic priorities like education, R&D, national parks, regulatory agencies, etc by bringing non-defense discretionary spending down to historic lows. But at least it will begin reducing the debt right away and help put the federal government on a more sustainable fiscal path, right?

Unfortunately, no. It turns out that the sequester will likely cause the debt ratio (public debt as a share of GDP) to rise rather than fall in the next couple of years. This is because there is a strong interaction between fiscal policy and the economy when the economy is weak and underperforming (i.e. operating below potential output), which the Congressional Budget Office projects it will be until mid-2017. A weak economy means a higher deficit: a high level of unemployment both depresses tax revenue and forces more people to rely on the social safety net (e.g. unemployment insurance, Medicaid, food assistance, etc). As the economy expands closer to potential output, the deficit falls because people move from the social safety net back into employment, resulting in lower spending and higher revenues.

This relationship also works in reverse: fiscal policy choices have a significant impact on the economy when it is operating below potential. Expansionary fiscal policy (i.e. spending increases or tax cuts) injects demand into the economy, causing a boost of economic activity and job creation. Contractionary fiscal policy, such as spending cuts or tax increases, drains demand from the economy and creates a drag on growth.Read more

Newly released data on corporate profitability for 2012 show the continuation of historic levels of profitability despite excessive unemployment and stagnant wages for most workers. Specifically, the share of capital income (such as profits and interest, which are hereafter referred to as ‘profits’) in the corporate sector increased to 25.6 percent in 2012, the highest in any year since 1950-51 and far higher than the 19.9 percent share prevailing over 1969-2007, the five business cycles preceding the financial crisis.

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Once a year, the Congressional Budget Office (CBO) publishes long-run debt projections under their assumptions about budget policy under future Congresses, known as the alternative fiscal scenario (AFS). It is used extensively by many—including House Budget Committee Chairman Paul Ryan (R-Wis.)—to argue that we face a catastrophe that can only be solved by effectively dismantling the social safety net and retirement systems that we have in place. But it’s also misleading.

Michael Linden at the Center for American Progress recently released a great analysis showing that this scary long-run debt projection is only scary because CBO assumes that future policymakers will make policy decisions that will make the deficit much worse. If you remove those assumptions to arrive at a more honest baseline, then the problem of an unsustainable rising debt mostly disappears.

But let’s back up a bit and marvel at the absurdity of long-term debt projections. Remember, these projected deficits are largely the product of CBO’s economic and demographic projections, coupled with assumptions about decisions made by future policymakers and long-term health costs. Moreover, economic, demographic, and other budgetary projections are most reliable in the near-term, and their margin of error compounds with time.
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What our economics experts were reading today:

• ‘Trickle-down consumption’: How rising inequality can leave everyone worse off (Washington Post)
• Is Job Polarization Holding Back the Labor Market? (Liberty Street Economics)
• It’s All About the Taxes (The People’s Pension)
• Sweatshops still make your clothes (Salon)
• Americans Widely Back Government Job Creation Proposals (Gallup)
  

In a previous blog post, my colleague Andrew noted the encouraging revenue targets in Senate Budget Committee Chairman Patty Murray’s (D-WA) Senate Democratic FY2014 budget resolution—revenue that would partially replace sequestration and minimize the per dollar drag of total deficit reduction. But unfortunately the budget, like many others before it, strives to hit stringent deficit reduction targets and in the process ends up having an adverse impact on the economy and job growth by 2014 relative to current policy. This focus on deficit reduction targets likely led to another unfortunate aspect of the Murray budget: its surprisingly large cuts to non-defense discretionary (NDD) programs.

The NDD budget is vitally important to the country, and includes security funding for areas like homeland security, veterans’ affairs, nuclear weapons and foreign operations; safety net programs including housing vouchers and nutrition assistance for women and infants; most funding for the enforcement of consumer protection, environmental protection and financial regulation; and practically all of the federal government’s civilian public investments, such as infrastructure, education, training, and research and development.Read more

Senate Budget Committee Chairman Patty Murray (D-WA) introduced, and the Senate passed, a Senate Democratic FY2014 budget resolution, which would purportedly place the public debt ratio on a more-than-sustainable trajectory down to 70.4 percent of GDP by fiscal 2023. The Murray budget deserves credit for mitigating the macroeconomic drags posed by sequestration, modestly increasing infrastructure investment and proposing substantial revenue increases. But in the end, the budget’s fixation with ten-year deficit reduction targets would result in premature near-term austerity.

The Murray budget proposes to raise an additional $923 billion in revenue over the next decade relative to current law. It also assumes that temporary tax provisions that would cost $954 billion to continue over the decade will either expire or be paid for—so against a current policy baseline in which these “tax extenders” are continued, the budget would raise $1.9 trillion.1 Revenue increases exert an economic drag, particularly while the economy remains weak, but are much less damaging per dollar than spending cuts. The Murray budget would use these revenue increases to partially replace the front-loaded, poorly designed sequester; in that context, the tax increases would help avert near-term austerity that is much more damaging. The budget would also slightly increase government spending in 2013 and 2014 relative to current policy—which assumes the sequester is repealed—and raise tax revenues in 2014.2Read more

The student workers who recently went on strike at McDonald’s in Harrisburg, Pennsylvania took a big chance. They could have been fired and then deported from the country. Instead, they got their boss fired and got a meeting with the head of the State Department program that brought them to the U.S. But they aren’t finished: they want to make sure that what happened to them never happens to foreign students again.

My colleagues and I met with four of the young workers last week, who came from Peru, Paraguay, Chile and Argentina. All had been recruited into the State Department’s J-1 summer work travel visa program by GeoVisions, a State Department-approved sponsor, which promised them three months of steady wages for slinging Big Macs, decent housing and a cultural experience, followed by a month of travel wherever they wanted to go.

What they and 14 other students got was an unpredictable mix of work hours—as little as four hours in a week for some and 25 hours in a row for others. They were required to live in the basements of homes owned by their boss, Andy Cheung, who packed six into one house and eight into another, jammed together with little privacy—only a curtain to separate the beds of four young men from four women. They were cheated on wages they earned, overcharged for their housing and forced to walk to work on highways instead of riding in free transportation they’d been promised. At least one was actually in debt to Cheung after almost 3 months of work.Read more

Dylan Matthews at Wonkblog posts a graph from Robert Lawrence and Lawrence Edwards that purports to show manufacturing employment declines are simply a capitalist inevitability. It’s essentially this graph:

So, if manufacturing employment is always shrinking as a share of overall employment, the implicit argument is that nothing– say very large trade deficits that characterized the past decade and a half in the American economy – can really affect this trend one way or the other.Read more

A common theme has emerged in recent punditry and economic analysis: policymakers should begin withdrawing support for growth and jobs because the economy is rapidly improving. In recent months one can find several examples of commentators urging the Federal Reserve to abandon its efforts to boost activity and jobs and begin tightening to forestall (so far completely hypothetical) inflation. And any call for fiscal support for job creation on a real scale is greeted with hand-wringing about its riskiness—as can be seen in much reaction to the  Congressional Progressive Caucus’s “Back to Work” fiscal 2014 budget alternative (BTWB, henceforth), which would invest $2.1 trillion in job creation measures over 2013-2015.

For example, David Brooks criticized the BTWB on the (incorrect) grounds that the economy “is finally beginning to take off…[as there is no longer] a large and growing gap between the economy’s current output and what it is capable of producing.” And a recent column by Ezra Klein contained concerns from Moody’s Analytics chief economist Mark Zandi that the BTWB  targets job growth too aggressively, meaning that: (a) the overall economy has recovered enough (or surely will) that it doesn’t need this boost; and (b) that recovery has been and will be sufficiently fast that even the estimates of how much fiscal support will boost jobs and growth are overstated.

We strongly disagree. The economy remains deeply depressed, and the coming year will see a significant drag on already inadequate growth from further fiscal contraction (sequestration on top of deepening discretionary spending cuts and expiration of the payroll tax cut). Given this, there’s no reason at all to think that fiscal expansion would be less effective than in the past 3-4 years, and there is certainly no reason to gamble on a robust recovery without policy help.Read more