Jason Richwine of the Heritage Foundation and Andrew Biggs of the American Enterprise Institute are at it again (following up on an earlier study for the Business Roundtable), claiming that government workers—in this case teachers—are grossly overpaid. EPI  and others have expended much ink on this topic, and forthcoming EPI research will address some of the latest claims in greater detail (though maybe Jon Stewart said it all in his message to teachers about “the greed that led you into the teaching profession”).

But one of the key arguments Richwine and Biggs make is so sloppy, it should only take a blog post to rebut: the claim that “teachers exhibit low cognitive abilities compared to other college graduates” and that once you take this into account teachers suffer no wage penalty. Since all employers would love to be able to accurately assess the skills of prospective employees, it’s amazing that such a tool, if it exists, isn’t in widespread use. The miracle tool turns out to be the Armed Forces Qualification Test, which Richwine and Biggs refer to as an IQ test. Here’s what the AFQT actually tests:

• general science
• arithmetic reasoning
• word knowledge
• paragraph comprehension
• numerical operations
• coding speed
• auto and shop information
• mathematics knowledge
• mechanical comprehension
• electronics information

Is it really surprising that a future kindergarten or high school history teacher would score lower on this test than a future engineer or army officer?  There are many other issues one can raise about the AFQT score, but that will have to wait for a later time.

But even if the AFQT score contained important information about teaching ability, Richwine and Biggs aren’t content to add this measure to their statistical model to explain wages as economists normally do.

That’s because adding this variable doesn’t change the basic story, which is that teachers’ earnings are significantly lower than those of similar college grads, even those with the same AFQT scores.

See the results in their table. In regressions with the traditional specification (i.e., the variables included as controls) they find teachers earn 12.6 percent less than comparable workers (see row 1). In their next specification, they add the AFQT score, thus controlling for comparable education and AFQT score (which they mistakenly refer to as IQ). Their results show that teachers earn 10.7 percent less than other workers with comparable education and AFQT scores. That means that including the AFQT score seems to reduce the teacher penalty (actually, they do not provide the statistical information to judge whether there is a statistically significant difference between these two estimates) but in no way eliminates it. So, how do Richwine and Biggs reach the conclusion that there is no teacher wage penalty? They say:

“The wage gap between teachers and non-teachers disappears when both groups are matched on an objective measure of cognitive ability rather than on years of education.”

Check out EPI research on the teacher pay penalty and the updated analysis and watch this space for an upcoming blog on teacher benefits, which Richwine and Biggs claim are worth as much as teacher salaries. In the meantime, you may want to read this DailyKos blog from a teacher inviting Richwine and Biggs to join him in the public schools. We can give Richwine and Biggs a pass on the value of their research if they want to enjoy these lavish perks themselves.

Yesterday, the congressional supercommittee announced that it failed to come to an agreement to reduce the deficit by at least $1.2 trillion over 10 years. The committee’s failure automatically triggers $1.2 trillion in cuts to domestic and defense spending starting in 2013, along with the expiration of the Bush tax cuts. The failure of the committee is no surprise to observers, given the failure of past commissions, negotiations, and various other initiatives. This is especially true since congressional Republicans continue to rule out reversing Bush-era tax cuts for high-income individuals, effectively insisting that the burden of deficit reduction be borne primarily by low- and moderate-income Americans.

The commission has not only failed to address medium-term deficits, but it has passed up an opportunity to address the immediate crisis: jobs. With unemployment and underemployment remaining high and job creation remaining weak, we cannot continue to let the wounds to the labor markets fester.

Looking forward, Congress needs to immediately turn to jobs. This means continuing emergency measures to boost consumer demand by extending support for unemployed workers and preserving tax cuts targeted to low-income taxpayers (by extending the payroll tax holiday or enacting a more targeted credit). It also means providing federal assistance to prevent further pullbacks by state and local governments. Finally, this means investing in America’s future by boosting infrastructure spending, supporting our children’s education, and creating work opportunities for all.

Congress can still address the jobs crisis, and should do so immediately.

From left, supercommittee members Sen. Max Baucus (D-Mont.), Rep. Rob Portman (R-Ohio), and Sen. John Kerry (D-Mass.). (Image from Flickr Creative Commons by sunlightfoundation)

Later today, I will pass through two of our nation’s airports, where I will see ample evidence suggesting that we collectively place a very high priority on protecting our transportation infrastructure from harm. On my way through security, I will dutifully remove my shoes, and will remove from my pockets such benign items as a marker, an extra paper napkin from lunch, and the keys to my bike lock.

Yet throughout this same country, there are nearly 70,000 bridges that the U.S. Department of Transportation has identified as “structurally deficient.” We all recall with horror the 2007 collapse of the bridge in Minneapolis, yet there are thousands of such ticking time bombs throughout America today. In three states — Iowa, Oklahoma, and Pennsylvania — there are over 5,000 bridges deemed to be structurally deficient. While not every one of those bridges is in imminent danger of collapse, these remain alarming numbers.

Fixing America’s crumbling infrastructure should be a top priority for every national, state, and local official throughout the nation. It’s easier than often is the case in public policy debates to connect the dots on this one:

• Crumbling infrastucture + alarmingly high rates of unemployment (particularly amongst construction workers) + interest rates at rates that remain at unprecedented low levels = jobs plan that helps put Americans back to work today, while laying the foundation for future economic growth and prosperity.

While there’s certainly room for debate about how to proceed with infrastructure investment at this time, there really shouldn’t be any debate about whether to do this. My colleague, John Irons, testified this week before the Congressional Progressive Caucus Ad Hoc Hearing on Job Creation. In his testimony, he noted, “Congress should immediately reauthorize the Surface Transportation Act at the higher spending levels requested by President Obama … increase[ing] transportation investments by $213 billion over the next decade [thereby] add[ing] 350,000 job-years of employment over 2012-2014.”

Michael Likosky has written at length about the need to create an infrastructure bank, leveraging both public and private sector money to strengthen America’s infrastructure, and noting that, “If we don’t find a way to build a sound foundation for growth, the American dream will survive only in our heads and history books.”

American workers understand the importance of investing in infrastructure — last Thursday, tens of thousands of workers rallied in cities and towns throughout America for bridge repairs and job repair, as part of the AFL-CIO’s Infrastructure Investment Day of Action.

For state governments, investing in infrastructure through bonding is one of the few (and most effective) tools at their disposal to help spark a real economic recovery that helps working families today, while making investments that will contribute to future prosperity. Friday’s “Smart Brief” from the American Society of Civil Engineers highlights Massachusetts Gov. Deval Patrick’s plan to invest $10 billion over the next five years in capital spending, “focus[ing] on job creation through transportation projects, smart growth and construction and improvement of public higher-education facilities.” This is the sort of initiative that other states should emulate. Only through such aggressive investment in infrastructure will Americans in every state be confident that they are safe crossing today’s bridges, and that the road ahead leads to shared prosperity.

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The House of Representatives voted today on H.J. Res 2, a Balanced Budget Amendment (BBA). Because it would have amended the Constitution, the BBA would have needed a two-thirds majority vote to pass. The final vote count was 261-165, with four Republicans voting against the bill (though some cast their votes because it wasn’t strict enough) and 25 Democrats voting for the bill.

This vote came about directly as a result of the August debt limit agreement, in which conservatives demanded a vote on a balanced budget amendment before the end of the year. Besides requiring the president to submit a balanced budget to Congress each year, this amendment would have required a three-fifths majority vote in order to raise the nation’s debt limit (which, in layman’s terms, would mean more playing chicken with the U.S. credit rating). A number of House Republicans would have preferred to vote on an amendment that included both a spending cap at 18 percent and a two-thirds majority vote requirement in order to raise revenue; this amendment did not include those measures seemingly in an effort to gain more Democratic support.

The term “balanced” budget amendment is misleading – it fools people into thinking it may be a responsible policy to support. This is anything but the case – a BBA would in fact be a gravely irresponsible way to go about addressing our nation’s fiscal issues. Bob Greenstein of the Center on Budget and Policy Priorities sums it up nicely:

“The amendment would raise serious risks of tipping weak economies into recession and making recessions longer and deeper, causing very large job losses. That’s because the amendment would force policymakers to cut spending, raise taxes, or both just when the economy is weak or already in recession — the exact opposite of what good economic policy would advise.”

When recessions hit, spending on unemployment insurance and various other safety net programs, like food stamps, increases as more people fall on hard times (these are called automatic stabilizers). At the same time, revenues fall due to fewer people working and paying taxes. This leads to natural deficits during recessionary times. These deficits then shrink as spending on automatic stabilizers eventually falls and revenue streams eventually pick up. A BBA would not allow this excess spending, and would instead force spending to fall along with revenues. This would be disastrous during economic downturns both macroeconomically and for millions of Americans’ living standards. The Macroeconomic Advisers, an economic forecasting firm, recently provided interesting detail in a blog post regarding what might have happened had a BBA been passed and ratified, and taken effect in 2012. They say:

“The effect on the economy would be catastrophic. Our current forecast shows a Unified Budget deficit of about $1 trillion for FY 2012. Suppose this fall the federal government enacted a budget for FY 2012 showing discretionary spending $1 trillion below our forecast, resulting in a “static” projection of a balanced budget for next year. $1 trillion is roughly two-thirds of all discretionary spending, and about 7% of GDP. Our short-run multiplier for discretionary spending is about 2, and let’s assume a simple textbook version of Okun’s law in which the unemployment gap varies inversely with, but by half as much as, the percentage output gap. Then, instead of forecasting real GDP growth of 2% or so for FY 2012, we’d mark that projection down to perhaps -12% and raise our forecast of the unemployment rate from 9% to 16%, or roughly 11 million fewer jobs. With interest rates already close to zero, the Fed would be near powerless to offset this huge fiscal drag.”

In sum, if a BBA had been in place, it would have resulted in catastrophically lower GDP growth for FY 2012 and catastrophically higher unemployment. A BBA is a bad idea that does not deserve the falsely positive term “balance” in its title.

Representative Denny Rehberg (R-MT), Chairman of the Labor-HHS-Education Appropriations Subcommittee, recently launched a massive attack on the federal government’s efforts to improve the labor standards, job prospects, wages and bargaining rights of American workers. His numerous amendments to a major bill to fund the Labor Department and other agencies would block the government’s efforts to improve enforcement of wage laws, make construction work safer, protect the jobs of U.S. workers, reduce the levels of respirable coal dust that causes black lung disease, and give workers a fair chance to have a union if they want one. And where the law is already working to ensure contractors don’t compete for federal construction projects by driving down wages, Rehberg’s amendments would undermine the existing law.

Given that a decent job is the ticket to the middle class, Rehberg’s attack looks like the 1 percent trying to slam the door on the 99 percent.

Rehberg is going after important protections that don’t cost a lot of money. One of his targets is a Labor Department program – Bridge to Justice — that does nothing more than refer workers who’ve been cheated out of wages through the American Bar Association to attorneys with relevant experience. Obviously, Rehberg isn’t trying to save the taxpayers money, he’s simply trying to protect unscrupulous employers.

Rehberg’s legislation fits neatly into the business lobby’s campaign to weaken the National Labor Relations Board, the agency created to protect the right of workers to join unions and exercise their collective bargaining rights. His bill cuts NLRB funding by $49 million and targets rules that inform workers of their rights, enable workers to communicate with each other during union election campaigns, and ensure that union elections are conducted efficiently.

The employer campaign to prevent reforms at the NLRB depends upon misinformation and the fact that the public is largely unaware that union elections look more like those in a one-party state than in a true democracy. The last thing Rep. Rehberg’s corporate allies want is a system that gives full expression to employees’ desires to join together and improve their wages, job security, and working conditions.

Finally, the bill undoes recent rule changes from the Labor Department in the H-2A and H-2B programs that favor the hiring of U.S. workers at prevailing wages over foreign guestworkers for relatively low-skilled jobs as farmworkers, hotel maids, and landscapers. The bill would thus make it harder for U.S. workers to find jobs and would depress wages.

Every one of the two dozen or so labor-related provisions in the bill is bad policy, and one can only hope that Senate Labor-HHS Appropriations Subcommittee Chairman Tom Harkin (D-Iowa) and his Senate colleagues reject them all.

Wednesday, the Congressional Progressive Caucus (CPC) held an ad hoc hearing on job creation. Ten members of the CPC, including co-chairs Raul Grijalva (D-Ariz.) and Keith Ellison (D-Minn.), listened to testimony from five economists and experts, including EPI Research and Policy Director John Irons, EPI board members Rob Johnson and Julianne Malveaux, and Jeff Sachs and Bob Borosage. They also heard from Garrett Gruener, representing the “Patriotic Millionaires.”

All agreed that the supercommittee is headed in the wrong direction. Bob Borosage, co-director of the Campaign for America’s Future, compared the supercommittee to a bus headed straight toward a cliff, with the bus driver fretting about which lane to be in. In his testimony, John Irons hit back against the notion that the supercommittee needs to “go big,” stating there is no indication that markets are worried about U.S. debt or that they would respond any more favorably to a plan that goes beyond $1.2 trillion in deficit reduction. Not only are interest rates low, but Moody’s Investor Services, one of the ratings agencies with the power to downgrade the U.S. rating outlook, stated recently that “failure by the committee to reach agreement would not by itself lead to a rating change.” Irons stated, however, that he believed the market would react if Congress fails to do anything on jobs.

The hearing concluded with Gruener, representing the Patriotic Millionaires, which are a group of very wealthy people who want to see taxes raised on those making over $1 million – people like themselves – for the good of the nation. They lobbied on Capitol Hill Wednesday, urging Congress to raise taxes on those who can most afford it. Gruener, a businessman, testified that not one of his business decisions has been a function of marginal tax rates. He said:

“Not once, and I literally mean not once, have any of my decisions – my personal investment decisions or any of the investment decisions I’ve ever seen in the venture community – been a function of marginal taxes. … We’re not trying to grow companies in which the change of a few percentage points one way or the other is going to make a big difference.”

The supercommittee would be wise to pay more attention to hearings such as these. But though the CPC invited members of the supercommittee to attend, none did.

The Judiciary Committee press release unveiling the Regulatory Accountability Act paints an alarming picture about the relationship between jobs and the economy. House Judiciary Committee Chairman Lamar Smith (R-Texas) states: “The current regulatory system has become a barrier to economic growth and job creation. Federal regulations cost our economy $1.75 trillion each year. Employers are rightly concerned about the costs these regulations will impose on their businesses. So they stop hiring, stop spending and start saving for a bill from Big Brother.”

If this picture were accurate, one might appropriately support legislation that a just-released Coalition on Sensible Safeguards study found would “grind to a halt the rulemaking process.” But it is not.

The chairman’s statement incorporates two oft-repeated but fundamentally inaccurate claims. The first is the cost of regulation finding from a study by Crain and Crain conducted for the Small Business Administration. Their $1.75 trillion estimate is a gross exaggeration. It has been debunked by the Congressional Research Service, Obama administration officials, and the Center for Progressive Reform.

A study by EPI’s John Irons and Andrew Green is especially telling. It examines Crain and Crain’s estimate of the costs of economic regulation, which accounts for 70 percent of the overall estimate. The economic regression model used to determine these costs contains a series of fundamental flaws, including reliance on an international data set rife with holes (spotty data typically produces spotty findings), as well as a misspecified regression that confuses regulatory stringency with regulatory quality. The Crain and Crain regression also produces the counterintuitive finding that increased education in a country leads to less economic growth, reason alone to be skeptical of the overall estimate.

Irons and Green correct for just one of the problems with the regression – they fill in the spotty data set – and find no statistically significant relationship between Crain and Crain’s measure of regulation and economic outcomes. This implies that the economic costs of regulation cannot be distinguished from zero, an unsurprising result since certain regulations, such as financial regulations that stabilize the economy, promote economic growth.

The second inaccurate claim of Smith’s is that the specter of additional regulation is what’s causing companies to hold back on additional hiring. EPI has released a series of reports on the relationship between regulations and jobs; one of the clearest findings is that it is a huge shortfall in demand, not regulatory uncertainty, which ails the economy.

In this report, EPI President Larry Mishel finds that data suggesting a significant role for regulatory uncertainty is altogether absent. In fact, investment in equipment and software has grown faster than during the previous three recoveries, and private sector employment has grown much faster than during the last recovery. There are no mysterious lags that might be explained by regulatory uncertainty.

In fact, Labor Department data show that in 2011, just 0.2 percent of mass layoffs have been due to regulation, while 29.7 percent have reflected the lack of demand. (This data is summarized by Bruce Bartlett.)

Of further interest, companies are not using a substantial amount of resources they already have at their fingertips; presumably, they would use these resources more fully before they would increase investment or hiring. The capacity utilization rate (the degree to which current factories and equipment are being used) is still well below its average from 1979 to 2007. Similarly, the average number of hours employed individuals are working each week is still below the pre-recession level. Substantial unused capacity is another indicator that lack of demand, not regulatory uncertainty, explains why economic trends have not been stronger.

Turning to what businesses themselves are saying, Mishel found that the percent of small businesses reporting that regulations are the single most important problem they face has not been out of its historical range during the Obama administration. For instance, the proportion reporting this concern is lower than it was during the Clinton years, when employment growth was rapid. What is unusual now is that the most common problem cited by far is “poor sales (an indicator of the lack of demand);” during the Obama administration, the average share of small businesses citing “poor sales” as the most important problem they face is more than double the average cited in the eight other presidential terms examined.

This Congress has seen many examples of unwarranted economic concerns about regulations driving legislation likely to prove damaging to the regulatory process, thereby undermining essential health, safety, and economic safeguards. The thinking behind the Regulatory Accounting Act is a case in point; bad diagnoses tend to lead to the wrong cures.

As Paul van de Water recently pointed out, some of the plans floated by supercommittee members cut non-defense discretionary spending by about the same amount as the sequestration trigger would. This is because the proposals to cut discretionary spending do not include a firewall between defense and non-defense, so it is likely that a large cut to the entire discretionary budget—such as the Democratic offer to cut $400 billion—would all end up falling on the non-defense side. Remember, the trigger was supposed to be so bad and disastrous that it would scare Congress into striking a deal. But apparently it’s just scaring Congress into making pretty much the same cuts to non-defense discretionary and just sparing defense.

Why should we care about non-defense discretionary? There are a lot of reasons to care about this portion of the budget, which includes just about every federal government function outside of Social Security, Medicare/Medicaid, defense, and net interest, despite only representing less than 20 percent of the budget. But one of my main concerns is public investments such as infrastructure, education, and research and development. Economists across the board—even presidential candidate Mitt Romney’s economic advisor!—recognize that these investments must be sustained and even expanded to ensure long-run economic growth and global competitiveness. But according to Office of Management and Budget account-level data, these investments make up 1.7 percent of GDP, or about 40 percent of non-defense discretionary. This means that it would be extremely difficult to hit the budget targets proposed without taking a decent-sized hunk of flesh from these accounts.

Second, non-defense discretionary has been on a downward path as a share of the economy since the late 1970s (about the time that income inequality really started taking off, hmmm…). The discretionary caps enacted into law as part of the debt ceiling deal would force non-defense discretionary to record lows: to just 2.7 percent of GDP, far lower than the levels of the 1990s and 2000s, and a 29 percent reduction relative to the funding in the 2000s. And both the sequestration trigger and the $400 billion cut—were it all to fall on domestic discretionary—would cut these services even further.

Mayor Michael Bloomberg of New York is in the news today for shutting down the Occupy Wall Street protests in Zuccotti Park. This reminds me that he spoke last week at a forum co-hosted by the Center for American Progress and the American Action Forum. Besides a couple of truly novel twists (comparing Social Security to OPEC?!) it’s actually useful bringing up his speech because it perfectly crystallized the dominant economic narrative that far too many policy-making (and media) elites tell themselves these days. The punchline of that narrative, presented with no evidence at all,  is simply that we need to urgently move to cut the budget deficit.

Bloomberg is sure that providing more fiscal support (i.e., using larger near-term deficits to finance spending and investments) to the economy won’t work to reduce unemployment. How is he sure? Because we gave some already and unemployment remains high. This is like a fire chief claiming that pouring water on a fire won’t quench it because once there was a really big fire and his crew poured more water on it than they’ve ever poured before … but it kept burning. So, apparently we’re going to move to pouring gasoline on it. Really, it says so right in the press release – “the best stimulus is fiscal responsibility (where “fiscal responsibility” is nearly always Beltway speak for quick reduction of budget deficits through large spending cuts leavened with some tax increases).”

I know that my harping on this may be getting old, but people haven’t stopped doing it yet, so here we go again: the failure of fiscal support would leave clear footprints in economic data. The textbook case for why debt-financed fiscal support does not lead to net new jobs and economic activity in some cases is that the first-round effect of spending and tax cuts are counter-balanced by rising interest rates that “crowd-out” private investment. There has been no rise in interest rates, hence there is no crowding-out.

Bloomberg is also sure that businesses aren’t spending enough – and that their failure to spend is because of vague uncertainty:

“But as important, and the subject for today, is the broader uncertainty that exists about the country’s long-term fiscal stability… . Nearly every CEO I talk with says the same thing: If the Federal government passed a real deficit reduction plan – and we’ll talk about what ‘real’ means in a minute – business leaders would respond just as they did in the 1990s, when President Clinton and Congress adopted a long-term deficit reduction plan that gave businesses more certainty about the market.”

But businesses are spending. Actually much, much more than they did during the first two-and-a-half years of the early 1990s expansion.

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And there is no actual evidence that uncertainty is constraining them. And if businesses are uncertain about the future, aren’t they at least happy enough with today’s record-high profit margins?

I guess this is the quality of fiscal policy analysis I should expect from somebody who seems to think that Congress forced banks to finance the housing bubble.

Enough for now – suffice to say that this speech could’ve been generated by a Ye Olde Beltway Centrist Cred-Producing software package from the mid-1990s. With this mindless invocation of “smaller deficits will fix everything,” is it really so hard to figure out why countries respond so poorly to financial crises?

As the deadline looms for the supercommittee to report back to Congress, some have raised the specter that “failure” would lead to a collapse in financial markets. For example, Massachusetts Sen. John Kerry has expressed concerns that a failure to reach an agreement would send a dangerous signal to markets, and the Committee for a Responsible Federal Budget has said that a “go big” agreement is needed to “reassure markets about our ability to repay our creditors.”

These concerns are misplaced.

First, even if the supercommittee fails to find an agreement, there would still be a $1.2 trillion 10-year spending reduction put onto the books via a process called sequestration that would limit annual appropriations by Congress. From a pure deficit-reduction perspective, a $1.2 trillion agreement would be no different than a so-called failure. Congress can of course revisit those cuts, but they could also revisit any other kind of spending agreement too.

Second, remember that financial markets are forward looking and respond primarily to unexpected news. Does the market believe that Democrats and Republicans will come together in a Kumbaya moment to pass $3 trillion in tax increases and/or cuts to spending? I wouldn’t bet on it. Goldman Sachs noted in a recent Q&A on the supercommittee that, “a ‘grand bargain’ to resolve this imbalance appears to be a low probability this year. Instead, the politically realistic outcomes range from no agreement to a deal reaching $1.2 trillion in deficit reduction over 10 years.” They also note that just “32% of economists polled in the November Blue Chip financial survey expected a super committee agreement to become law.” Thus a failure would merely confirm market expectations, and there should be little reaction in the markets.

Third, as I noted in an earlier post, real interest rates on federal debt are negative for some maturities, and very low for longer term bonds. There is no indication that markets are worried about U.S. debt and need to be reassured. For example, Moody’s rating agency recently stated that, “failure by the committee to reach agreement would not by itself lead to a rating change.”

Finally, the main worry for businesses is the lack of demand for their goods and services and the main worry for individuals is the lack of jobs. The markets would react if Congress fails to continue a payroll tax holiday or fails to continue unemployment insurance payments. The real, immediate crisis is jobs and economic growth – Congress needs to focus on getting people back to work. A jobs-first focus would, more than anything else, reassure markets that the U.S. economy is poised for growth, and not slipping into premature, job-killing austerity.