The leaked document that purports to show the Obama administration’s opening bid for resolving the “fiscal cliff” is deeply encouraging, on many fronts—as detailed by Andrew Fieldhouse. Given how strong a proposal it is, and how in-line it is with many of the principles for fiscal policy that we have laid out in the medium– and long-run, it seems churlish to raise any note of criticism. It needs to be said, however, that as good as this proposal is, it still does not look like strong-enough medicine to solve the most pressing problem of sluggish economic growth and chronic joblessness in the coming years.

To be sure, if adopted it would turn fiscal policy from dangerously contractionary to supportive of growth in the next couple of years. And the most basic contours of their proposal, as Andrew notes, are actually very much in line with the proposed strategy we recently outlined.

FULL ANALYSIS FROM EPI: Budget battles in the lame duck and beyond

But, as our own paper noted, both our strategy and the Obama administration’s proposal start with the presumption that measures that are strong enough to reliably solve the crisis of joblessness in the near term are totally outside the bounds of political realism. Read more

President Obama’s opening bid for negotiations resolving the “fiscal cliff” has surfaced, and the contours are both familiar and sound. The Washington Post and an unofficial outline drafted by Republican aides both suggest that the administration has essentially proposed its budget request for fiscal 2013. And the president’s latest budget offers a solid framework for navigating the fiscal obstacle course, as it would substantially moderate the pace of deficit reduction while making a responsible down payment on longer-term deficit reduction. Relative to current policy, the contours are shaping up roughly as follows:

• Allow the upper-income Bush tax cuts to expire (+$850 billion)
• Restore the estate and gift taxes to 2009 parameters (+$120 billion)
• Curb tax expenditures (+600 billion)
• Stimulus spending (-$50 billion)
• Extend emergency unemployment benefits (-$30 billion)
• Extend or replace the payroll tax cut (-$110 billion)
• Continue AMT patch, “doc fix,” and tax extenders (-$240 billion)
• Defer sequestration (?)

Most critically, the Obama framework includes a variation of his American Jobs Act, proposing increased near-term government spending on infrastructure and state fiscal relief while maintaining the ad hoc stimulus set to expire at year’s endRead more

Last week, President Obama’s vestigial campaign sent out an infographic touting his plan to address the fiscal cliff. This plan would end the upper Bush tax cuts and cut spending by more than $3 trillion, including the cuts already signed into law since early 2011, and preserve nondefense public investments in areas like education and infrastructure.

FULL ANALYSIS FROM EPI: Budget battles in the lame duck and beyond

There’s an irony in that the cuts already signed into law were never actually supported by the president, who only relented when the House GOP threatened to shut down the government (the spring 2011 appropriations showdown) and collapse the economy (the summer 2011 debt ceiling showdown). He was right then, because these cuts—particularly the half that come out of the domestic discretionary budget—are horrible policy. Domestic (non-security) discretionary spending is the portion of the overall budget that not only delivers the primary source of investment in our nation’s future, but also provides vital services to people in need, protects Americans from corporate abuses and environmental degradation, and keeps the government itself operating. (The nondefense budget includes all of non-security plus homeland security, veterans affairs, nuclear weapon security, and foreign affairs.) Bottom line, it’s important stuff. And yet over the last year, the president has begun touting the fact that his budget brings the non-security portion of the budget down to record low levels—“the lowest level since President Eisenhower,” as the president is fond of saying—as if this is somehow a good thing. Read more

In a year of professional sports lockouts, teacher strikes, and disappearing Twinkies, we’ve heard a lot about the “labor dispute.” The phrase implies unreasonable labor demands and stalled collective bargaining negotiations and has frequently provided cover for businesses that have failed to adapt to changing economic conditions. The Hostess bankruptcy is the latest example of workers bearing the blame for years of bad management and myopic business strategy. The language used to describe these events is indicative of the vilification of workers —from Detroit, to Irving, Texas, to Washington, D.C. Yet, in so many of these cases, labor is neither the provocateur nor the problem.

When Hostess executives (who recently treated themselves to 30–300 percent pay increases) proposed a plan to slash employee compensation by 30 percent, it wasn’t in response to labor demands. When the workers refused to accept management’s proposed compensation cuts, it was resistance to extortion, not a labor dispute. Employees sticking together to protect the compensation they’d earned, following recent sacrifices to the tune of at least $110 million, wasn’t “big labor” picking a fight or wanting more. Read more

In a recent blog post, we made the point that the debate over the “fiscal cliff/obstacle course/austerity crisis” is fixated on the too-modest goal of avoiding outright recession in the coming year, rather than actually pushing the U.S. economy back to full economic recovery. This latter goal—actually ending the economic slump that began with the Great Recession in late 2007—is obviously politically unrealistic (which, by the way, should be sign one of just how deranged D.C. policymaking has become), but we should be clear that it’s the right thing to do.

FULL ANALYSIS FROM EPI: Budget battles in the lame duck and beyond

The U.S. economy has already forfeited literally trillions of dollars in national income by not pushing the economy back to full health after the Great Recession. Knock-on effects of this policy failure include damage to future potential income from economic “scarring;” to put it simply, allowing productive economic resources (both people and capital) to sit idle and atrophy is exceptionally inefficient. A less important knock-on effect of this continuing slump is that it will predictably cause future projected budget deficits to balloon. Yet far too many self-proclaimed deficit hawks among D.C. policymakers seem strangely unconcerned about this particular driver (continued economic weakness and unemployment) of future budget deficits, and too many are instead advocating near-term fiscal contraction that will further delay recovery.

The U.S. economy is running $973 billion (5.8 percent) below potential economic output—what the economy could produce with higher (but noninflationary) levels of employment and industrial capacity utilization. Cumulatively, these output gaps imply that the U.S. has forgone roughly $3.6 trillion of national income over 2008—2011, projected to hit $4.6 trillion by the end of 2012.

Moreover, the Congressional Budget Office’s (CBO) economic baseline shows output gaps persisting into 2018: Under current law, another $3.5 trillion worth of cumulative output gaps are projected over 2013–2017. These forecasts are likely overstated in the near term, as Congress probably won’t actually allow all the fiscal contraction baked into current law to actually come to pass. Still, CBO’s current economic forecast indicates a decade-long economic slump, in which the United States will forgo $8.1 trillion of national incomeRead more

Here’s some of the interesting content that EPI’s research team browsed through today:

• “Obama must push for another extension of unemployment insurance” (Washington Post)
• “Poor management, not union intransigence, killed Hostess” (Los Angeles Times)
• “Tax Time: Why we pay” (New Yorker; subscription)

Zachary Goldfarb wrote an interesting piece on President Obama’s commitment to fight rising economic inequality as president. Lots of it rings true—the president has indeed expressed concerns about rising inequality and many of his policy initiatives (particularly the coverage expansion included in health reform) will indeed do much to ensure that rising inequality no longer provides as daunting a barrier to low– and middle-income households’ living standards growth.

What’s consistently depressing in the inequality debate as waged around D.C. politics, however, is the telescoping of the debate into being all about tax rates and educational attainment.

Goldfarb repeats a piece of ossified conventional wisdom in his piece, writing, “The data show that rising inequality is largely the result of a changing economy that handsomely rewards people with better skills or credentials—a college education—and leaves people with a basic education at a disadvantage.”

This just isn’t right. Check out how wages for college graduates have fared in the past decade. Read more

Warren Buffett wrote a great New York Times op-ed in which he illustrated the ridiculousness of the claims that higher tax rates on the rich will cause them to forego profitable investments. As he points out, the decline of tax rates on the rich over the last few decades have only served to further fuel their skyrocketing incomes at the expense—rather than to the benefit—of everyone else.

Making the highest income households pay a fair share of taxes is important for the principles of fairness itself: the concept of vertical equity stipulates that tax burdens should be proportionate to a taxpayer’s ability to pay, so as income rises, so too does the share of income paid in taxes (and thus effective tax rates). As my colleague Andrew Fieldhouse calculates, very high-income households start to see their effective individual income tax rate start to fall, as the preferential treatment of capital gains and dividends undermine the basic tenant of our progressive income tax that effective tax rates should rise with income. This implies the burden of taxation is being shifted from those best able to pay to those more burdened by higher effective taxation.

But it’s not just about fairness—raising taxes on the rich produces a lot of revenue, which we can then use to create jobs and Read more

The Washington Post lead editorial today claims that the chained CPI-U is a better measure of the inflation facing the elderly than the current estimate of consumer prices used for that purpose. The editors argue that using the chained CPI-U is therefore not just an effective way to get substantial budget savings from a major entitlement program, but also a fair way to do so.

If the current COLA is set too high because it is calculated using a measure that systematically overstates inflation, then we ought to change it. But in fact, it doesn’t. Contrary to the Post’s assertions, the chained CPI-U and the current unchained version probably understate inflation for the elderly and disabled because the mix of goods and services they purchase is much more heavily weighted toward medicine and health services, where inflation is very high, than it is for younger consumers. In addition, elderly and disabled beneficiaries spend a greater share of their incomes on necessities like rent and utilities, and are therefore less able to substitute cheaper goods and services in response to price increases.

It is possible that Alan Simpson and Erskine Bowles didn’t know this when they recommended Read more

There is a widely held view in Washington that if employers don’t like the labor force they find in their area, they should be able to replace the locals with foreign workers. If people who live and work where a business is located aren’t willing to work for however little a business owner wants to pay, the business should be able to resort to “guest workers,” foreign workers who are permitted to work only for that employer while they are in the U.S. and who have to leave as soon as the employer has finished with them.

The Washington Post, for example, recently announced that any comprehensive immigration reform would have to give businesses “timely access to adequate numbers of seasonal and agricultural workers.” Francisco Ordonez, a McClatchy News reporter, spoke to Republican leaders who say that if immigration reform is going to happen, “Democrats have to stand up to unions and support an expanded guest-worker program, including some non-agriculture jobs.” The unemployment or underemployment of 15 percent of the U.S. labor force apparently isn’t enough to provide “adequate numbers.” Read more