Following the release of last week’s report on GDP growth, I wrote the following for a press advisory:

“Gross domestic product grew in the fourth quarter of 2011 at the fastest rate since the first half of 2010 – but any celebration should be muted. The 2.8% growth rate for the quarter was well below expectations and the year-round growth rate for 2011 was only 1.7%, a rate that would not generate reliable declines in unemployment should it continue…”

And the GDP report before that one I wrote*:

“The Bureau of Economic Analysis reported today that the economy grew by 2.5% in the most recent quarter – meaning that it has grown by only 1.6% over the last full year – this sluggish growth is the root cause of the stubbornly high unemployment rate we’ve seen over that time. While a double-dip recession does not seem to be in the cards, this does not by a longshot mean that the economy is healthy.”

And the one before that one I wrote:

“Gross domestic product grew at a 1.3% rate in the second quarter of 2011 and has averaged just 1.6% growth for the entire first half of 2011. This anemic growth is why the unemployment rate stopped falling and actually began rising during these same six months. Worse, the rush to fiscal austerity will make the problems of slow growth and joblessness even worse.”

In short, I’ve been pretty boring over this time in my reactions to subsequent data releases. Take a look at the jobs day releases from my colleague Heidi Shierholz and you’ll see a similar blizzard of same-old-same-old calls that job growth is positive but not fast enough blah blah blah.

But, this week’s update by the Congressional Budget Office of their potential GDP series lets me show why this unvarying string of negativity is actually informative; we just aren’t recovering. The figure below plots the ratio of actual GDP to potential GDP – with potential GDP being the amount of economic output we’d be producing if all workers and factories were fully employed. The gap between these two series (creatively named “the output gap”) is a measure of how far away we are from full recovery. And for the past year or more we have made essentially no progress on this front. Another way to put this is “zero is not the magic number” – GDP (or employment) growth can come in positive forever without actually moving the economy any closer to full recovery. And each month/quarter/year that we do not close the gap between actual and potential GDP is another month/quarter/year that we’re simply leaving hundreds of billions of dollars on the table (cumulatively around $3 trillion and counting since the start of the recession).

So, given this, would writing more unpredictable reactions to each new data release over the past year actually have been informative? Or misleading?

*Note that these “quick takes” were reactions to “advance” estimates of GDP – the growth rates for these quarters have since been revised by BEA.

Today, Congresswoman Rosa DeLauro held a press conference to discuss food stamps and the critical role they play in our economy. She asked several experts, including myself, to discuss the role of food stamps in helping people and helping the economy. I’ve summarized my comments below:

First, food stamps help people. About 46 million people participate in the Supplemental Nutrition Assistance Program (SNAP), which translates into over 1 in 7 Americans who use food stamps. Nearly 75 percent of SNAP participants are in families with children, and more than one-quarter of participants are in households with seniors or people with disabilities. Food stamps primarily help children – roughly 50 percent of those on food stamps are under the age of 18. Over 40 percent of all recipients live in households where family members are employed.

Food stamps go to people truly in need. To be eligible, households have to make a gross income below 130 percent the poverty line and a net income (once all deductions are applied) of less than 100 percent of the poverty line. The average monthly allowance is about $130 per person. In 2010, these modest payments kept over 5 million people out of poverty.

Second, food stamps provide extremely effective support for the overall economy. Food stamps go to people that are cash strapped, by definition, which means they spend the money right away, putting the cash received directly back into local businesses and grocery stores. Nearly all macroeconomic forecasters agree that food stamps are among the most effective forms of fiscal support to create economic activity and jobs.

Third, SNAP is a very efficient program, with 92 percent of SNAP benefits going directly to people to spend on food (the remainder is low administrative costs of running the program, determining eligibility, and the like, and other food assistance). When the money goes to people, they spend it and stimulate the economy on the order of $1.5 to 1.7 for every dollar spent. This means that the $78 billion spent on food stamps in 2011 led to $115 billion in overall economic activity.

Finally, SNAP swelled because the economy entered the worst recession since the Great Depression and remains severely depressed even 18 months after the official recovery began. And this expansion of SNAP was a good thing – benefits keep 5 million people out of poverty and are universally considered some of the most effective fiscal support available to help an economy that is projected to see unemployment rates above 8 percent until 2015. Cutting these benefits would simply be a mistake for families and a mistake for the economy.

Jobs are a top priority in this country at this time. If our main goal is to create jobs, we need to stimulate demand. To stimulate demand, we need to put money in the hands of people who will spend it.  One of the more efficient and effective ways to put money in the hands of people who will spend it is food stamps.

Rules to prevent financial fraud or toxic dumping or faulty medical devices — these don’t destroy the free market.  They make the free market work better. — President Obama, State of the Union Address, 1/24/12

Over the past year, discussion over regulations has frequently been distortedly one-sided, as if their only possible effect on the economy and markets is to cause damage. The Obama administration itself has often failed to add balance to this conversation, so it was heartening to see the president lay out a more comprehensive assessment in his State of the Union address.

In the address, President Obama focused most on the financial crisis and regulations. He, appropriately, stated that the roots of the economic collapse and ongoing economic troubles included regulatory inadequacy:  “In 2008, the house of cards collapsed.  We learned that mortgages had been sold to people who couldn’t afford or understand them.  Banks had made huge bets and bonuses with other people’s money.  Regulators had looked the other way, or didn’t have the authority to stop the bad behavior.”

So the effective implementation of strong financial regulations can not only provide needed protections to individual borrowers and savers, they can also abet financial stability, in all these ways making the free market “work better.”

A fuller version of the President’s claim would also include the following reasons why regulations can help the free market work better and help the economy.

• Even outside of the financial sector, weak or absent regulations can be a direct threat to the economy and employment. Inadequate regulation contributed to the BP oil spill and its substantial economic costs. Inadequate regulation can also undercut the faith of consumers in an industry’s products because when dangerous products are being produced the public is naturally less likely to buy them. This story recently applied to the food industry. In the wake of too many product horror stories and weak regulation, the food industry supported stronger regulations in the form of the Food Safety Modernization Act of 2010.
• Regulations can have broad economic benefits that may not be apparent at first blush. Clean air regulations, for instance, significantly improve the health of workers and children, resulting in lower health care costs and more productive workers.
• Regulations often spur technological innovations that boost productivity. Michael Porter of Harvard Business School—a self-described Republican and an eminent specialist on how companies and nations compete—has hypothesized that properly designed environmental regulations can lead to so much innovation that they completely offset the costs of compliance.
• Regulations ensure that firms do not act in ways that place unacceptable costs on those outside the firm, or on the society as a whole; these “externalities” are themselves a form of “market failure.” For example, economists would say that much of the externality (or external costs) of air pollution has been overcome with regulations designed to correct this market failure (a term which refers to any market result that does not result in optimal results for society).  Once, manufacturers could pollute the air at will. With regulations, laws now require manufacturers to reduce pollutants and to incorporate into their production processes the costs of disposing of waste. This has benefited both the public at large as well as the private sector (companies benefit, for instance, when their workers are not breathing polluted air caused by other firms).
• The direct cost of complying with regulations translates into increased employment. For example, an environmental regulation will mean more jobs for those engaged in pollution abatement. Further, it is possible that regulations may produce more labor-intensive production processes.  Compliance can particularly benefit job creation when labor markets are slack, and companies generally have substantial surplus cash, as is now the case; companies do not have to divert such spending from other investments, and plenty of workers are available to meet any increases in demand.

This isn’t to suggest that the only potential effect of any regulation is to improve free markets, but it is to suggest that the relationship between regulations and the market is a complicated one, and frequently positive. For those interested in more detail, please see this report from a year ago on the role of regulations and the economy.

Earlier this week, the Congressional Budget Office released its Jan. 2012 Budget and Economic Outlook, which showed a sustainable fiscal outlook over the next decade provided Congress leaves the budget on autopilot. The current law baseline—the legislated status quo—depicts the budget deficit averaging only 1.5 percent of GDP over the next decade (fiscal years 2013-22), public debt peaking at 75.1 percent of GDP in FY2013, and the public debt-to-GDP ratio gradually falling to a more-than-sustainable 62.0 percent of GDP by FY2022. This picture is not perfect—the fiscal drag from the debt ceiling deal and expiring tax provisions is projected to slow growth to an anemic 1.1 percent of GDP in 2013 (and unemployment projections were raised half a percentage point across the decade)—but it is certainly fiscally sustainable in the out years, after the economy has recovered.

And the single biggest policy threat to this sustainable fiscal outlook? Congress might extend all the George W. Bush-era tax cuts over the next decade, to the tune of $4.4 trillion over a decade. That’s $3.8 trillion (-9.1 percent) in revenue loss and $657 billion (+15.5 percent) in additional debt service. Yes, deficit-financed tax cuts increase spending. CBO’s current law baseline projects cumulative budget deficits of $3.1 trillion, so continuing the Bush-era tax cuts would more than double the scope of fiscal stress.  (These calculations assume that Congress will continue patching the alternative minimum tax and attribute a $1.1 trillion interaction between the policies to the Bush tax cuts, which pushed more households into the AMT, significantly increasing the cost of the AMT patch.) Measured differently, the hefty opportunity cost of the Bush-era tax cuts averages 1.9 percent of GDP in revenue loss and another 0.3 percent of GDP in increased interest spending over 10 years.

Under current law, the budget will begin running sustained primary surpluses (where revenue exceeds non-interest spending) starting in FY2015. If Congress patches the AMT, primary surpluses begin in 2017. If the Bush tax cuts are extended, the budget never reaches primary balance. (Primary balance is a common metric for sustainability: while it does not necessarily stabilize debt as a share of GDP—which depends on interest rates, outstanding debt levels, and GDP growth—it’s a decent approximation.)

The Bush tax cuts remain expensive, ineffective, and unfair, and permanently extending even a portion of them—which President Obama proposes to do for 98 percent of households—makes it difficult to adequately fund public investments, economic security programs, and national security spending. Congress and the public have to accept that the federal government must either collect significantly more revenue (above that projected under current law) or renege on commitments insuring that seniors, the poor, and the disabled are provided with health care and a degree of retirement security. Like it or not, we can’t afford the New Deal, the Great Society, and the Bush tax cuts.

Last week, the Washington Post published an essay by James Q. Wilson that’s bound to generate controversy. While Wilson acknowledges rising income inequality, his analysis of the factors driving the trend is seriously flawed. Furthermore, he belittles the need to tax the rich more in order to help the poor or to address overall inequality.

Wilson rightly acknowledges the growth of income inequality and correctly notes:

“The mere existence of income inequality tells us little about what, if anything, should be done about it. First, we must answer some key questions. Who constitutes the prosperous and the poor? Why has inequality increased?”

It is after this point that his argument goes off track. While there is much to comment on, I will only address a few issues, starting with Wilson’s explanation of rising inequality. He writes, “Affluent people, compared with poor ones, tend to have greater education and spouses who work full time.” Wilson then suggests that if these are the drivers of inequality, then it is best not to do anything about the problem, since, in his words, “We could reduce income inequality by trying to curtail the financial returns of education and the number of women in the workforce—but who would want to do that?”

It is true that those at the top have more education and are more likely to have a working spouse, but this hardly explains the large increase in inequality over the last 30 years. Let’s start with the role education plays in growing wage inequality. Wilson points out that those with at least a college degree saw wage growth far greater than those lacking a high school degree. While Wilson cites the data incorrectly (he cites Bureau of Labor Statistics data on “hourly” wages when they are actually median weekly earnings of full-time workers, and he flips the genders for college-educated wages), his point holds true: Wages have risen more for the college-educated (increasing 20 percent for men and 33 percent for women) over the last three decades than for those lacking high school degrees (with the wages of these workers falling 31 percent for men and 9 percent for women).

However, these data essentially compare the top 30 percent or so to the bottom 10 percent. In terms of explaining the surge in wages for the top, his analysis mostly misses the mark. After all, what we really need to explain is why the top 1 percent of wage earners saw their annual wages rise by 131 percent from 1979 to 2010—and why the top tenth of the top 1 percent saw their wages grow 278 percent—while wages for the bottom 90 percent increased just 15 percent (see the graph below).

Moreover, noting someone’s education does not explain why their wages rose or fell. After all, the reason why CEO pay has exploded in the last few decades is not because most CEOs happen to have college degrees. Rather, it’s due to a self-serving system that ensures CEOs reap the fruits of their company’s rewards.

As for Wilson’s point on working spouses, I’ll leave it to him to prove that this is a major driving factor behind the trends starkly depicted in the graph above.

Another serious flaw in Wilson’s argument is his contention that the existence of some economic mobility somehow negates the need to be concerned about high and rising income inequality. He illustrates mobility by pointing out that within nine years one can rise from being a business school student to earning a big Wall Street salary and a hefty yearly bonus. While this is true enough, Wilson misses the point yet again; business school students have traditionally been upwardly mobile. Instead, what is useful to know is whether someone from a poor or lower-middle-income family has the same or better chance of attaining such a position than in an earlier generation. The answer is quite clear that mobility within one’s lifetime (the chance of becoming that Wall Street banker) is no greater now than in the past. Moreover, the earning potential of today’s young workers is more tightly linked to their parents’ income than before. The existence of some mobility (and some variability from year to year) does not lessen the concern about inequality. (Also, see Dean Baker’s critique of the mobility data Wilson uses.)

In short, Wilson’s dismissal of inequality based on who the rich are, and why inequality has grown, is not very persuasive. However, the most curious part of Wilson’s piece is his contention that taxation is not relevant to income inequality:

“Making the poor more economically mobile has nothing to do with taxing the rich and everything to do with finding and implementing ways to encourage parental marriage, teach the poor marketable skills and induce them to join the legitimate workforce. It is easy to suppose that raising taxes on the rich would provide more money to help the poor. But the problem facing the poor is not too little money, but too few skills and opportunities to advance themselves.”

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The Congressional Budget Office released a report today claiming that “the federal government paid 16% more in total compensation than it would have if average compensation had been comparable with that in the private sector, after accounting for certain observable characteristics of workers.” Specifically, the report finds that average wages were roughly the same in both sectors, but that the value of benefits was almost 50 percent higher in the public sector (the overall difference comes to 16 percent because the bulk of compensation takes the form of wages).

CBO cautions, however, that “estimates of the costs of benefits are much more uncertain than its estimates of wages, primarily because the cost of defined-benefit pensions that will be paid in the future is more difficult to quantify and because less-detailed data are available about benefits than about wages.” This a serious understatement. In fact, the results appear to hinge entirely on the interest rate used to discount pension benefits, which isn’t even mentioned in the report.

Though the report itself provides no useful information about how the cost of particular benefits was estimated, a working paper by the same author indicates that CBO probably used a 5 percent rate of return to discount the value of future pension benefits (in other words, $105 in pension benefits next year is valued at $100 today). In practice, this means that if the rate of return on pension fund assets turns out to be higher than 5 percent, which is very likely, the present cost of funding future pension benefits will be lower than CBO estimated.

Where does the 5 percent discount rate come from? CBO based this on a 4 percent “risk-free” yield on Treasuries, with a little wiggle room to account for the fact that pension benefits aren’t quite risk-free (“federal pension obligations are not protected by the Constitution, and the pension obligations of private-sector employers are only partially covered by the Pension Benefits Guarantee Corporation”). If you’re wondering why the riskiness of pension benefits matters rather than the expected return on pension fund assets, that’s a very good question.

With compounding, using a nearly risk-free discount rate can double or even triple the cost of pensions compared to using expected returns on actual pension fund assets. Admittedly, expected returns are uncertain, and the uncertainty itself imposes an indirect cost on pension sponsors. But if you’re going to consider indirect costs like uncertainty, you should also factor in indirect advantages for employers, like reduced turnover.

The experts consulted by CBO for this report include my EPI colleague, Heidi Shierholz, as well as two researchers on the other end of the political spectrum, Andrew Biggs of the American Enterprise Institute and Jason Richwine of the Heritage Foundation (Biggs and Richwine were also consulted for the working paper). Though it’s nice that CBO considered a range of opinions, it’s a shame that Biggs, Richwine and others have been successful in convincing CBO and others to use low Treasury yields to estimate the cost of future pension benefits. A paper to be released next week by EPI also shows that Biggs and Richwine use highly unorthodox methods in comparing public- and private-sector pay. Among other things, they ignore enormous differences in educational attainment between teachers and private-sector workers.

Congress is debating whether to renew legislation that has extended unemployment insurance benefits for the long-term unemployed for up to 99 weeks (73 weeks of federal benefits beyond the regular 26 weeks of state-financed benefits). The decision should be consistent with the original decision to extend benefits, based on the condition of the economy and the likelihood that jobless workers will be able to find paid employment.

The unemployment rate, which was 8.3 percent in Feb. 2009 when the American Recovery and Reinvestment Act (ARRA) was enacted, and was 8.5 percent in Dec. 2011, is one measure, but not the best measure, of the need for extended benefits. The best measure is probably the ratio of long-term job seekers – the population that receives extended benefits – to available job openings. That ratio was 1.1 to 1 when ARRA put the 99 weeks of benefits in place and was still a much higher 1.8 to 1 in Nov. 2011.

This very high long-term job-seekers ratio indicates that the economy has not recovered enough yet to reduce the number of weeks of unemployment insurance benefits the jobless may receive. There are still more than 5.5 million Americans who have been seeking work for 27 weeks or more. Their ability to find work, to find employers willing to hire them after they have been unemployed for 6 months or a year, is greatly reduced.

Congress should reject Congressman Dave Camp’s (R-Mich.) legislation to eliminate 40 weeks of potential benefits or even 20 weeks, which some reports have mentioned as a compromise. Rep. Camp is off-base when he claims that 59 weeks of benefits is “a level consistent with prior recessions.” There has not been a single recession in the last 70 years that approached today’s levels of long-term joblessness. Both the number of long-term unemployed and the share of the unemployed who have been unemployed for more than 27 weeks are about double the levels of any other post-war recession.

Congress should renew the program of extended benefits as it is until the end of 2012.

The rate of capacity utilization in the electric utility sector dropped below 80 percent in 2011. This is the lowest level on record, with data going back to 1967, or nearly a half-century ago. The figure is far below the average utilization rate of 89 percent over this period.  (See figure below.)

The exceptional degree to which there is unused capacity in the electric utility industry (or the “electric power generation, transmission, and distribution” sector as defined by Federal Reserve Board data) is entirely at odds with the notion that new regulations finalized or proposed by the Environmental Protection Agency are holding back job growth. To the contrary, this trend is consistent with the theory that such regulations can lead to modest increases in employment, since the compliance costs they lead to would not compete with other investments by this sector.

If regulation was holding back investment in the utility sector, one would expect there to be high capacity utilization rates. Companies would be relying heavily on existing capacity rather than investing in new capacity because they would be deploying investments on regulatory compliance, or because they were fearful new regulations would undercut their return on new investments.

While the existence of large, unused capacity is thus inconsistent with the notion that regulations are thwarting job creation in the electric utility industry, it is completely consistent with the notion that the lack of stronger demand is holding back increased investments in facilities or more hiring. Why make such investments when current resources are far from being fully utilized? The data suggest that until demand picks up more rapidly and cuts into excess supply, accelerated investments will not occur.

The broad attacks on regulation advanced over the past year have consistently featured the supposedly dire consequence of EPA regulations on the utility industry. The capacity utilization data for all of 2011 provide additional evidence that these attacks have been misplaced. Instead, the data are consistent with earlier EPI work finding that lack of demand, not regulations or regulatory uncertainty, underlie the modest pace of job growth and that now might be an especially timely moment to advance new regulations.

The Illinois state legislature begins its next session this week and will likely debate a bill that will raise the state minimum wage from $8.25 to $10.65 over four years—providing a substantial boost to the state’s lowest-paid workers and the economy. The measure will mirror a similar proposal from last year, S.B. 1565, which would have raised the minimum wage in four steps and, after reaching $10.65, would have tied future increases to inflation. That measure would give 1.1 million low-wage workers a raise, providing more than $3.8 billion in increased wages for directly affected workers.

During the last 30 years, the real value of the Illinois minimum wage has eroded and working families’ incomes have essentially stagnated, reflecting the rest of the nation’s growing wage inequality. Restoring Illinois’ minimum wage to its pre-erosion level would help to return it to its original intent as a policy that sets wage standards for low-wage workers at a level that is high enough to be meaningful. Restoring the value of the minimum wage through incremental annual increases will ensure that it never again strays from its original purpose as a basic protection of fair wages.

We know that a minimum-wage increase will boost the earnings of working families in Illinois—an added bonus is that it’s a tool for economic growth. It spurs spending by the workers who get the raise, thereby increasing economic activity and, in turn, creating jobs. It’s time that the American worker starts to share in the prosperity that corporate America has enjoyed—thanks to the growing productivity of workers—since the 1970s. A minimum-wage increase in Illinois would mean a shift from corporate profits to the America worker and would start to reverse the trend of increasing inequality evident since 1973. While corporate America enjoyed more than 200 percent growth in profits from 1973 to 2006, the real value of the Illinois minimum wage in 2010 was only 14 percent higher than it was in 1973. During the same period, American workers’ productivity increased almost 100 percent. The graph below shows this overwhelming disconnect:

Keeping the real value of the Illinois minimum wage at a level that allows low-wage workers to afford basic necessities is  a policy that Illinois families cannot afford to lose—most minimum-wage workers are at least 20 years old and have total family incomes of less than $45,000. The consumer spending of workers affected by this increase will create a direct stimulus effect, pumping more than $2 billion into the economy and creating 20,000 jobs.

Amid persistently high unemployment (9.8 percent in Illinois), a resulting lack of wage growth, and a severe jobs deficit in Illinois, there will be no upward pressure on wages for a very long time. Since raising the minimum wage helps working families, does not cause job loss, and is a boost to the economy, now is exactly the time to increase the minimum wage.

David Leonhardt of the New York Times has a chart on the Economix blog today that shows how austerity measures at the federal, state, and local levels have held back growth in the U.S. economy over the past year and a half. As the blue line from his chart indicates, despite gains in the private sector, public sector growth was negative every quarter since Q3 2010.

What does this look like in terms of jobs? As you can guess, it isn’t pretty. In a blog post last September, I noted that government job losses are at the heart of overall job losses in numerous states since the recession officially ended in June 2009. Just to coincide with the timeframe I’ve noted from Leonhardt’s chart, the table below shows the change in government employment, total job losses for industries that lost jobs, and government losses as a percentage of total losses by state since Aug. 2010. The Dec. 2011 state unemployment rates and net change in employment figures are shown as well.

The numbers are pretty explicit: For the United States as a whole, every major industry except for government has gained jobs since Aug. 2010. Federal, state, and local governments have lost 440,000 jobs over that timeframe, accounting for 100 percent of losses for industries that lost jobs. Just to clarify, this does not mean that only government workers lost their jobs, but for every non-government worker in the country that lost a job over the past four months, at least one more job was created someplace else in that industry.

At the state level, government accounted for more than half of all job losses for industries that lost jobs since Aug. 2010 in 27 states, and made up 100 percent of losses for industries that lost jobs in Arizona, Idaho, Massachusetts, North Dakota, Oregon, Pennsylvania, and Texas. Government losses also made up more than 50 percent of losses in seven of the 10 states with the largest number of jobs lost, and six of the 10 states with unemployment rates above 9.5 percent.

Of course, the private sector will absorb some of these losses and thankfully we have seen a positive net change in employment for most of these states since Aug. 2010.  But make no mistake, the idea that drastic cuts to public budgets would somehow spur private-sector growth is a myth that has undermined recovery efforts both in the United States and in Europe. In reality, cuts to public-sector budgets have a significant negative private-sector impact. As my colleague Ethan Pollack has demonstrated, “for every dollar of budget cuts, over half the jobs and economic activity will be lost in the private sector.” Net change in employment since Aug. 2010 may be positive for most states, but it’s frustrating to think how much better these job numbers might be if we hadn’t spent the past 16 months shooting ourselves in the foot.

Research assistance by Natalie Sabadish