In bad times, borrowing from yourself doesn’t make you poor
Last week on NPR, Robert Reich did a nice segment connecting the (not exactly cryptic) dots between high rates of unemployment, extraordinarily low interest rates, and the clear benefits of improving the nation’s infrastructure. However, he noted that the extraordinarily low interest rates meant that we could borrow cheaply (to fund infrastructure projects that would re-employ people – in case that part wasn’t obvious) “from the rest of the world.”
Actually, the low interest rates also mean that we (or the federal government) can borrow much more cheaply from ourselves (i.e., American households and businesses) too. And since the beginning of the Great Recession, we’ve been doing that more and more. While Federal borrowing has risen sharply (both a symptom of and sensible response to the recession), private savings – both household and business – have sharply increased. In fact, the upward swing in household and business savings is larger than the upward swing in federal government borrowing. This means that we are borrowing much less from the rest of the world than we were even before the Great Recession hit (in fact, it’s currently less than half as much as we were borrowing at the height of the housing bubble in 2005).
This is, of course, both bad and good news. The bad news is that the huge upward swing in private savings means that private spending is way, way down – and that’s why the economy remains so sluggish. The good news is that domestically financed increases in federal budget deficits means that, despite all the overheated rhetoric decrying them, there is no direct generational implication of them – we’re borrowing from ourselves and we’ll just pay it back to ourselves at a later date (for the long version of this argument, see here). More good news is that today’s low interest rates are no fluke or quirk that will quickly reverse – they are the inevitable consequence of this huge upward surge in private savings, and they will remain with us as long as the economy keeps operating so far below potential. Low interest rates, however, have not proven a panacea for growth, hence the need for bigger budget deficits to get us back to full employment.
Unfortunately, the past few quarters have seen U.S. borrowing from the rest of the world increase again – the mirror image of the increase in the trade deficit that has dragged on growth in that time. This trade deficit, in turn, highlights yet again the need to do something to allow the dollar to reach a level that keeps pre-Great Recession levels of trade deficits to return. If we do this, then we can borrow from ourselves to both fund economic recovery and a better infrastructure.
Taxing health benefits no silver bullet: Famous economists agreeing with us, Part 2
Prominent economists from the Urban Institute, John Holahan, Linda J. Blumberg, and others, published an insightful study this week on policies that might significantly contain the growth of health system spending. This post is going to focus on a policy that would not – the excise tax on high-cost employer-sponsored insurance plans.
There are two points they make abundantly clear. First, yes, the excise tax on high cost health plans will generate revenue. Second, it’s not going to do much to contain long term health cost growth.
The first point is indisputable. The second runs contrary of conventional wisdom about how effective taxing benefits will be in driving consumers to purchase less expensive plans. All else equal (firm size, region, age of workers at firm, etc.), less expensive plans require consumers to pay more when they seek care – higher coinsurance rates, higher deductibles, or the like. When consumers have to pay more, they will consume less. Voila! Rising health cost growth halted and we are saved.
Holahan and co-authors say it’s not so simple because spending on health care is not evenly spread across the population. And, I quote:
“Those least likely to be involved in the health care system—those with the lowest health care needs—will be most likely to be affected by increased cost-sharing. Given the strongly skewed distribution of health care spending, with 65 percent of total spending accounted for by only 10 percent of the population, significant health savings will not be achieved unless the highest spenders are affected as well.”
It sounds so convincing and reasonable to me, perhaps because I tried to make similar arguments during the health reform debate. It’s not that I had unusual foresight, but it’s just common sense when you look at the data. Back in March 2009 I argued:
“But the potential gains in cost containment from taxing health benefits are wildly overblown. We know that 80% of health costs are borne by 20% of the population. Serious cost containment measures should deal with bringing down the costs of the most expensive cases in our system (e.g., managing chronic diseases) rather than arguing over the much smaller amounts spent by the rest of the population. Policies fixated on reining in the first few hundred dollars of health spending do not effectively or efficiently deal with what is driving the high costs of the U.S. health system.”
However, as the health reform debate progressed, the policy virtues of taxing insurance benefits became exaggerated. And another set of prominent economists even identified the tax on expensive health insurance plans as one of just four critical elements of reform.
To sum up the Urban study’s main points that are consistent with those I raised two years ago:
1. Taxing benefits will have little impact on reining in health care spending because the distribution of health spending is skewed with few spending the vast majority of health dollars.
2. Increased cost sharing could lead to increased costs if patients respond to increased cost-sharing by substituting other services or delaying care until more expensive medical interventions are necessary.
3. Increased cost sharing could have significant negative health outcomes for people who have chronic conditions or are poor.
I might (and did in 2009) make another point: “high-cost” plans aren’t the same thing as “Cadillac” plans. The excise tax was often sold as taxing only those workers lucky enough to have lavish health coverage that demand minimal cost-sharing relative to normal plans (hence they were “Cadillac” plans). But in the market for health insurance, plans are expensive for a number of reasons (firm size, age of workforce, location, etc.) besides how much cost-insulation they provide. Further, as the excise tax threshold rises slower than health care inflation, it can no longer legitimately be called a tax on high-cost plans, unless the definition of what are high-cost plans is altered to mean all plans.
Why is this still a live question? Various proposals to even further erode the tax-preference for health insurance continue to pop up in the debate over budget deficits. So, it should be pointed out again that the excise tax (or taxing benefits through a tax exclusion cap or the like) is simply “not well targeted” (pg. 10) and does not create the right incentives for the creation of the most efficient insurance policy; in fact, it is a blunt instrument that creates no incentives except to purchase cheaper policies.
In the end, health care cost control should not come about by forcing consumers to figure out what they’re going to sacrifice – our health system just does not provide them the information they need to do this. The rest of the Holahan et al paper describes some better ways to contain costs.
With friends like these…
This past Wednesday on Marketplace, the regulation-and-jobs debate came up again. An NPR segment with two leading economists who have provided cutting-edge research on why many environmental regulations have very high benefit/cost ratios was … both unhelpful and wrong about the current debates regarding regulatory changes.
Rob Stavins argued that the effect on jobs of regulatory changes is second-order and shouldn’t be the driver of public debate. He’s clearly right. Then he said, “This is an area where unfortunately one has to curse both sides of the debate.” The NPR reporter immediately followed: “These aren’t end-of-the-economy-as-we-know-it job destroyers. They aren’t miracle economic growth engines.”
This is maddening. While it’s not clear whether it’s Stavins or the NPR reporter setting up the “crazies on both sides” frame, it is worth pointing out that the anti-regulatory side has indeed routinely made crazy claims about the job-destroying impact of regulations. But, on the pro side, who has claimed that new regulations would be “miracle economic growth engines?” Seriously, who? It’s true that proponents of green-jobs often make some large claims about their potential as economic growth engines – but these are always premised on policy proposals that are much larger than just regulatory changes. I really can’t think of a single analyst or advocate who has claimed that regulatory change alone could serve as a jobs program (ed note – To be clear, by “regulatory change” I mean specifically “adopting new regulations” – the other side’s contention is that doing away with all (or even some) regulations will indeed have a mammoth positive impact on jobs).
Michael Greenstone then argued, “The costs of these regulations are greater in challenging economic times like the current one.”
Again, this is just not right. In fact, when the economy has lots of excess slack and interest rates have run up against the zero-bound and cannot provide any further incentives for firms to borrow and undertake job-creating investments in plant and equipment, then any exogenous policy change that does shake free some plant and equipment investments will create new jobs and provide a boost to the economy. In short, the costs of passing regulations that require firms to make outlays on new investments to comply are lower, not higher, in times like these. In fact, for some rules, the net new jobs created by these investments lead the overall jobs-impact of undertaking them now to be positive.
And how has EPI described the jobs-impact of regulatory changes? In a comprehensive literature survey, John Irons and Isaac Shapiro conclude:
“this review of the studies of regulations in place finds little evidence of significant negative effects on employment. Overall, the picture that emerges from this review is a positive one. For decades, regulations have generally and consistently struck a reasonable balance, with their benefits to health, safety, and well-being far exceeding their costs.”
And, in a comprehensive look at a particular regulatory change, the “air toxics rule,” I wrote:
“The claims of this paper are conservative—the toxics rule is not a jobs program. Instead, it is a regulatory change that generates great benefits at moderate costs and, along the way, will likely create a relatively modest number of jobs.”
This is just not an issue (regulation and jobs) where both sides deserve a pox – one side is being careful and weighing evidence and the other side is just bloviating.
Snapshot: Areas with highest Hispanic unemployment are in Northeast
Quick, name the U.S. metropolitan area with the highest unemployment rate among Hispanics. Need a hint? It’s in the Northeast.
This may surprise many of you because when people think of high Hispanic unemployment, they think of metro areas like Las Vegas and Los Angeles. As Algernon Austin, director of EPI’s Race, Ethnicity, and the Economy program, pointed out earlier this week, this assumption is understandable because those areas have both large Hispanic populations and high levels of Hispanic unemployment.
At 25.2 percent, the Providence, R.I., metropolitan area has the highest Hispanic unemployment rate. Another New England metro area, Hartford, Conn., is second with a Hispanic unemployment rate of 23.5 percent. Both areas also had the highest percentage-point increases in Hispanic unemployment from 2009 to 2010; Hartford went up 7.5 percentage points and Providence 4.6. According to 2010 Census data, Providence is 37th and Hartford 39th in Hispanic population in metropolitan areas.
SEE FULL SNAPSHOT: Metropolitan areas with highest rates of Hispanic unemployment
In order, here’s where the five metro areas with the largest Hispanic populations ranked in unemployment:
- Los Angeles: 9th, 13.4 percent
- New York: 23rd, 11.0 percent
- Miami: 12th, 12.8 percent
- Houston: 36th, 8.9 percent
- Riverside, Calif.: 5th, 18.4 percent
For more on this issue, read Austin’s piece Hispanic unemployment highest in Northeast metropolitan areas. And for a companion paper on black metropolitan unemployment, read High black unemployment widespread among nation’s metropolitan areas.
Calculating the cost of war
Today marks 10 years since the commencement of the U.S war against Afghanistan. To date, Congress has appropriated approximately $1.3 trillion dollars to prosecute that conflict along with the war in Iraq. This estimate is consistent across varied sources and is readily available from the Congressional Research Service, but tallying appropriated costs understates the true cost of our war efforts. In a nutshell, these figures do not include the debt service to finance the wars, which for the first time in U.S. history have been not been offset by tax increases. They also do not include war expenses hidden in the Pentagon’s base budget, or the costs of providing medical care and disability benefits for the thousands of veterans permanently injured by fighting abroad.
A group of academics has added it all up and estimates that the cumulative costs of the wars are up to $4 trillion and rising. Staggering though that number may be, what appalls me is that their estimate, the most comprehensive publicly available, is ultimately an unofficial one. There has been no official accounting or independent audit of Iraq and Afghanistan war costs so that taxpayers know exactly what value they have received for their money. Contrast that with the federal government’s accounting of the American Reinvestment and Recovery Act (ARRA), which has an entire website that gives laypersons, policy wonks and researchers customized looks at how virtually every dollar of ARRA funds were allocated and spent. Yet for war costs, already well above what was spent on ARRA, we are forced to rely on unofficial estimates.
This lack of transparency weakens our democracy by not allowing Americans to hold our elected officials accountable for decisions they make to engage in conflict. Rep. John Lewis (D-GA) has introduced The Cost of War Act, a bill that takes only 91 words to direct the Department of Defense to publish, on a public website, the cost of our current wars. The value of such an action—especially if the end result is as robust as Recovery.gov—would be to force this Congress to have an adult conversation about priorities, spending, deficits and debt. Right now, the only sunlight on federal spending shines on the non-defense, discretionary side, which is dwarfed by defense spending–all of which is discretionary. Exposing it all to the same level of scrutiny would lead to better debate among our policymakers.
To be sure, even if there were a definitive, transparent accounting of the financial obligations incurred by the war efforts, we would still not have an understanding of the true costs of war. What might we have used the money on, if not the wars? Imagine what hundreds of billions invested in infrastructure or education would do to reduce unemployment and increase competitiveness. Or, imagine the economic productivity that the more than 6,000 killed would have generated over their lifetimes. These opportunity costs are either difficult or impossible to calculate, but are nonetheless real. But even if the metaphysical costs of the Iraq and Afghanistan conflicts are too philosophical to consider, it is certainly possible to calculate and publicize the dollars and cents we have spent and continue to spend on our military efforts.
Could currency legislation lead to a trade war? Think again
On Wednesday, Senator Orrin Hatch claimed that the Currency Exchange Rate and Oversight Reform Act of 2011 (S 1619) (the Currency Reform Act) could cause “a huge trade war … with China.” Nothing could be further from the truth. A large share of our exports to China are intermediate products that are used to produce exports to the United States. If China raised tariffs or otherwise restricted imports of those products, it would simply raise the cost of their own exports to the United States. Furthermore, U.S. imports from China exceed our exports to that country by a ratio of more than 4 to 1. So every dollar in tariffs imposed by China would, in theory, be matched by four dollars in U.S. tariffs on their exports, if China ever tried to engage us in a trade war. But history shows us that they will not.
Senator Hatch also disparaged my latest report on China trade and U.S. employment, but I’ll save that argument for another post. We appreciate his use of our research, and are glad that he felt it necessary to respond.
In Aug. 2005, the Senate passed much a much tougher currency bill sponsored by Senators Chuck Schumer and Lindsey Graham (S. 295) that would have imposed a 27.5 percent tariff on all imports from China if it failed to revalue within 180 days. That bill never passed the House and never become law. Nonetheless, shortly after the bill was approved in the Senate (by a veto-proof majority), China began to revalue, for the first time in more than seven years, ultimately allowing the yuan (or RMB) to rise by 18.6 percent over the next three years. China did not retaliate.
China will not retaliate if the Currency Reform Act becomes law because it will hurt its own exporters if it does, and because China will benefit if it does revalue. If the yuan is allowed to appreciate, it will lower the cost of oil, food and other imported commodities in China. This will put downward pressure on inflation, which has been accelerating rapidly in China this year. Lower fuel and food prices will be particularly helpful to low-income families in China, who are very dependent on these basic commodities.
As shown in my most recent report on China trade and U.S. employment (Table 2), some of the most important U.S. exports to China are basic commodities used in producing exports such as chemicals ($11.6 billion, 13.5 percent of total U.S. exports to China), scrap and second hand goods ($8.5 billion, 10.0 percent) and semiconductors ($6.1 billion, 7.1 percent). Agricultural products ($15.4, 18.0 percent) could be vulnerable, but U.S. imports from China, which could be subject to some trade restrictions, were $363.6 billion and exceeded agricultural exports by a ratio of 23:1 in 2010.
When Senator Hatch referred to a “huge trade war,” most people think of the Smoot-Hawley Act of 1930, which raised tariffs on about one-third of U.S. imports to a peak of 59.1 percent. However, average tariff rates rose to only 19.8 percent in 1933. Canada, our largest trading partner retaliated with higher tariffs on about 30 percent of U.S. imports, and Germany developed a system of autarky (little or no trade).
The Currency Reform Act of 2011 would not impose sweeping, across-the-board tariff increases (as did the Smoot-Hawley Act). It defines a new process for determining which currencies are “fundamentally misaligned,” and defines new procedures for conducting negotiations with such countries including new consequences, especially when a country persistently fails to revalue despite continuing negotiations. These measures are intended to spur negotiated solutions to currency manipulation, not to spark a trade war.
The Currency Reform Act also authorizes the Commerce department to take currency manipulation into account in anti-dumping and countervailing duty investigations. But these changes will affect a small share of total U.S. trade with currency manipulators. Again, there is nothing similar in these proposals to the broad, across-the-board tariffs imposed in the Smoot-Hawley act.
“Trade war” is a term that is easily thrown around in legislative debate and by political commentators. As Fred Bergsten has noted, China’s currency manipulation “is by far the largest protectionist measure adopted by any country since the Second World War – and probably in all of history.” The Currency Reform Act is a measured response designed to bring about a negotiated end to China’s predatory economic policies. China has launched a trade war on the rest of the world. It is important to stand up to the bully, to restore balance to the global trading system and world demand.
The teacher gap
Over the last three years, state and local government employment has dropped by 641,000 as state and local budgets have been squeezed as a result of the recession. With kids heading back to the classroom this fall, it’s worth considering how much of that drop has hit public schools.
Of the decline in state and local government jobs over the last three years, close to half (278,000) was in local government education, which is largely jobs in public K-12 education (the majority of which are teachers but also includes teacher aides, librarians, guidance counselors, administrators, support staff, etc). On the other hand, over the same period, public K-12 enrollment increased by 0.6 percent (using the actual and projected enrollment growth rates found in Table 1 here). Just to keep up with this growth in the student population, employment in local public education should have grown at roughly the same rate, which would have meant adding around 48,000 jobs. Putting these numbers together (i.e., what was lost plus what should have been added to keep up with the expanding student population) means that the total jobs gap in local public education as a result of the Great Recession and its aftermath is around 326,000.
This decline means not only larger class sizes, but also fewer teacher aides, fewer extra-curricular activities and a narrower curriculum for our children. Furthermore, this number almost surely understates the real gap. Between 2008 to 2010, the number of children living in poverty increased by 2.3 million, and is likely even higher today. Increased child poverty increases the need for services provided through schools. Instead, public schools have fewer personnel and fewer resources to educate more students, and more students with greater needs.

Quick Take: Miserably low job growth
The unemployment rate is for the moment holding steady at 9.1 percent, but at the current rate of job creation, the unemployment rate will soon begin to rise again. We are mired in high unemployment with miserably low job growth. This country has 14 million unemployed people, and the job growth rate has unmistakably slowed down since the spring.
This morning’s data release shows that 103,000 jobs were added in September. That number, however, includes around 45,000 Verizon workers coming off the picket lines, so the net new jobs the economy created in September was actually around 58,000. This level of growth is in line with the dismal average of the last four months, which was 64,000, and that was a slowdown from the not-doing-much-more-than-keeping-up-with-population-growth average of 123,000 of the prior 14 months.
The H-2B guestworker program puts downward pressure on American wages
This past January, the Department of Labor (DOL) published a final rule establishing a new wage methodology for determining the appropriate wages to be paid to guestworkers in the “H-2B” program—a temporary immigrant guestworker category intended to help employers fill labor shortages. Among other things, U.S. law and regulation require that H-2B workers only be authorized to enter and work in the United States if the H-2B worker’s employment will not be “adversely affecting the wages” of United States workers. The DOL’s new rule will require that H-2B workers receive the average wage paid to all workers in the same occupation and geographical region in order to prevent downward pressure on the wages of U.S. workers. But for now, the rule’s implementation has been delayed—and a lobbying firestorm by businesses and members of Congress, led by Senator Barbara Mikulski from Maryland—has put its survival in doubt.
The chart below shows the difference between the hourly rate that H-2B crab pickers and landscape workers are currently paid in Maryland under the old (and still current) rule, and the statewide average for all workers in the given occupation, which is what workers should be paid in order to prevent wages from being depressed for U.S. workers. H-2B crab pickers and landscapers are underpaid by $4.82 and $3.35 per hour, respectively.
These data suggest that employers have been using the H-2B program as a way to degrade the wages of U.S. workers. H-2B crab pickers in Maryland (i.e., workers who literally pick the meat out of a crab, like this), who fall under the occupational category of “Meat, Poultry, and Fish Cutters and Trimmers” above, are paid the federal minimum wage ($7.25), when the state-wide average is $12.07 per hour.
Another way to look at this is that a crab picker earning the state average will earn $25,105 over the course of a year, which is above the poverty line for a family of four ($22,113). But current H-2B crab pickers only earn $15,080 a year—which is about $7,000 below the poverty line. For landscapers in Maryland, the results are similar—in both cases the increase in hourly wage will literally lift the H-2B worker out of poverty.
You can read more about the H-2B program and the Labor Department’s wage rule in my new extended commentary, H-2B employers and their congressional allies are fighting hard to keep wages low for immigrant and American workers.
So’s your mother. And Reagan. And you’ve never run a business!
A few days ago, Paul Krugman noted the evidence-free “rebuttal” offered up by the American Enterprise Institute to Larry Mishel’s takedown of the “regulation is what’s holding back recovery” argument. The title of Krugman’s post -“So’s your mother. And Reagan” – captured the useful content of what I generally hear from those engaged in hand-waving about “job-killing regulations.”
On Tuesday, though, I got to hear another argument from Peter Schiff on John Stossel’s show. I was making the case that it’s hard to see how regulation is driving up costs and robbing firms of profitability given that profit margins (unit profits as a share of total costs) were at their highest levels in either 42 or 45 years (depending on whether you looked at pre- or post-tax rates*). And, as Brookings’ Gary Burtless has pointed out, if you’re profitable now and fearful of future regulations, then you’d be doing everything you can to produce goods and services for sale now rather than later; we should see strong employment growth in the short-term.
Now, what would keep firms that were making record profits on each unit shipped from deciding to ship even more units and hire more workers to do so? A shortfall of demand (i.e., not enough customers) maybe?
Hearing this argument, Schiff made a careful, empirically-based case for why I was wrong started sneering that I had never run a business. It’s true, I haven’t. But I can look at data.
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*The data came from Table 1.1.15 of the National Income and Product Accounts (NIPA) from the Bureau of Economic Analysis – Price, Costs, and Profit Per Unit of Real Gross Value Added of Nonfinancial Domestic Corporate Business.