All politicians say they want to protect the middle class, but who belongs to the middle class? The Census Bureau puts the median household income at a shade under $50,000, and a broad definition (leaving out the bottom and top twenty percent) gets you a range of about $20,000 to $100,000, ignoring differences in household size and regional cost of living.

But the definition of “middle class” seems to expand or contract depending on the context. When it comes to shielding taxpayers from tax increases, the “middle class” tends to extend well above the $100,000 threshold. For example, the Alternative Minimum Tax is “patched” by Congress each year in the name of protecting the middle class, even though roughly three-fourths of the forgone revenue comes from households making more than $100,000. Similarly, while campaigning for president, Barack Obama famously pledged not to raise taxes on married couples with incomes under $250,000 or single taxpayers with incomes under $200,000.

But when it comes to Social Security cuts, the middle class seems to shrink. The co-chairs of the president’s Fiscal Commission, for example, proposed cuts for the “most fortunate” that reduced benefits for Social Security’s prototypical medium earner (a worker earning around $43,000 in 2010) by 19 percent. Though some of this would come from across-the-board cuts like a lower cost-of-living adjustment, even targeted (“progressive”) cuts would fall on those earning as little as $38,000.

Why go after middle class retirees? One reason is that there are few wealthy retirees and they don’t receive much in Social Security benefits. Only 7 percent of Social Security beneficiary “units” 62 and older had incomes above $100,000 in 2008 (this includes single retirees and married couples). Even if these upper-income retirees all received close to the maximum benefit of around $35,000, it’s hard to achieve substantial savings without going lower down the income scale or eviscerating benefits for higher-income retirees, who earned them through years of contributions and already rebate some through the income tax system.

While trimming benefits for high-income retirees doesn’t get you very far, a modest payroll tax increase on high-income workers does. Currently, earnings above $106,800 are exempt from Social Security taxes. Taxing all earnings equally would all but eliminate Social Security’s long-run shortfall. Alternatively, removing the cap on the employer side and indexing it to cover 90 percent of earnings on the employee side (as it did in the early 1980s when Social Security was in long-term balance) would close around 70 percent of the shortfall if benefits are based on the employee contribution. This has the advantage of neither raising employee taxes nor creating outsize benefits.

Despite strong public support for lifting or eliminating the payroll tax cap, politicians like Texas Governor Rick Perry insist on keeping alive the idea that the projected Social Security shortfall can and should be closed by “means testing” benefits for high-income retirees. Going after AARP-card-carrying Lexus drivers living in gated communities (as Fiscal Commission co-chair Alan Simpson characterized opponents of benefit cuts) may sound like a good idea until you realize how elastic class categories are. In fact, even those of us who drive old Chevy Prizms and live in rental apartments had better watch out.

In an eloquent veto message of a school accountability reform bill last weekend, California Governor Jerry Brown articulated an alternative to the narrow standardization of schooling and the promotion of misleading quantitative test score measures that have characterized American education in the last generation.

Most observers recognize that as government increasingly held schools and teachers accountable primarily for the math and reading test scores of their students, schools inevitably narrowed their curricula to minimize attention to other important educational outcomes, substituted test preparation and test taking skills for real learning, and even engaged in cheating to meet politically determined targets.

Some policymakers have recently attempted to address these problems by advocating accountability for “multiple measures.” Their reasoning has been that the corruption of education that results from a near-exclusive focus on basic skills in math and reading can be ameliorated if other indices can be added to accountability systems to supplement the math and reading test scores. This was the goal of the California bill, sponsored by liberal Democrats, and sent to Brown for signature.

But because other important outcomes of education – like character, inquisitiveness, citizenship, civic awareness, historical reasoning, scientific curiosity, good health habits – cannot be standardized like math and reading scores, proponents of “multiple measures,” like the California senators who crafted the bill, are left with adding indices like attendance rates, parent satisfaction, graduation rates, the number of students taking advanced placement courses, and the like. But this does little to divert schools’ obsession with math and reading test scores, since they remain the only academic outcomes that count.

As Brown observed, “adding more speedometers to a broken car won’t turn it into a high-performance machine.”

In his veto message, Brown recalled an aphorism of Albert Einstein: “Not everything that counts can be counted, and not everything that can be counted, counts.” The bill, Brown said, “nowhere mentions good character or love of learning. It does allude to student excitement and creativity, but does not take these qualities seriously because they can’t be placed in a data stream.”

Brown invited the legislature to work with him to devise a truly workable accountability system for education, one that relies on qualitative evaluations by “panels [that] visit schools, observe teachers, interview students, and examine student work.”

The Broader, Bolder Approach to Education campaign has advocated such a system, and described it in more detail in a statement issued by nationally prominent educators and policy experts. The system is also described in Grading Education: Getting Accountability Right. If the panels that Brown advocates are constituted with appropriate experts in curriculum and instruction, and include members of the public as observers, they have the potential to finally provide citizens with the ability to distinguish effective from ineffective schools in their state and communities.

It is encouraging that California State Senator Darrell Steinberg responded to Brown’s veto message with a willingness to work with him to design such an accountability system. Should they succeed, it could signal that some in the nation may finally be ready to turn away from a well-intentioned but destructive reduction of schooling to the standardized tests that can, at best, measure only a small aspect of education.

High-profile education “reformers” in Washington, D.C., New York, and Chicago have asserted over the past decade that test-based accountability, whether for teachers (D.C. and N.Y.) or schools (Chicago) is key to student improvement. They have accused those who note the well-documented impact of poverty on academic achievement of “making excuses.”

Ten years in, what do they have to show for these resource-consuming “no excuses” initiatives? The answer seems to be very little, and maybe less than that. Recent reports on Chicago and Washington schools find little improvement in student achievement overall, with the white-black and rich-poor achievement gaps reformers promised to close actually widening in some cases. In New York, rewards for high-performing teachers proved so ineffective in raising test scores that the city abandoned them.

Michelle Rhee’s tenure as D.C. Public Schools Chancellor provides a stark example. Rhee invested $4 million in her new teacher evaluation system in 2009 and fired 1,000 educators in her 3 ½ years based heavily on test scores biased in favor of wealthier students. Current status? A stubborn achievement gap and apparently rampant cheating. In schools serving lower-income students especially, high stakes have also likely led to the substitution of real learning for test prep, to those students’ detriment. 

Two D.C. schools illustrate the strong correlation between test score disparities and the concentration of low-income students. In a January Washington Post article, Bill Turque notes that at Horace Mann Elementary School, with a 73 percent white student body and only 4 percent of students qualifying for free or reduced-price lunch, around 90 percent of students meet or exceed district achievement standards. Across town at Stanton Elementary School, where 85 percent of students qualify for free or reduced priced lunch, only 9 percent of students met or exceeded 2011 math and reading standards.

Rhee’s regime of test prep for students and tough accountability for teachers did little to narrow these gaps because it ignored the more complex and challenging issue of poverty. Ineffective teachers and principals clearly impede learning. But the variation in teacher quality is overwhelmed by the variation in social and economic conditions that promote (or limit) children’s readiness to learn. The failure of a small-carrot large-stick approach to attaining teacher “excellence” should give serious pause to the certainty of “reformers” like Michelle Rhee. It also challenges their assertions that acknowledging the effects of lack of early childhood education, excess mobility, family stress, and poor health on student outcomes amounts to “excusing” teachers. Rather, the “no excuses” crowd must stop excusing itself.

Fiscal year 2012 kicked off on Oct. 1 to an economy roughly $1 trillion (-6.2 percent) below potential economic output—the level of economic activity that would be associated with full employment and industrial capacity utilization. This economic slack has significant consequences for the budget deficit because revenues are lower and more Americans rely on the social safety net.

Recently, the Congressional Budget Office estimated that this portion of the budget deficit attributable to economic weakness is $340 billion this fiscal year (FY2012). In other words, if the unemployment rate were closer to 5 percent, the budget deficit would be around a third lower than its projected level ($973 billion, or 6.2 percent of GDP). CBO’s methodology and older estimates can be found here.

While sizable, these estimates understate the impact of the recession on the budget by only focusing on economic variables and ignoring deliberate legislative efforts to prop up the economy. Objectively stimulative provisions in last December’s tax and insurance compromise added $124 billion to this year’s deficit (in addition to the $299 billion added to the deficit by extending current tax policies), the Recovery Act added $49 billion, and supplemental stimulus extensions (UI, helping states with their Medicaid bills, and a teachers’ jobs fund) added $1 billion. Similarly, tax deal stimulus added $157 billion to last year’s deficit, the Recovery Act added $163 billion (net of the alternative minimum tax patch, which wasn’t stimulus), and supplemental stimulus extensions added roughly $47 billion to last year’s deficit.

Adjusting the budget deficit (less cyclical contributions) for these legislative decisions, the effective impact of the recession is closer to $699 billion last year and $514 billion this year, or about 54 percent of last year’s actual budget deficit and 53 percent of this year’s deficit.

Even adjusting for legislated economic support underestimates the impact of the recession, because many economically sensitive projections, such as decreased revenue from capital gains realizations, show up in CBO’s ‘technical revisions’ rather than the cyclical economic revisions. Technical revisions are residual non-legislative, non-economic changes in projected receipts and mandatory outlays, influenced by factors such as the distribution of tax filers through income brackets or effective tax rates. Kitchen (2003) finds that economic and technical revisions demonstrate a statistically significant and close relationship, particularly with personal income receipts. Since the start of the recession, technical revisions to CBO’s budget outlook have cumulatively added $139 billion to the FY2011 budget deficit and $246 billion to the FY2012 deficit.

Stripping out the combined impact of cyclical economic factors, stimulus legislation, and technical revisions, this year’s structural deficit would be $223 billion, or 1.4 percent of GDP. Last year’s structural deficit would have been $446 billion, or 3.0 percent of GDP. Put differently, a host of recession-related factors account for at minimum half and upwards of 65 percent of last year’s deficit and 77 percent of this year’s deficit.

Click to enlarge

This analysis shows just how sensitive the budget is to economic activity and employment. Unfortunately, the economy faces a big drop off in deliberate fiscal support between last year and this year. Goldman Sachs recently estimated that under current law, U.S. fiscal policy will shave 1.8 percentage points from GDP growth in calendar year 2012 (or one percentage point even if the payroll tax cut is extended). We estimate that the debt ceiling deal’s initial spending cuts, coupled with failure to extend the payroll tax cut and UI, would shave 1.5 percent off growth and lower employment by 1.8 million jobs in 2012.

Congress needs to change course and enact more economically supportive policy to put millions of Americans back to work and improve the fiscal outlook.

Researchers from the UC Berkeley Institute for Research on Labor and Employment released a paper today that shows clearly and persuasively that the state budget crisis that continues to cripple most states has been caused by the bursting of the housing bubble and the persistent recession (and very weak recovery), not as many contend, by the presence of public sector unions.

The authors, labor economist Sylvia Allegretto, Ken Jacobs, and Laurel Lucia, connect the dots: the economy fell off a cliff and unemployment hit double digits, simultaneously increasing demands for state services and decimating state tax systems reliant on income and consumption, and then political opportunists lined up to identify scapegoats for widespread state revenue crises. Allegretto et al.’s paper separates the research data wheat from the political rhetoric chaff.

Step one shows that state and local government employment has remained remarkably consistent over the past 30-plus years, hovering between 14 percent and 15 percent as a share of total non-farm employment. During the recession, it bumped slightly above 15 percent primarily because the denominator, total employment, shrunk dramatically. Can the current acute fiscal distress be blamed on steady public sector employment? Hardly.

Click to enlarge

As seen in the map, there is considerable variation between states in the share of total employment comprised of state and local government employees. The states with the largest share of state and local government employees may surprise some – it’s generally not states that are normally associated with “big government.” Moreover, in step two, the authors demonstrate that there is no statistical correlation between higher public union density and share of public sector employment.

Steps three and four show that public sector compensation as a share of state budgets has actually declined over the past two decades, and summarizes new research (including IRLE research, The Truth About Public Employees in California: They are Neither Overpaid Nor Overcompensated) showing that public sector employees are not overcompensated.

Having demonstrated that public sector workers are not to blame for state fiscal woes, the authors drill down to the real cause of state fiscal distress – the bursting of the housing bubble. They find that regardless of public sector union strength, “house price declines [resulting from the bursting of the housing bubble] were, to a large extent, a central reason why state budgets are in such dire straits.”

The real take-away of this paper – “It’s the economy, stupid!” – highlights the path needed to further revive state fiscal conditions. Putting American workers back to work will breathe new life into both income tax revenues and state sales taxes. It’s time to focus on the real crisis facing America, rather than being distracted by so many paper tigers.

Last night, Congress passed a free trade agreement for the first time since 2007. In fact, it passed three.

Behind vast Republican support, the House and Senate approved trade deals with Colombia, Panama and South Korea. This came, of course, one day after Senate Republicans killed President Obama’s jobs bill. These trade agreements should be a boon for jobs, right?

Not so fast. Robert Scott, EPI’s Director of Trade and Policy Manufacturing Research, estimates that 214,000 net U.S. jobs will be lost or displaced in the first seven years under the FTAs with Colombia and South Korea.

“With 14 million unemployed, these deals will only further burden our domestic economy, which is already teetering on the brink of another recession,” wrote Scott in a statement today.

Supporters of the FTAs, however, claim the deals will create tens or hundreds of thousands of U.S. export jobs. That would sound great if it wasn’t so naive.

As Scott points out in this week’s snapshot, trade both adds to and subtracts from the demand for workers. While the growth of exports supports domestic employment, the increase of imports displaces American jobs. Scott says counting export jobs while ignoring imports is like “trying to run a business while ignoring expenses.”

In 1993, the Clinton administration also had high hopes for job creation when the U.S. and Mexico signed the North American Free Trade Agreement. They claimed NAFTA would “create an additional 200,000 high-wage jobs related to exports to Mexico by 1995.”

Before NAFTA, the U.S. had a trade surplus with Mexico. By 2010, the U.S. had a trade deficit with Mexico and had lost or displaced 682,900 jobs. Free trade, anyone?

Clive Crook blogs on my paper, Regulatory uncertainty: A phony explanation for our jobs problem, and finds it “clever and interesting but not all that persuasive.” He reports that the paper finds “Trends in investment (this recovery, weak as it may be, has been “investment-led” by historical standards), in hiring, and in hours worked all suggested that lack of overall demand is the problem,” and does not dispute any of the conclusions. Crook just thinks I should have written a different paper:

“First, the focus on regulatory uncertainty seemed too narrow. What about other kinds of policy-induced uncertainty? Second, its target–the idea that regulatory uncertainty as opposed to weak demand is the cause of slow growth–is a straw man. Who is denying that weak demand is a factor, or even the larger factor of the two?”

Well, I do think there are a ton of important people denying that there is any demand problem whatsoever, or at least one that can be addressed by policy. How else can there be an essentially uniform view among the Republicans that the initial stimulus had zero effect? How else to explain that the program of each candidate for the Republican presidential nomination has an exclusively ‘supply-side’ approach which basically boils down to fiddling with the structure of taxation? How else to explain the recent contention by the top four Republican leaders in Congress that the Federal Reserve should take no further policy actions to expand demand? It is hard not to notice that conservatives and Republicans are seeking immediate reductions in federal spending, which can only exacerbate any demand-side problem. Perhaps Crook should supply some examples of leading conservative economists and Republican leaders saying there is a demand problem, that it is a ‘larger factor’ than uncertainty, and of the proposals they are advancing to address the demand shortfall.

That my analysis focused on regulatory and tax uncertainty was not arbitrary, of course; this is what conservative economists, business trade associations and Republican politicians are saying is the sole reason for high unemployment, and I offered several (of numerous possible) examples. They do not talk about other types of uncertainty when trying to explain persistent high unemployment and slow job growth. They focus on regulations and taxation because they are claiming that Obama administration policies and proposals are inhibiting job growth. In fact, just last week, House Republicans “dared President Obama and other Democrats to support two bills that would delay two pending Environmental Protection Agency (EPA) rules, a move they said would have a more immediate effect on jobs than anything Obama has proposed.” I am confused why Crook does not understand that examining the employment and investment impact of tax and regulatory uncertainty is a key question in current policy debates.

Crook suggests a broader uncertainty lens, which to me is changing the topic. He points to a recent paper by Scott Baker, Nicholas Bloom and Steven Davis which attempts to measure uncertainty and finds:

“Index values are high in recent years and show clear jumps associated with the Lehman bankruptcy, the 2010 midterm elections, the Euro crisis and the U.S. debt-ceiling dispute. … Greater policy uncertainty in 2011, relative to 2006 levels, lowers GDP by about 1.4 percent and employment by about 2.5 million…”

I am not persuaded that the measurement of uncertainty in this paper is worthwhile since their metric relies heavily on news citations; consequently, when the conservative echo chamber screams about a topic their index captures these claims as real economic concerns. Nevertheless, it is interesting that the paper’s results in no way support the conservative/Republican/business association claim that Obama’s policies have inhibited job growth. Note that the paper’s conclusion estimates the impact of uncertainty from 2006 to the first half of 2011, so it covers much ground before Obama was even elected. If you look at the paper you will see that the main spikes in policy uncertainty (see their Figure 1 below) are due to the Lehman implosion, the TARP legislative debate and the banking crash, all of which pre-date Obama, and that by far the largest spike in uncertainty under Obama was the ‘debt ceiling dispute.’

Click to enlarge

Now, in my view and I think in most objective observers’ views, the debt ceiling fiasco was a crisis totally manufactured by Republican politicians. So, if uncertainty hurt job growth, then one should point at those responsible for the financial crisis and the debt ceiling debacle. Crook has clarified one thing for me. Anyone claiming uncertainty is holding back the economy needs to identify the particular types of uncertainty and who’s responsible for those uncertainties—Obama, Republican policymakers, both or neither. The case that Obama’s policies are generating job-killing uncertainty has not been substantiated and the intense emphasis by conservative/Republican/ business association leaders on tax and regulatory uncertainty is a counterproductive distraction from advancing the demand-side policy changes necessary to move the economy forward.

In an interview with the Wall Street Journal, GOP presidential candidate Herman Cain responded to a question about the Occupy Wall Street protests by saying, “Don’t blame the big banks. If you don’t have a job and you’re not rich, blame yourself.”

Here are the facts: This morning, the Bureau of Labor Statistics (BLS) released new data from the Job Openings and Labor Turnover Survey showing that there were nearly 3.1 million job openings in August. However, we know from other BLS data that there were 14 million unemployed workers in August. In other words, there were nearly 11 million more job seekers than job openings.

The ratio of unemployed workers to job openings is now 4.6-to-1. A job seeker’s ratio of more than 4-to-1 means there are literally no jobs available for more than three out of four unemployed workers. In a given month in today’s labor market, the vast majority of the unemployed are not going to find a job no matter what they do. It is wrong, not to mention cruel, to call this their fault.

Mr. Cain went on to explain that he doesn’t “understand these demonstrations and what is it that they’re looking for.” For many, the answer is simple: jobs. National politics wrongly vilifying the unemployed while ignoring the economic fundamentals of a severe aggregate demand slump, however, are blocking an appropriate fiscal response that could put millions of Americans back to work.

In education policy, Congress and President Obama’s administration continue to seek an unrealizable national whip that will somehow transform American schools for the better. These efforts ignore both evidence and common sense.

The latest example is a proposal developed by Senate Democrats to re-authorize the Elementary and Secondary Education Act (known recently as “No Child Left Behind,” or NCLB). Democratic Senator Tom Harkin of Iowa, chairman of the Senate education committee, has drafted a bill that will relieve states of having to meet federally specified achievement goals in math and reading. Instead of requiring all students to be “proficient” in these basic skills by 2014 (as NCLB demands), or to be “college ready” by 2020 (as the Obama administration proposes), the Harkin bill will require only that schools show “continuous improvement” for all students, and for students from low-income families, those who don’t speak English, minority students, and students with disabilities (see page 52 of the draft bill).

According to a report in Education Week, “state and local officials likely will be exchanging high-fives, since that would give them much of the flexibility they’re looking for.”

They are in for a shock. “Continuous improvement” is no more reasonable or achievable than “proficiency for all,” or universal college readiness.

Of course, citizens should expect every public school to strive for its peak level of performance, but some schools have much farther to go to reach this level than others. Unlike present policy, a well-designed accountability system could judge how far each school can and should go, and whether it is on the right track to get there for the several populations it may serve. In each case, this is a difficult judgment to make, and a slogan is no substitute. In this regard, a single one-size-fits-all metric such as “continuous improvement” is no better than “proficiency for all.” The Broader, Bolder, Approach to Education campaign has described the outlines of a more reasonable accountability system, and a book, Grading Education, goes into more detail.

NCLB’s attempt to require all students to be proficient at a challenging level led to the absurd result that nearly every school in the nation was on a path to be deemed failing by the 2014 deadline. The demand ignored an obvious reality of human nature – there is a distribution of ability among children regardless of background, and no single standard can be challenging for children at all points in that distribution.

Expecting all children to be college-ready suffers from the same problem, and more. In a nation where 32 percent of all young adults now earn bachelor’s degrees, and where the Bureau of Labor Statistics projects that only 30 percent of job openings by 2018, even in a healthy economy, would require a bachelor’s degree or more, the notion that 100 percent of students would be able to succeed in an academic college by 2020 is even more fanciful.

So why not “continuous improvement” instead? It’s a nice slogan, borrowed from a management fad promoted by W. Edwards Deming and others who thought this was the key to Japanese auto manufacturing success. But while consistent attention to small improvements makes sense as a management tool, no company has ever continuously improved, overall, indefinitely. There are spurts of improvement, and plateaus, and then the most successful companies fade, to be overtaken by others. No management expert would recommend that firms be dismantled if they are consistently profitable, but just not more profitable year after year after year.

But continuous improvement will now, if Senate Democrats have their way, be the trajectory for every school in the country, by law. Read the rest of my commentary here for more on why the expectations of Congress have no basis in reality.

Back when the “Gang of Six” was the fiscal flavor of the week and Sen. Tom Coburn (R-Okla.) was sparring with Grover Norquist over ethanol subsidies, I wrote that Norquist’s Taxpayer Protection Pledge is the height of fiscal irresponsibility. The pledge unconditionally rejects any net reduction in tax credits, deductions, or increase in rates unless matched dollar-for-dollar by some other tax reduction. (The pledge should have lost some of its gravitas when conservatives decided it didn’t apply to the payroll tax cut enacted last December.)

Since then, a rigid refusal to restore any revenues from levels diminished by current tax polices led Republican leadership to repeatedly walk out of debt ceiling negotiations, first with Vice President Biden and then again with President Obama. Instead of a grand bargain containing more desperately needed support for the faltering economy, our political system delivered an eleventh hour debt ceiling deal that prompted a credit rating downgrade from Standard & Poor’s, albeit on specious grounds (they made a $2 trillion baseline error but continued with the downgrade based strictly on political judgments). A stage of Republican presidential candidates unanimously declared that they would oppose a budget deal with 10 dollars in spending cuts for every dollar in new revenue.

Now, an impasse over revenue suggests that the super committee (tasked with negotiating the second phase of the debt ceiling deal) will go down in flames. This would trigger further discretionary spending cuts—the $111 billon cut slated for FY2013 would wallop GDP growth a year from now—and all but rule out more near-term fiscal support (due to limited borrowing headroom). The pledge is also hindering initiatives to put millions of Americans back to work; House Majority Leader Eric Cantor (R-Va.) recently proclaimed the American Jobs Act dead, having objected to its revenue offsets. Advantage Norquist?

Not so fast. Last Tuesday, Rep. Frank Wolf (R-Va.) excoriated Norqusit for guarding spending through the tax code, obstructing tax reform, and thwarting deficit reduction deals. “Have we really reached a point where one person’s demand for ideological purity is paralyzing Congress to the point that even a discussion of tax reform is viewed as breaking a no-tax pledge?” Wolf, who is one of only six House Republicans who have not signed Norquist’s pledge, came to Coburn’s defense a little too late, but this is nonetheless encouraging. Shortly thereafter, Taxpayer Protection Pledge signee Sen. John Thune (R-SD) said that Congress can’t be “bound by” pledges if it wants to enact comprehensive tax reform. Michael Gerson understands that pledge ideology rules out political agreement on long-term deficit reduction, and his attempt to fault the president’s emphasis on tax “fairness” as being equally unproductive is preposterous (he must have repressed all memories of the debt ceiling negotiations, and for good reason).

One by one, conservatives may be coming to the realization that the pledge is incompatible with fiscal responsibility of any form. Perhaps it helped that President Obama threatened to veto any budget deal that cuts Medicare without raising more revenue from upper-income households and businesses. Hopefully a critical mass of conservatives will stray from the herd of deficit peacocks and prioritize reducing the long-term budget deficit rather than blindly obsessing over the level of government spending.