In his excellent piece in today’s New York Times on the declining economic mobility of Americans, Jason DeParle mentions a commentary by Reihan Salam for the National Review Online, “Should we care about relative mobility?”

Salam disputes that there’s anything wrong in the natural tendency of economically successful families to give their children special advantages in the competition for jobs, education and other resources. He admits, however, that affluent white families may have social networks that blacks cannot access and that protect whites, but not blacks, from downward mobility. Salam writes:

“To be sure, there might be an incumbent-protection story here, as Scott [Winship] has suggested. That is, it is possible that non-black families in the top three-[fifths] of the income distribution are giving their children advantages that protect them from scrappy upstarts in ways that might damage our growth prospects. That really is a legitimate concern.”

The particular mechanism Salam identifies – internships — is one that EPI has identified as a serious problem for the economic mobility of minorities and for the labor market in general.  Salam recognizes that internships are sometimes reserved for the affluent: “Moreover, parents who have achieved some success tend to be part of social networks that can give their children access to valuable economic opportunities. Even the most committed egalitarian won’t deny her daughter the opportunity to take an internship with a beloved friend and colleague just because other children won’t get the same leg up.”

Unpaid internships, in particular, exclude students from poorer families who can’t afford to work for nothing for a summer or a semester, especially after they graduate from college with tens of thousands of dollars of student loan debt. The children of affluent families, on the other hand, can afford to live in the most expensive cities in the U.S., such as New York and Washington, making contacts, building their resumes, and sometimes even learning skills, while their parents pay for their room and board, travel and entertainment. Before even taking into account the family connections that reserve some of the best opportunities for the sons and daughters of the affluent, the $4,000-$5,000 cost of, for example, moving to Washington and living for 10 weeks prevents almost any working class kid from taking an unpaid internship.

As Ross Perlin points out in his meticulously researched book, Intern Nation, the number of unpaid internships is growing exponentially, fueled by the failure of the U.S. Department of Labor to enforce the minimum wage, a new industry of internship coordinators and consultants, and the recession. It’s hard to quantify the impact of this phenomenon on the decline in economic mobility, but I suspect it has been substantial and will continue to grow until the  Department of Labor cracks down on what is, in many cases, illegal exploitation.

A couple of commentators have put forward reasons why 2012 might be a better-than-expected year for the economy. Matt Yglesias’ entry into the “happy days are here again” sweepstakes is a bit older, but it’s smarter than most and invokes an obscure, but important, economist of olde to make the point. Thus, it’s a good peg to use to remind people about the case for pessimism.

Yglesias’ post basically sums up multiplier-accelerator models of recovery – the idea that when recoveries begin, they will be self-sustaining and initial improvements in one sector of the economy will generate further increases in activity in other sectors (this reasoning also explains the dynamic of contractions, not just recoveries).

As Yglesias puts it:

“But every downward tick in the unemployment rate is another twentysomething moving out of his parents’ basement, stimulating a return to a more normal level of construction. Multifamily housing starts are already up 80 percent over the past year to accommodate the likely coming flood of renters, and there’ll be more to come once people have more cash in their pockets.

This increase in economic activity will boost state and local tax revenue and end the already slowing cycle of public sector layoffs. Re-employment in the construction, durable goods, and related transportation and warehousing functions will bolster income and push up spending on nondurables, restaurants, leisure and hospitality, and all the rest. Happy days, in other words, will be here again.”

This is indeed what recovery will look like when it comes. But there’s very little evidence that the process has started.

For one, “every downward tick in the unemployment rate” that we’ve seen over the past two years (i.e., since the unemployment rate peaked at 10.1 percent in Oct. 2009) has not represented somebody getting a job (and hence able to move towards independence and spending). Rather, it’s represented somebody dropping out (or choosing not to enter) the labor force. And even over the past year (since Nov. 2010), fully two-thirds of the decline in the unemployment rate was driven by a shrinking labor force and not by employment growth.

The best chart to show that a robust multiplier-accelerator process has yet to begin remains the difference between actual and potential GDP. The size of this gap is the progress that is being made (or not) towards recovery. The free-fall of this ratio that was the Great Recession has stopped, but so has the upward progress of the early part of the recovery (when, by the way, there was an actual boost to the recovery being provided by fiscal support, instead of the drag that will constitute the next year). Until one sees a rapid upward movement in the gap between actual and potential GDP (and, actually, until one sees this movement driven by improvements in actual rather than a deterioration in potential GDP), it seems awfully premature to think that a positive, self-reinforcing cumulative causation has set in or can be banked on for the coming year.

As you’ve probably noticed, Working Economics is on vacation. Unless there’s some breaking news or other pressing circumstances, we’ll resume blogging on Tuesday, Jan. 3. Until then, please take time to enjoy your families and the holiday season!

And if you find the wait for our return too unbearable, you can revisit some of our most popular posts since our launch last fall:

• By the numbers: 2010 income, poverty, and health insurance coverage
• Regulatory uncertainty not to blame for our jobs problem
• Clive, don’t change the subject
• What should have been different this time? The policy response
• It’s [not] the economy [that I recognize]
• Garbage in, garbage out at Heritage and AEI?
• Why falling unemployment may not be making voters happy
• Supply-side’s abject failure
• On fairy tales about inequality
• Top 10 lies about Social Security (from those who just want to dismantle government)

As my colleague Monique Morrissey highlights, Jeff Madrick has a terrific (albeit somewhat depressing) list of the 10 worst economic ideas of 2011. Doubling down on the failed supply-side experiment and making taxes more regressive is honored as the fallacious economic policy coup de grâce of the year:

“At the top of the list for sheer scandalous insensitivity are Herman Cain’s and Newt Gingrich’s tax plans for America… Gingrich’s plan wins the gold medal: his plan is both regressive and a gigantic revenue loser.”

Spot on. Cain’s plan is wildly regressive. Gingrich’s plan is grossly unaffordable and irresponsible. Cain’s “9-9-9” plan would swing the average tax rate for households in the lowest income quintile (those earning under $18,000 annually) by 18.3 percentage points, from 1.8 percent to 20.2 percent. The swing at the top end of the earnings distribution is almost as wild, with rates plunging 17.2 percentage points to 17.9 percent for the top 0.1 percent of earners (those making roughly $2.7 million or more), an average tax cut valued above $1.3 million. (See this Tax Policy Center current policy baseline table.)

As for Gingrich, Madrick notes his optional flat tax would blow a gaping hole in the federal budget: $850 billion relative to current policy and $1.28 trillion relative to current policy in 2015 alone. The price tag has (extremely misguided) purpose: The highest income 0.1 percent would see their average tax rate cut by two-thirds and fall to only 10.8 percent, a giveaway averaging $1.9 million per household.

But this is more than a two-pronged onslaught of voodoo economic practitioners. Remember Rick Perry’s tax plan? Eerily similar nostrum: Gut the central tenant of a progressive tax code that effective tax rates are supposed to rise with income, give the highest income 0.1 percent a tax cut of $1.5 million, and drain the Treasury of $995 billion relative to current law ($570 billion relative to current policy) in 2015 alone. The presidential campaign trail has been inundated with plans to slash corporate tax rates, cut capital gains and dividends taxes, and eliminate the estate tax. (See this great comparison table detailing and contrasting all the GOP presidential candidates’ tax plans, produced by the good folks at TPC.)

It’s also worth noting that House Budget Committee Chairman Paul Ryan was paving this path in 2010 when he released his Roadmap for America’s Future, which proposed shifting the distribution of taxes from upper-income households to the middle class by replacing the corporate income tax with a regressive subtraction-method value added tax that forces up middle-class tax rates. (Ryan would end all taxation of corporate profits by also eliminating taxes on capital gains and dividends.)

This is the bedrock of conservative economic policy. It’s even politically enshrined in Grover Norquist’s Taxpayer Protection Pledge. Never mind that it hasn’t improved economic performance, it has and continues to defund government, and it would continue to exacerbate income inequality. Unfortunately, with the election looming, it’s a safe bet that sweeping regressive tax cuts will be a top contender for 2012’s worst economic policy ideas.

The whole list is worth a read. Other highlights include the fallacy of expansionary austerity and arbitrarily capping federal expenditures as a share of the economy (somewhere between 16.6 percent to 21 percent, none of which would be tenable levels).

Jeff Madrick rightly dubbed cutting Social Security and raising the Medicare eligibility age two of the 10 worst economic ideas of 2011. Nevertheless, the idea that we need to work into our late 60s or even 70s has become an obsession of many inside the Beltway, who prefer to close Social Security’s modest projected shortfall on the cost side rather than the revenue side. Likewise, self-styled budget hawks are more concerned with reducing government spending on health care than addressing inefficiencies in the overall system, which are worse in the private sector.

Among other problems, an obsession with working longer ignores the fact that women, at least, are working more at younger ages. Not only does this help Social Security’s finances, but it turns out that forcing seniors to keep working into old age might actually reduce the number of younger women who are able to work (this assumes there are jobs for everyone). A new working paper by economists Janice Compton and Robert A. Pollak finds that proximity to grandmothers increases mothers’ employment, presumably because grandparents are able to help with childcare. (Though the study only directly measures the impact on women who live near their mothers and mothers-in-law, it also indirectly captures some of the effect of doting grandfathers and other relatives.) Though the study doesn’t take into account whether the grandmothers are working or retired, retirees have more time to spend on care-giving, which can oftentimes allow their children the flexibility to return to, or remain in, the workplace.

This study resonated with me because, like a lot of new parents, my ability to return to work this year depended not only on a paid caregiver, but also on grandparents. My husband and I were lucky to have both a friend looking for a flexible job and parents living nearby who offered to pitch in one day a week and as needed. Not only is my daughter blossoming under her grandparents’ and my friend’s care, but my parents’ help indirectly boosted the economy by allowing both my friend and me to return to work. (Admittedly, in some cases grandparent care may reduce the paid workforce, and GDP, to the extent that it simply replaces paid care-giving with unpaid care-giving, but as feminist economists like to point out, GDP is not a good measure of social welfare.)

On Jan. 1, 2012, Washington will become the first state in the nation to have a minimum wage above $9 per hour ($9.04/hour to be precise). Washington is one of 10 states with some form of minimum wage indexing, requiring that the state minimum wage grow at the same rate as inflation, thereby ensuring that the real value of the lowest-paid workers’ wages does not shrink as normal costs of living go up. Eight of these states will have automatic increases take effect on New Year’s Day: Arizona, Colorado, Florida, Montana, Ohio, Oregon, Vermont, and Washington.

You may be thinking that $9 per hour seems like a lot, especially for the neighbor’s teenage son who works part-time down at the local fast food chain, right? Well this may be the perception that some have of minimum-wage workers, but it is wrong on a number of levels. First, the typical minimum-wage worker is not a teenager, nor is she a man. According to data from the Current Population Survey, 80 percent of minimum-wage workers are over the age of 20. This is true not just in the eight states seeing an increase on Jan. 1, but nationwide as well. At the same time, roughly 60 percent of minimum-wage workers are female, despite the fact that women make up only 48 percent of the national workforce. See the table below for more details.

Second, over three-quarters of minimum-wage workers work more than 20 hours per week, and just over half are full-time employees. In fact, my colleague Heidi Shierholz has calculated that families with a minimum-wage worker rely on those minimum-wage earnings for nearly half (45.9 percent) of their income.

Third, make no mistake, $9 per hour is not a lot of money. Assuming they work 40 hours per week, 52 weeks a year, a minimum wage worker earns $18,720 a year. For comparison, the 2011 federal poverty line for a family of three—such as a single mother with two children—is $18,530 a year. (Note: If you were only making the federal minimum wage of $7.25 per hour, your annual income would be $15,080 – not enough to be above the poverty line for a family of three, and just barely over  the poverty line for a family of two.)

Finally, in a historical context, the minimum wage has been considerably higher. In inflation-adjusted terms, the federal minimum wage was highest in 1968, at a value of roughly $9.85 per hour in 2011 dollars. So even at $9 per hour, the Washington minimum is well below historical highs, not to say anything of the federal minimum wage, which at $7.25 has declined in value by more than 26 percent since 1968. With inequality at record levels, and still on the rise, indexing the federal minimum wage would be one very basic protection of workers at the very bottom of the income distribution. The question we should be asking then is not whether Washington’s minimum wage is too high, but why isn’t the federal minimum wage just as high or even higher?

At least for the approximately 194,000 workers in Washington state, and the 1 million across all eight states, who will be directly affected by these increases, the value of their paychecks will hold steady for one more year. Roughly another 400,000 workers across the eight states, whose wages are just above the minimum, will also see a small pay increase as employers adjust their overall pay scales to reflect the new minimum. (These are the “indirectly affected” workers in the table below.) It’s a shame that low-wage workers nationwide will not see this same minimal protection of their wages, but at least for this New Year, we can toast the Evergreen State.

Click to view in full-size:

Robert Pear’s story in the New York Times yesterday about the impasse in Congress over renewing the federal emergency unemployment benefits program was a mixed bag. It did a good job of demonstrating how differently Republicans and Democrats view the unemployed, making clear that some Republican politicians have decided to scapegoat the unemployed and blame the victims rather than those truly responsible for our economic woes. But Pear also inadvertently contributed to misunderstandings and misinformation about the unemployment insurance (UI) program and failed to point out essential facts about its operations and justification.

Pear reports that 3 million people could lose their unemployment benefits in the near future if Congress fails to renew federal assistance. That’s true, and it would not only be painful to disastrous to these individuals and their families, it would be bad for the economy, as everyone from Goldman Sachs to EPI recognizes.

Well almost everyone. As Pear reports, House and Senate Republicans think a lot of people ought to lose their benefits because they’ve received them too long and are essentially just taking a long vacation. He quotes Michigan Republican Dave Camp, who heads the tax-writing committee that’s in charge of UI, and who wants to chop 40 weeks off the maximum benefit duration: “This reflects a more normal level of benefits typically available after recessions.” Rep. Camp somehow has forgotten that there’s little normal about the current economy, which with an 8.6 percent unemployment rate is still struggling to recover from the Great Recession, the worst economic downturn in 80 years.

But Sen. Orrin Hatch (R-Utah) expresses what may be on the minds of many of the Republicans who want to kill or reduce the emergency UI benefits: “I don’t see why you have to go more than 59 weeks. In fact, we need some incentives for people to get back to work. A lot of these people don’t want to work unless they get really high-paying jobs, and they’re not going to get them ever. So they just stay home and watch television. I don’t mean to malign people, but far too many are doing that.”

Republican Congressmen Orrin Hatch, left, and Dave Camp are outspoken critics of extended unemployment insurance benefits. (From Flickr Creative Commons by Michael.Jolley)

Pear could do his readers and Sen. Hatch a service by letting them know that workers receiving the last 20 weeks of benefits possible – Extended Benefits – have no choice about what job they’ll take.  The law says their benefits are cut off if they refuse even a minimum wage job, so they aren’t holding out for “really high-paying jobs.”

This would also have been a good moment for the article to have mentioned that there are more than four unemployed workers for every available job. The experience of most unemployed workers is that they call and write and email employers and never hear a word back. Indeed, the evidence suggests that workers who receive UI do more job search than those who never receive benefits. They have every incentive to look hard because: a) their benefits are cut off if they don’t look, b) the benefits are so low (averaging less than $300) they barely amount to the minimum wage for a 40-hour work week, and c) most people are embarrassed or even ashamed to be jobless, even though the fault lies with the economy and not them.

More damaging, Pear leaves an impression that there are no job search requirements for UI at all. He describes the Republican position as imposing job search requirements for the first time: “House Republicans said they wanted a full-year extension, with additional requirements to prevent abuse of the program. They would require most recipients of jobless benefits to search for work…” Job search is not “an additional requirement.” Every UI recipient already is required to look for and accept suitable employment, until they begin receiving Extended Benefits, at which point they are required to accept even minimum wage work for which they are totally overqualified.

The Republicans want to set new and punitive barriers to benefits in front of the unemployed, including drug tests and high school GED requirements, perhaps to paint a picture of them as undeserving. There’s no good reason to subject people to humiliation who have worked hard and earned insurance benefits. They are not the reason employers are sitting on record profits and refusing to hire. They did not engineer the $8 trillion housing bubble that crashed the economy.

They want to work. There are no jobs. They have been punished enough.

In a scathing critique of the House Republicans’ strategy regarding the payroll tax cut, the Wall Street Journal’s editorial board really botched the underlying economics:

“House Republicans yesterday voted down the Senate’s two-month extension of the two-percentage-point payroll tax holiday to 4.2% from 6.2%. They say the short extension makes no economic sense, but then neither does a one-year extension. No employer is going to hire a worker based on such a small and temporary decrease in employment costs, as this year’s tax holiday has demonstrated. The entire exercise is political, but Republicans have thoroughly botched the politics.” (Bold added.)

The Journal‘s editorial page inverts the economics of the payroll tax cut by confusing the enacted employee-side tax cut (being considered for extension) with an employer-side tax cut. The objective behind the employee-side payroll tax cut extension is to put $120 billion worth of disposable income into the hands of consumers, creating and sustaining demand for goods and services, rather than altering marginal hiring costs.

The two-month extension that passed the Senate with overwhelming bipartisan support would increase disposable income by $20 billion via the payroll tax cut and pump another $8 billion into the economy through emergency unemployment benefits. Short of assigning a zero (or negative) fiscal multiplier to these programs, it can’t be argued that this will have no impact on an economy running $918 billion (5.7 percent) below potential output. And recent research by Berkeley professors Alan Auerbach and Yuriy Gorodnichenko, among others, finds that large output gaps imply large multipliers; a zero fiscal multiplier for government spending in a depressed economy is entirely unsubstantiated. (A legitimate critique would be that serious infrastructure investment or public works employment would be a better way to generate demand than the payroll tax cut, some of which will undoubtedly be saved.)

With regard to the duration of extension, Howard Gleckman aptly notes that setting tax policy in two-month increments makes little sense, but I think the Journal’s editorial board would agree with Gleckman that House Republicans only have themselves to blame for that situation.

Turning their backs on millions of unemployed workers who can’t make ends meet without the help of their unemployment insurance (UI) benefits, 229 Republican House members voted not to renew federal emergency benefits for the long-term unemployed. In a bipartisan vote, the Senate had agreed to continue the emergency benefits until the end of February, along with an extension of the payroll tax cut that expires at the end of December. But the House refused to consider that bill yesterday, killing hopes for the unemployed as winter begins.

What does the House vote mean for the unemployed?

Regular state UI benefits generally last no more than 26 weeks. The average benefit is less than $300 a week, but an individual’s benefit varies depending on previous earnings and state law. The maximum state-provided benefit currently ranges from $235 in Mississippi to $629 ($943 with dependents) in Massachusetts.

The federal legislation the House was voting on provides up to 73 weeks of additional benefits; workers in any state who exhaust their regular UI benefits before they can find a job can receive up to 34 additional weeks of benefits through the temporary federal Emergency Unemployment Compensation (EUC) program enacted in 2008. That number rises to 53 weeks in states with especially high unemployment rates. Workers who exhaust both their regular UI and EUC benefits can receive up to 20 additional weeks of benefits through the Extended Benefits (EB) program.

The House vote will terminate all of the additional federal weekly unemployment insurance benefits, as of Jan. 3, 2012. For more than 400,000 workers who will exhaust all of their regular state benefits in January, there will be no more federal help; their benefits will be cut off. More workers will exhaust benefits in February and each succeeding month, and all of them – millions of workers — will be denied any federal benefits.

Nearly 600,000 very long-term unemployed workers who are currently receiving Extended Benefits will lose those benefits in January 2012 because their states will end their EB program when full federal funding expires.

More than 3 million workers are currently receiving EUC. Most of them will lose those benefits prematurely if the legislation is not renewed. EUC provides benefits in “tiers” of weeks; people receiving EUC as of Jan. 3, 2012 will be allowed to complete their current tier but not move on to the next tier. The National Employment Law Project estimates that over 700,000 workers will reach the end of their current tier and thus receive no further federal benefits in January. Many more will lose EUC benefits prematurely in the months to follow.

Altogether, the Department of Labor estimates that about 2.5 million workers will lose benefits by March 3, 2012, and 5 million by year’s end, if federal benefits are not renewed.

Although the economy has improved since the depths of the recession, by any measure, the labor market is very poor, and jobless workers face terrible challenges. A recent report by the Council of Economic Advisers makes clear that the jobless are not to blame for their situation; the fault lies with the economy:

As of November 2011, the unemployment rate stood at 8.6 percent and 5.7 million workers had been out of work for more than 26 weeks; the average duration of unemployment was 40.9 weeks. In October, the latest month for which job vacancy data are available, there were more than four job seekers per job opening (versus 1.5 pre-recession). Estimates based on flow data from the Bureau of Labor Statistics monthly Current Population Survey (CPS) show that the probability that an unemployed worker finds a job in any given month is roughly 17 percent. For those who have been unemployed for more than 26 weeks, the monthly job-finding rate is closer to 10 percent.

1. Social Security costs are escalating out of control. No. Costs are projected to rise from roughly five to six percent of GDP before leveling off.
2. Americans want benefits but aren’t willing to pay for them. Wrong again. Americans across political and demographic lines support paying Social Security taxes. They also strongly prefer raising taxes over cutting benefits as a way to close the projected shortfall. The most popular option is raising taxes on high earners, since earnings above $106,800 aren’t taxed. But Americans prefer to close the gap on the revenue side even if asked to pay more themselves.
3. Our children and grandchildren will drown in debt if we don’t cut the social safety net. No, future generations will drown in debt—their own or the federal government’s—if we don’t address health care cost inflation. Cutting Medicare or Medicaid benefits just pushes costs onto the private sector. And there’s no reason to lump Social Security in with other programs since it’s funded through dedicated taxes and prohibited by law from borrowing.
4. The Baby Boomers will sink us. No, we saw them coming. Social Security began building up a trust fund in the early 1980s in anticipation of the Boomer retirement. The trust fund will keep growing for another decade to around $3.7 trillion, enough to last through the peak Boomer retirement years.
5. We’re living longer, so we need to work longer. No—only some of us are living longer, and most of us are already working longer. Gains in life expectancy have been concentrated among people with higher incomes and more education, especially men. Meanwhile, the labor force participation of older workers is close to the postwar peak.
6. We just need to save more for retirement. That’s a reason to expand Social Security, not shrink it. The average household has a retirement income deficit of $90,000, a conservative measure of how far behind they are in saving and accumulating benefits for retirement—and that’s without further cuts to Social Security. Retirement insecurity is increasing due to earlier Social Security cuts and the shift from secure pensions to do-it-yourself retirement accounts. (If anything, budget hawks should look to trim 401(k) tax breaks, two-thirds of which go to taxpayers in the top fifth of the income distribution and have little impact on saving.)
7. Seniors are greedy. No, they’re struggling to make ends meet. By any reasonable measure, seniors and other beneficiaries are worse off than working adults, so it makes sense to increase contributions rather than cut benefits. Older households have incomes roughly half those of working-age households. The “greedy geezer” myth rests on the fact that seniors have lower official poverty rates than children and working-age adults, though an improved measure that takes into account higher medical expenses for seniors shows that the three groups have similarly high poverty rates. In any case, cutting Social Security would increase poverty for all. Also, while older households typically have accumulated more savings than younger households, these savings are not enough to maintain their pre-retirement standard of living through retirement.
8. Benefits are generous. No, they’re modest and shrinking. The average retirement benefit is $14,000 a year—less than a full-time minimum wage worker earns—and benefits constitute two-thirds of income for the average older beneficiary. For a medium earner retiring at 65, benefits replace 41 percent of pre-retirement earnings, down from 52 percent in 1981. This replacement rate is scheduled to drop in the next 15 years to a meager 36 percent.
9. We’ll just cut benefits for people who don’t need them. No, proposed cuts would hurt the middle class now and the poor later. Because benefits for high earners are modest and wealthy retirees few, supposedly “progressive” plans actually go after middle-class benefits in order to yield significant cost savings. Social Security’s enduring popularity rests on the fact that people earn the right to participate by working and contributing, in keeping with core American values. Moving from a universal social insurance program toward a need-based one would doom Social Security to the same fate as targeted programs like Medicaid, which are being squeezed even as demand for them grows. An even worse idea is cutting cost-of-living adjustments, which would have an impact on all beneficiaries, but especially the oldest old, who are also the poorest old.
   
10. Social Security won’t be there for us. Only if we fall for these arguments. Social Security can pay full promised benefits for another quarter-century. Even if nothing is done to shore up the system, Social Security can continue to pay three-fourths of promised benefits after the trust fund runs out. Though this would be far from ideal, it’s certainly no reason to preemptively cut benefits. Instead, we should devote a small portion of the economic growth projected over Social Security’s next 75 years to continuing to build economic security on the cornerstone laid by President Franklin D. Roosevelt.