The Occupy Wall Street (OWS) protests have been spreading. In Chicago, protestors have gathered around the Chicago Federal Reserve Bank. Again, the protestors seem to have chosen an awfully good symbolic venue – over the past two years, the Fed has been under ferocious political attack from conservative politicians who want them to stop trying to reduce unemployment with monetary policy. If the Occupy Chicago protests provide counter-pressure from more progressive perspectives, this would be a great thing.*

We’ve already noted the letter from four GOP leaders to Federal Reserve Chairman Ben Bernanke last month demanding that he declare surrender in trying to help the faltering economy. This is just the latest in what has been a pretty remarkable effort by conservative politicians to stop the Fed from trying to boost the economy and to convince it to fret about the phantom danger of inflation.

It’s pretty telling that the best that prominent Democratic politicians have managed in response is some hand-wringing that such criticisms threaten the sanctity of central bank independence – essentially demanding that the GOP “leave Ben Bernanke alooooone!”

However, as Mike Konczal notes, even in the best of times, central bank independence as practiced by the Fed should hardly be a prime progressive demand. The Fed’s Open Market Committee – the body that sets the monetary policy direction of the economy – contains 12 slots. Seven of them are for Fed Governors (there are currently 2 vacancies on the Board of Governors), who are generally either economists or policymakers with some expertise in issues the Fed confronts. But five are set aside for presidents of the Fed’s regional reserve banks. These presidents are picked by the board of directors for each regional bank – and these boards are comprised of financial-sector (commercial bank) executives. Essentially, the finance sector gets to pick 5 of the 12 voting members of the FOMC. If one thinks that the interests of the financial sector are not necessarily the same as those of, say, unemployed workers (and I think they’re not) – perhaps the financial sector is more scared of inflation and less scared of unemployment – then central bank “independence” should probably be treated as less sacrosanct than it currently is in D.C.

Imagine, for example, that somebody demanded that the AFL-CIO get 5 voting slots on the FOMC. That would, of course, be considered absolutely crazy by those determined to preserve central bank independence as a principle (i.e., the vast majority of professional policymakers and analysts inside the Beltway). Of course, in practice, this would mean an FOMC that tried much, much harder to fight unemployment than the one we currently have, so crazy sounds pretty good to me.

Worse, this ingrained deflationary bias of the Fed is being reinforced in the current crisis by conservatives who want to abandon all the policy measures (fiscal, monetary and exchange-rate) that could actually help reduce joblessness. Some lonely (and admirable) voices calling on the Fed to do more are out there, but they’re few and far between (and sometimes working for the Bank of England, instead of the Fed).

Finally, however, there seems to be a little pushback. Besides Occupy Chicago, Massachusetss Representative Barney Frank wants to take away the voting power of the five rotating regional banks and replace them with political appointees that must be approved by the Senate. Given that the political appointees of the current Fed have consistently shown more concern over unemployment than their regional bank colleagues, this would be a good (if small) first step to privileging democracy over Fed “independence.”

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*It’s true that the president of the Chicago Fed has been admirably aggressive in calling for more Fed action to reduce unemployment, especially relative to his other regional bank presidents. So, maybe protests can follow in Dallas, Minneapolis, and Philadelphia?

Via Roberton Williams over at TaxVox, I see that House Majority Leader Eric Cantor has a surprising objection to President Obama’s American Jobs Act (AJA) and its pay-fors: it will hurt soup kitchens and Americans living in poverty. How? By taxing upper-income individuals, of course. Thank goodness compassionate conservatism isn’t dead.

As I noted earlier, the largest component of the revenue offsets for the AJA would limit the rate at which itemized deductions and specified above-the-line deductions and exclusions reduce tax liability for households with adjusted gross income above $200,000 ($250,000 for joint-filers). These tax expenditures increase in value with one’s marginal tax rate. The president’s proposal would cap the value at 28 percent, slightly reducing the benefit from 33 percent or 35 percent for these upper-income tax-filers. Cantor objects to the proposal on the grounds that it would further “tax charitable donations to soup kitchens, churches, and cancer research centers.”

Williams makes two excellent points: if the tax policy objective is a higher incentive to charitable giving, Cantor should 1) not object to restoring the top marginal tax rate to 39.6 percent, which he does, and 2) not support lowering the top marginal tax rate to 25 percent, which he also does. Indeed, the House Republican 2012 budget would cut both the corporate tax rate and top individual tax rate to 25 percent at a revenue loss of $2.0 trillion(some of which is theoretically offset by eliminating unspecified tax expenditures—perhaps perennial GOP targets such as the Earned Income Tax Credit), on top of continuing the regressive Bush-era tax cuts to the tune of $3.8 trillion.

From Flickr Creative Commons by republicanconference

But the Republican budget reveals much deeper hypocrisies when it comes to the interests of poor and working families than the marginal tax rate. Bob Greenstein of the Center on Budget and Policy Priorities estimated that two-thirds of the spending cuts in their budget come from programs for lower-income Americans. Food stamps are cut and federal spending on Medicaid—health care for the disabled, poor children, and poor seniors—is slashed in half over the next 20 years. Medicaid alone would be cut by $1.4 trillion this decade.

Broadly speaking, Cantor objects to a revenue offset that would only affect 2.2 percent of the population, according to the Tax Policy Center, most of whom earn at least tenfold the poverty threshold for a family of four. More critically for impoverished Americans, the $447 billion in near-term job creation would boost employment by 1.9 million jobs and reduce the unemployment rate by 1.0 percentage point next year, according to Mark Zandi of Moody’s Analytics. In 2010, the federal poverty threshold for a family of four was $22,113; a family with earned income at this level would receive a payroll tax cut of $686 under the American Jobs Act, but not under the House budget. Unemployment insurance kept 3.2 million Americans out of poverty last year; the American Jobs Act would extend emergency unemployment benefits, but the House budget would not. Soup kitchens aside, putting Americans back to work and strengthening, rather than eviscerating, the social safety net is the way to address rising poverty.

Cantor is correct that the tax incentive for charitable giving would decline, although only for 2.2 percent of households. Expressing this concern in the name of the poor is, however, irreconcilable with the budget he steered through the House of Representatives, which would represent a massive redistribution of wealth from low- and middle-income families to the so-called “job creators.”

Just a quick reminder why the actual Wall Street is an attractive place for those wanting to protest the direction of economic policy. When asked why he robbed banks, Willie Sutton famously allegedly [ed. note – Snopes tells me that Sutton denies having said this and that it was an “enterprising reporter” who attributed this quote to him. Shoot. Well, it’s a good line so I’m going to stick with it, caveat emptor and all that) replied, “That’s where the money is.”

The figure below shows the share of all corporate-sector (about 60 percent of the overall economy) salaries and profits (and profits broken out by themselves) that are claimed by the finance sector. After a very brief dip in 2008, the recovery has been fast and has continued (accelerated?) the trend of finance claiming an ever-larger share of the economy. It also shows the share of the overall economy (GDP) earned by finance – and this too has reached its highest level on record.

So why go to Wall Street to demand shared prosperity?

Click figure to enlarge

In a report for the Ohio Business Roundtable, AEI’s Andrew Biggs and Jason Richwine estimate the cost to private-sector employers of Social Security and traditional pensions at just 2 percent of wages. This will come as a surprise to employers used to paying roughly three times as much for this coverage, as well as anyone who’s followed Biggs’ work over the years and knows he’s no fan of either Social Security or defined benefit pensions.

But this time, Biggs isn’t promoting Social Security privatization or 401(k)s. Instead, he and Richwine are trying to make the case that government workers in Ohio are paid a whopping 43 percent more than workers in the private sector, attempting to counter an EPI study that found government workers were, if anything, slightly underpaid. To do this, Biggs and Richwine systematically low-ball the pay of private-sector workers and inflate that of teachers and other state and local government workers in Ohio, who aren’t covered by Social Security.

Studies published by the Center for Economic and Policy Research and the Center for Retirement Research at Boston College support Rutgers University Professor Jeffrey Keefe’s research for EPI showing that public sector workers have lower salaries than comparable private sector workers and receive the same, or slightly lower, compensation once benefits and hours are factored in.

So how do Biggs and Richwine arrive at a 43 percent pay premium for government workers in Ohio? As Keefe and Amy Hanauer of Policy Matters Ohio explain, Biggs and Richwine selectively alternate between the actual cost to employers of providing fringe benefits and their supposed value to employees. So, for example, they magnify the cost of public-sector retiree health benefits by using the cost of purchasing insurance on the individual market, but they don’t do the same for life insurance provided by Social Security. According to Keefe, they also double count the cost of retiree health insurance by ignoring the fact that it’s paid for through pension contributions in the public sector, while falsely assuming that no private-sector workers receive these benefits.

Biggs and Richwine also claim that job security should be valued at 9 percent of earnings for government workers–12 percent once their supposedly higher pay is factored in–even though the evidence that state and local government workers actually have more job security is weak. Last but not least, Biggs and Richwine more than triple the cost of public pensions by projecting a very low rate of return on public pension fund assets, a favorite theme of  Biggs.

The Occupy Wall Street (OWS) protests have stretched into their third week and seem to be growing in strength and numbers. The protestors have been generally mocked by press coverage for having an inchoate message. Though this general criticism is going to be generally true of any large gathering, it’s worth noting that failure of message discipline has hardly been the death-blow to other protest movements that tend to get treated much more respectfully by the press. Further, a simple root of their protest is that U.S. economic policy is unfairly tilted towards the already affluent – and I surely would not disagree with that.

If it was decided, however, to turn the attention garnered by the OWS protests into a single policy “ask” (not saying this would be a good decision – I know nothing about effective organizing!), I’d probably nominate the financial speculation tax (FST).

Even a very small FST (say 0.25 percent on the sale or purchase of a stock, with rates on other financial assets set so as to minimize tax-arbitrage opportunities) has the potential to raise significant amounts of revenue very progressively and to reduce short-term, destabilizing financial speculation while imposing only trivial costs on longer-term, productive investments. Investing in America’s Economy, EPI’s long-run budget blueprint, proposed an FST that the Tax Policy Center estimated would raise $821 billion over the next decade—revenue that would finance more job creation, ease budgetary pressures elsewhere, and help to eventually stabilize public debt as a share of the total economy.

From Flickr Creative Commons by Mathew Knott

To put the cost of the tax in perspective, it is important to realize that an FST of this size would raise today’s transactions costs for financial speculation by less than they’ve fallen (due to market innovations and technology) since the 1980s – and nobody in that decade seemed to think that high financial transactions were strangling market participants’ ability to engage in trading.

In short, such a tax would raise money from a sector (finance) that has profited enormously in recent decades (aided by government guarantees) while too much of the rest of the economy has lagged. It would also provide a progressive and extraordinarily efficient way to raise tax revenue – providing a much less painful way to resolve much of the debate over long-run budget sustainability. Consequently, the policy is gaining momentum on the American left and abroad. In budget proposals for the Peter G. Peterson Foundation’s Solutions Initiative, the Center for American Progress and the Roosevelt Campus Network also proposed FSTs, as did the Congressional Progressive Caucus’s People’s Budget. The European Union also appears to be headed towards a uniform FST.

Given that many of today’s most enthusiastic deficit-hawks like to talk about “going after sacred cows” and “shared sacrifice,” it is odd indeed that an FST doesn’t loom larger in the U.S. fiscal policy debate, particularly among the deficit-obsessed political centrists. Maybe the OWS crowd really does have a point about how economic policy is made.

Robert Samuelson argued this past Sunday that lack of confidence is a factor holding the economic recovery back – pointing to low rates of consumer spending and business investment as evidence. One hears (or a variant – that it’s “uncertainty” holding back the economy) a lot, so it’s important to note that there’s no evidence for it.

Larry Mishel has shown that the argument that business uncertainty about regulation and taxation is holding back the recovery has no evidence behind it. One thing he could’ve added to this is the fact that capacity utilization rates – think of them as the employment rate of the nation’s capital stock rather than its labor force – remain very low – 77.3 percent in August, compared to a non-recessionary average of 80.8 percent between 1979 and 2007.

The uncertainty argument is supposed to be about firms not wanting to make commitments to future costs – so they eschew investment and long-term hiring. But, as Larry’s paper shows, they’re not eschewing investment (equipment and software investment is currently actually outperforming the last three recoveries). Firms are also not using their current stock of productive inputs – the incumbent workforce and plant and equipment – at anywhere near full capacity. What does uncertainty have to do with not working your current workers as many hours per week as you did before the recession or running your factories as long?

What would keep businesses from working their labor force as hard as they did pre-recession or running factories at the same pace? Lack of demand – the other (and actually convincing) explanation for why the recovery remains so sluggish.

Samuelson (and others) also points to consumers’ lack of confidence as inhibiting recovery – and this could, in theory, be the cause of weak consumer spending. Of course, the $8 trillion reduction in wealth erased by the housing bubble’s burst could explain this as well (and does a much better job of it).

Further, it’s important to note that today’s levels of consumer spending and saving do not look obviously “too low” by any measure. The jump in personal savings from just about 1.5 percent of disposable income in 2005 to over 6 percent by the end of 2008 was a large driver of the recession – households, seeing themselves much less wealthy because of the housing bubble’s burst decided to stop spending so much and this was a key driver of the downturn. But, a 6 percent personal savings rate may just be the appropriate one for households that don’t see their assets inflated by stock or housing bubbles. From 1979 to 1996 (right before the stock market bubble really reached absurd levels) the personal savings rate averaged 7.6 percent.

So, is behavior by today’s consumers really about excessive “fear?” Not obvious to me. And is today’s corporate behavior evidence of excessive risk-aversion, or of just poor sales?

Again – the traditional Keynesian diagnosis of deficient demand is old and has gotten boring to many. But it has the virtue of actually being correct. Today’s sluggish economy simply needs more spending (and government is the only sector likely to provide it in the near-term), not pep talks.

All the talk about the supposed need to cut Social Security hasn’t had a noticeable impact outside the Beltway, where support for the program remains strong across demographic and political lines. A survey commissioned by the Institute for Women’s Policy Research and the Rockefeller Foundation found that 61 percent of women and 54 percent of men support increasing Social Security benefits. That’s perfectly rational, considering that benefits replace a shrinking share of pre-retirement earnings even without additional cuts.

While women and Democrats show the strongest support for social insurance programs, even Republican men oppose Social Security and Medicare cuts. And contrary to the stereotype that people care only about themselves and aren’t willing to pay for government programs, when surveyed about taxes the most enthusiastic response was to the following statement: “I don’t mind paying Social Security taxes because it provides security and stability to millions of retired Americans, the disabled, and the children and widowed spouses of diseased workers.” Roughly nine in 10 women (88 percent) and eight in 10 men (82 percent) agreed with that sentiment, even more than the majority who said they didn’t mind paying Social Security taxes because they knew they themselves would receive benefits when they retired.

The Great Recession and bursting of the housing and stock market bubbles has only strengthened support for social insurance programs, which is not surprising since we tend to take such programs for granted until we really need them. Only 37 percent of women and 44 percent of men now expect to maintain their standard of living in retirement, whereas a majority of both women and men thought their retirement savings had been adequate before the recession (they were probably wrong, but that’s another story). This doesn’t just reflect generalized anxiety: while the share of respondents who worried about ending up in a nursing home increased only modestly since 2007, the share who worried about not having enough money to live on and not being able to afford health care in retirement jumped markedly, as did the share worried about Social Security being cut back or eliminated (63 percent of women and 54 percent of men are now worried about Social Security cuts, up from 55 percent of women and 41 percent of men in 2007).

Click figure to enlarge

In light of this afternoon’s cloture vote in the Senate on China’s currency bill, I think it would be helpful to go over why the bill is so important. Simply put, unlike most bills that proponents claim are about “job creation,” this one actually is. Since it entered the World Trade Organization in 2001, China has engaged in massive intervention in currency markets, buying U.S. dollar-denominated assets to boost the value of the dollar and keep their own currency artificially cheap. This acts as a subsidy to U.S. imports from China, and it raises the cost of U.S. exports — both to China and to every country where U.S. exports compete with goods coming from there.

Between 2007 and 2010, China invested nearly $450 billion per year in Treasury bills and other foreign exchange reserves to keep its own currency cheap. In the year ending June 30, 2011, China’s purchases of foreign exchange surged to nearly $730 billion, and its total holdings reached $3.2 trillion, as shown in the figure below. Roughly $2.2 trillion (70 percent) of China’s foreign exchange reserves are held in Treasury Securities and other dollar denominated assets.

Click figure to enlarge

The best estimates arethat the Chinese currency, known as the yuan (also known as the Renminbi, or RMB), is undervalued by approximately 28.5 percent, relative to the dollar.  China’s currency manipulation has compelled others to follow similar policies in order to protect their relative competitiveness and to promote their own exports. Hong Kong, Malaysia, Taiwan, and Singapore have currencies that are undervalued by 27.5 percent to 38.5 percent against the dollar.

In The Benefits of Currency Revaluation I showed that full revaluation of the yuan and other undervalued Asian currencies would improve the U.S. current account balance by up to $190.5 billion, increasing U.S. GDP by as much as $285.7 billion, adding up to 2.25 million U.S. jobs over the next 18-to-24 months, and reducing the federal budget deficit by up to $857 billion over 10 years. This change to the current account balance would also help workers in China and other Asian countries by reducing inflationary overheating and increasing workers’ purchasing power.  Revaluation is a “win-win” for the global economy.

As an advocate for education policies to help children living in poverty narrow the achievement gap, I, like many others, tend to think of the Bronx, Newark, and East St. Louis as epicenters of stubborn rich-poor and white-Black achievement gaps. But the Great Recession has put millions of children living in suburbs and even in the bucolic “heartland” of America in dire educational straits. And as a recent New Yorker article illustrates, this reality has been festering for a decade, with origins long before the housing and economic busts of the past few years.

So-called education reformers and the “experts” on whom they rely point to unions, lazy teachers, and uninspired principals as the culprits. Yet, 50 years of rigorous evidence make clear the vicious impact of poverty and its various familial stresses on student well-being. This body of research is backed in real time by the inability of No Child Left Behind, Race to the Top, and other policies focused on standards-and-accountability measures to substantially narrow the gaps.

George Packer’s assertion that since September 11, “the country’s problems were left to rot” is all-too clearly played out in Mount Airy, N.C., the town that inspired Andy Griffith’s Mayberry. This American small town is indeed, Packer says, typical, but not in any ideal way. Rather, Surry County’s job losses have spread since 9/11 from former textile workers to veterans newly back from multiple tours in Iraq and Afghanistan. Packer concludes ominously that “You were your kids’ hero when you went, but three years later, when you might be losing your home or you’re impoverished, you might not be your kids’ hero anymore.” Long-term unemployment, unstable housing, insufficient food and stressed-out home environments also mean that you won’t be the same parent or teacher anymore. Mayberry, welcome to the Bronx.

Over at the American Enterprise Institute blog, James Pethokoukis responds to my recent paper, Regulatory uncertainty: A phony explanation for our jobs problem, and blog post. I presented evidence that trends in investment, private-sector job growth, unemployment, and work hours were not inferior in this recovery compared to other recent job-challenged recoveries. That is, I noted that this recovery fares well relative to the recoveries under George W. Bush and George H. W. Bush. If you look at what employers are doing rather than what trade associations are saying, you would see that uncertainty about regulations and taxation has not impeded job growth. What we are seeing is what you expect given the slow growth in GDP.

What was especially curious to me is that Pethokoukis has no counter-argument or data other than, “But go ahead and contrast the Obama recovery, instead, to the Reagan recovery where private sector jobs grew 9.9 percent during its first two years.” Really, that’s it. The whole evidence that uncertainty is holding back jobs is that job growth in the Reagan recovery was a “V” recovery. Actually, the first two years of the recovery starting in Nov. 1982 was 9.4 percent, but what’s 0.5 percent job growth between friends? How does 7.2 percent private-sector job growth in the Gerald Ford-Jimmy Carter recovery fit into his story?

Pethokoukis is scrupulous enough to note that I do provide a good reason for the better job-performance in the Ronald Reagan recovery – that recession began with the short-term policy rates controlled by the Federal Reserve at 19 percent! There was plenty of room to use conventional monetary policy to get the economy moving. This time, the economy entered recession with these rates just over 4 percent. Oh, and the fact that this recession was caused by a financial crisis – something that research has shown again and again produces much slower recoveries.

Anyway, this just seems to confirm to me that there is no “there there” in the economic case that uncertainty about regulation and taxation is holding back job growth. I looked for any analysis that those articulating this view could point to and did not find any. I guess they do not have any over there at AEI.