The Senate appears poised to pass two components of President Obama’s American Jobs Act, having found the first area of bipartisan agreement. These two components, however, fall woefully short of what is needed to address the jobs crisis.

The first provision would provide tax credits for hiring veterans, with bigger credits for hiring veterans who have been out of work for more than six months and those with service-related disabilities. It would also expand education and training opportunities for up to 100,000 older veterans. Helping veterans find employment or vocational training is a laudable goal. The problem is that this hiring credit is a rounding error in terms of national economic activity and will not visibly budge the dial on the national unemployment rate.

As Larry Mishel recently pointed out, scale is critical to evaluating any jobs plan. The president proposed a $447 billion jobs bill that would boost employment by 1.9 million jobs and reduce the unemployment rate a percentage point, according to Mark Zandi. The $1.6 billion cost of the Senate’s bill for veterans, on the other hand, represents only one-hundredth of one percent of GDP.

Worse, a second provision would repeal a requirement that, starting in 2013, will withhold 3 percent of payments to government contractors, in the form of a credit against contractors’ tax liability they already owe. Essentially, the cost of helping veterans is simultaneously helping government contractors avoid taxes. Of course, the increased tax avoidance would cost money – but the Senate provided a “pay-for” in the form of decreasing eligibility for Medicaid and subsidies for those seeking to buy health insurance under the Affordable Care Act (i.e., the health reform bill passed at the beginning of 2010).

So, to recap, the big “jobs-plan” coming out of the Senate today would help veterans (good), but would not move the dial on overall joblessness (bad), would facilitate tax avoidance by government contractors (bad), and would pay for this loss in tax revenue by eroding some of the benefits of health reform (bad). Will this pass? Probably—so much for the alleged benefits of bipartisanship. The likely success of this legislation owes first and foremost to the fact that it would not be paid for with a millionaires’ surtax. Over the last month, Senate Republicans have filibustered all of the following measures, which would have been paid for with varying surtaxes on incomes of more than $1 million:

1. $447 billion for the entire American Jobs Act (10/11/2011)
2. $35 billion to put teachers and first responders back to work (10/20/2011)
3. $56 billion to build roads, repair bridges, and create an infrastructure bank (11/3/2011)

Helping some of the 240,000 unemployed veterans of the wars in Iraq and Afghanistan is merited, but so is helping the broader pool of 25 million un- and underemployed Americans. As we have pointed out over and over again, boosting GDP growth in a $15.2 trillion economy and seriously tackling persistent underemployment requires hundreds of billions of dollars in additional fiscal support. Republicans in the 112^th Congress, however, have filibustered (or blocked through other procedural means) all job creation proposals that would provide any meaningful help ameliorating the jobs crisis.

The Washington Post‘s Ezra Klein with a useful observation…

Just a reminder: The market will literally pay us to borrow money from them for 5, 7 or 10 years. Pretty good deal for a country that has, say, trillions of dollars in infrastructure repairs it needs to make, or millions of workers who are unnecessarily unemployed. More here.

Here are the real interest rates on Treasury’s TIPS (click to enlarge):

On Friday, the Bureau of Labor Statistics released its monthly report with the most recent data on jobs and employment in the United States, a bleak reminder that things aren’t getting much better for the unemployed in this country. Sadly, as the International Labor Organization’s annual World of Work report reveals, the world economy is no better, and the risk of social unrest has increased dramatically in rich countries as a result (see figure below). The ILO’s calculations are based on “levels of discontent over the lack of jobs and anger over perceptions that the burden of the crisis is not being shared fairly.”

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Just in the past year, we’ve seen violent clashes erupt between protestors and police in London, New York, Rome, and Oakland as a direct result of citizens protesting budget austerity, joblessness and a sputtering economic recovery. And in encampments literally all over the world people are peacefully protesting income inequality and widespread joblessness as part of the Occupy Wall Street movement. Thanks to a 17 percent youth unemployment rate in the U.S., young people in New York, Tulsa, Sacramento, Philadelphia, Minneapolis and elsewhere have plenty of time on their hands to protest and make their voices heard. Even recent college graduates have an unemployment rate that’s almost double what it was before the recession.

But just because they’re peaceful does not mean the OWS protestors are not seething with anger about the way that high level executives in the financial services industry – who are some of the wealthiest people in the world (better known as “part of the 1 percent”), have escaped prosecution or serving any jail time after bringing our economy to the brink of collapse, while the industry as a whole somehow managed to escape serious reform by Congress.

One of the other principal gripes of the peaceful OWS protestors is that Congress has failed to do almost anything to invest in the economy or create jobs since the stimulus package was passed in 2009, despite persistent joblessness and underemployment. Foreign governments in other developed countries have failed at this as well – and the discontent is palpable. Just look at the scale of protests in Spain, spurred in part by the country’s eye-popping 46 percent youth unemployment rate.

From most reports, it appears that the OWS protestors are committed to remaining peaceful – for now. Let’s hope it stays that way, despite this new evidence that things may deteriorate if economic conditions fail to improve.

My colleagues at EPI recently outlined how the grievances of the Occupy Wall Streeters are fact-based and supported by ample evidence. The ILO’s 2011 World of Work report offers a new estimate that should motivate 99 percent of the global population to join together into one massive movement that challenges the financial and political elite to enact policies that will put people back to work around the world. The table below is the ILO’s estimate that by 2013, there will be a global shortage of 40 million jobs – that’s a lot of desperate, hungry people with way too much time on their hands.

In a blog post yesterday, Paul Krugman again noted that the growth in income inequality is not all about education.

He pointed to two different charts to illustrate: one showing the growth of the top 1 percent relative to other income groups and a second with wage growth by education levels. Since the two charts had different scales, it was hard to see just how out of whack the education-explains-inequality story really is.

Below is a chart that combines the two series in one chart, showing that the top 1 percent has outpaced, by a very wide margin, not just those with less formal education, but college grads as well. And this gap between the growth of the top 1 percent and the rest is much larger than the growth gap between education levels.

This is not to say that education is not important. The chart also shows that those with a college (or post-secondary) degree have outpaced others. But it’s also clear that this trend only explains a small part of the broader inequality story.

(Note: The top 1 percent line shows the growth in average after-tax incomes for this group, via the CBO, data from Figure 2. The education lines show the growth in wages for all workers, via EPI’s State of Working America data on wage and compensation trends by education. Both are inflation adjusted.)

As Americans wrap their heads around the meaning of the growing “Occupy” movements in cities throughout the nation, trying to determine whether or not the 99 percent vs 1 percent breakdown of Americans constitutes “class warfare,” there are a great many irrefutable facts that need to inform such discussions. Many have been clearly articulated recently, (including this great collection by my EPI colleagues). In this blog post, I begin a renewed examination of how the decline of manufacturing employment has contributed to the erosion of the American middle class, and in the process, left many state economies in shambles.

Employment in the manufacturing sector has long provided a foundation for the American middle class. In 1999, former EPI economists noted key features of manufacturing employment:

Manufacturing provides middle-class jobs and a channel of upward mobility for non-college-educated workers (especially men). Compensation is higher and fringe benefits (such as health insurance and pension coverage) are more common than in other industries that, like manufacturing, employ non-college graduates. Blue-collar workers in manufacturing are also more likely to be union members, and thus they have more bargaining power than do comparable workers in services.

In 1999, there were troubling signs that all was not well in the American manufacturing sector, with the “Asian crisis” identified as a growing threat; a threat which my colleague Rob Scott has repeatedly shown to have continued to erode American employment (see, for example, Growing U.S. trade deficit with China cost 2.8 million jobs between 2001 and 2010). The alarming decline of the American manufacturing sector has of course only gotten worse over the intervening decade, leaving in its wake many state economies that have yet to recover. Since Jan. 2000, the American manufacturing sector has lost 5.5 million jobs, nearly a third (32.1 percent) of the Jan. 2000 total. Six states – Michigan, North Carolina, Rhode Island, Mississippi, New Jersey, and New York – have lost over 40 percent of their manufacturing workforce, while another five states have lost more than 37 percent of their manufacturing employment (collectively, the dark red states in the figure below). Indeed, only Alaska has seen growth in its manufacturing sector since 2000, though numbering less than 2,000 workers.

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In future posts, I’ll examine the impact the erosion of manufacturing employment has had on wage trends in those states that have been hardest hit by the decimation of manufacturing employment. Lest readers despair, here are some concrete suggestions for what can be done to breathe new life into American manufacturing:

• The Alliance for American Manufacturing has a comprehensive plan for job creation based on the following five strategies:  expanding American production, hiring, and capital expenditures; investing in America’s infrastructure; enhancing our workforce; making trade work for America; and rebuilding America’s innovation base.
• AAM’s Executive Director Scott Paul appeared Tuesday night on The Ed Show, noting how different the American economy would be if 5.5 million manufacturing jobs had not been lost over the past decade.

Washington Post reporter Lori Montgomery’s recent  article on Social Security’s finances has been the subject of blistering critiques by Dean Baker, Paul Krugman, and others who rightly point out that her opinions belong on the editorial page, not the front page. But Social Security’s finances have also tripped up more even-handed observers. To help the genuinely perplexed, here’s a primer on Social Security and the federal deficit (for a more in-depth discussion, go here).  A follow-up blog post will look at the impact of the recession and explain the meaning of Social Security’s primary (or “cash-flow”) deficit.

Does running a deficit mean you’re piling up debt?

Not necessarily. You can be rich as Croesus and still be running a deficit. All it means is that you’re spending more than you’re taking in over a specified period, whether by borrowing or drawing down savings.

Is Social Security running a deficit?

No. Social Security is running a surplus. Its combined revenue sources – payroll taxes, interest from the trust fund, and earmarked income taxes on some Social Security benefits – are still larger than benefit payments. The trust fund, which currently has $2.6 trillion dollars, is projected to grow to around $3.7 trillion in 2022. But once Social Security starts drawing down the principle in the trust fund to help pay for the Baby Boomer retirement, Social Security will be running a deficit. Also, as will be explained at greater length in our second blog post, Social Security is currently running a primary deficit, which means it would be running a deficit absent the interest on the trust fund.

Is drawing down the trust fund a bad thing?

No, that’s what it’s there for. Social Security is structured as a pay-as-you-go program, with current benefits mostly paid out of the revenue from current payroll taxes. With steady population growth, the trust fund would only need enough to handle normal cash flow, like a checking account.  However, for nearly a generation significant savings were built up in the trust fund and are now there to handle the demographic “bulge” of the Baby Boomers’ retirement. The fact that Social Security will tap the trust fund to help pay for the Boomers only comes as a surprise to people like Alan Simpson.

Can Social Security contribute to the federal deficit?

It can, if you’re looking at a unified federal budget. By law, Social Security isn’t considered part of the federal budget since it has dedicated funding. But it can be useful to consider the federal government as a whole, including off-budget programs like Social Security. If you do, Social Security’s surplus or deficit contributes to the unified federal budget surplus or deficit.

Can Social Security contribute to the federal debt?

No. Social Security is prevented by law from borrowing—it can only draw down savings in the trust fund. Since Social Security must operate in long-term balance, it can’t contribute to the federal debt over time. This is true whether you consider Social Security as part of a unified federal budget or as a stand-alone program.Read more

I apologize for continuing to harp on this Rick Perry study, but I just can’t help myself. As I mentioned in an earlier post, the first thing that really jumps out at you is the breathtaking intellectual dishonesty. But beyond its complete inconsistency with Perry’s ideology and professed objectives, the analysis simply doesn’t make sense. Here are a few examples:

1) GDP growth is impossibly high: Remember that Heritage Foundation analysis of the House Republican 2012 Budget, the one that predicted economic growth and unemployment at levels most economists considered impossible? Well, John Dunham and Associates’ (JDA) projections underpinning the analysis of Perry’s tax plan are even more impossibly higher! The Heritage analysis found that the average annual real growth rate from 2014-2020 would be about 3.1 percent. JDA is predicting that under Perry’s plan, it would be 5.3 percent. Reality’s overrated anyway, right?

2) Double counting: The analysis claims that “overall income is based on growth in nominal GDP and population (pg. 4).” See the problem here? Yeah, that’s right, nominal GDP already takes into account population growth. We checked their numbers, and it does appear they grew income by both GDP and population, so it doesn’t seem to be just a typo.

3) Other weird stuff: Check out the qualified dividends forecast from Table 2 of the analysis. From 2016-2019 dividends grow at an average 12.6 percent, including 13.2 percent in 2017, 14.0 percent in 2018, and 8.2 percent in 2019. And then 2020? Whoops. According to this forecast, qualified dividends in 2020 will be exactly the same as in 2019, to the dollar. Same thing with 2011 and 2012. The chance that that’s not a mistake is about zero.

4) Optional or mandatory?: It is unclear whether JDA modeled an optional flat tax or a mandatory flat tax as a replacement for the current income tax. The campaign maintains that JDA did model optionality. But their stated methodology does not mention how they modeled which taxpayers would choose which system, and their description of the proposal—”a 20 percent flat rate for both personal income taxes and corporate income taxes”—also makes no mention of having a choice between the current system and the new system.

We contacted the Perry campaign in regards to these numerous errors and omissions, but have yet to hear back. These aren’t minor problems – the entire analysis is suspect and the Perry campaign should retract these numbers.

At EPI’s 25^th anniversary celebration last night, we presented an award to Paul Krugman. (You know, because he’s short on credentials and really could use some professional validation.)  Harry Hanbury produced a very candid video about him for us, and it’s well worth seeing – it’s not just a hymn of praise, it actually has a great narrative arc.

MORE: Multimedia on EPI at 25

I think the only thing I’d add that the video didn’t emphasize (because it was made for people, not economists) is just how inspiring Krugman’s work is for economists who are actually trying to make sense of the real world. Nobody else so consistently reaches back for the tools that we’re all taught in grad schools (many of which he built, it bears saying) – tools like graphs and equations and models that often seem dry and abstract – and holds them up against developments in the real world to see what they actually can and can’t explain. He runs with the things that are useful and (often pretty brutally) discards the things that aren’t. For those of us who got into the economics business to understand the world around us, his work is an inspiration.

Krugman’s acceptance speech

[pro-player width=’540′ height=’304′ type=’video’ image=’http://www.epi.org/files/2011/Krugman_Award.png’]http://www.youtube.com/watch?v=-pKRBLdG1eA[/pro-player]

A clear trend is developing among the economic plans of the GOP presidential hopefuls: shift the burden of taxation from upper-income to lower-income households. Yesterday, the Tax Policy Center released an analysis concluding that Texas Gov. Rick Perry’s plan would cut taxes on high-income households, raise taxes on low- and middle-income households, and produce bigger deficits. The gist of Perry’s plan is to add an optional federal income tax to the current code: a flat 20 percent tax on (almost all) income less personal exemptions, charitable giving, home mortgage interest, state and local taxes, and all capital gains and dividends income (aptly dubbed an “Alternative Maximum Tax” by Howard Gleckman).

Those earning more than $1 million would see their average tax bill fall by more than half, a tax break of $496,000 in 2015 alone, relative to current policy. The highest income 0.1 percent of households (with income above $2.8 million) would see a tax break of over $1.5 million—even more egregious than the mammoth tax cut they would receive under Herman Cain’s “999” plan.

Meanwhile, Perry’s plan appears to let the Bush-era tax cuts expire in 2013, meaning that lower-income households would lose their expanded earned income tax credit, child tax credit, and the 10 percent bracket. (The John Dunham and Associates analysis for the Perry campaign uses a current law baseline and TPC also concluded that the Bush-era tax cuts would expire on schedule.) The Bush-era tax cuts were regressive and disproportionately benefited upper-income households, but a fraction of these tax cuts have gone to lower- and middle-class households; Perry would effectively do away with these tax cuts while giving higher-income households an even bigger tax cut. This would mean an average tax increase of over $400 for households earning between $20,000 and $40,000. Although this may appear at odds with Perry’s anti-tax ideology, higher taxes for the poor and middle class is in fact entirely consistent with his misleading rhetoric lambasting the “injustice” that nearly half of households don’t pay federal income taxes.

The chart below depicts TPC’s analysis of effective tax rates by cash income level under Perry’s plan versus current policy. On average, households with income under $50,000 see a tax hike. Above this level, tax cuts balloon as income rises. Millionaires would be left paying a lower effective tax rate than a middle class family earning between $50,000 and $75,000. This completely violates the idea of a progressive tax code and the Buffett Rule.

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The natural result of modestly raising taxes on working families while slashing taxes for upper-income households is hemorrhaging revenue: this is not about “shared sacrifice” or the budget deficit. As my colleague Ethan Pollack points out, the Perry campaign relies on highly dishonest dynamic scoring to claim their tax code produces more revenue. Official budget scorekeepers incorporate behavioral responses but not dynamic growth effects into tax policy analysis, because research shows growth effects are generally small and can break either way depending on how tax cuts are financed (see this CBPP overview of dynamic scoring). TPC’s static model shows Perry’s plan losing $995 billion relative to current law, a decrease of 27 percent, in calendar year 2015 alone ($570 billion relative to the inadequate levels projected under current policy).

Working households would get hammered again when that additional revenue loss is financed with draconian spending cuts, as required by the balanced budget amendment and spending cap component of Perry’s economic plan. This is merely a plan to dismantle government and refund all the savings, plus some of working families’ disposable income, to upper-income households.

I’ve been reading through Rick Perry’s official analysis of his tax plan (scored by John Dunham and Associates), and hoo boy, it’s a doozy. Difficult to know where to begin.

The intellectual dishonesty is breath-taking. The basic conservative argument that tax cuts increase economic growth goes like this: tax cuts for the rich results in more capital formation, which fuels greater productivity and higher economic growth. In other words, supply-side growth with demand catching up. It’s a pretty ridiculous model in the face of huge demand shortages, but hey, at least it’s a model.

But as Matt Rognlie points out, the model that Rick Perry used is very different, and in fact has a lot more in common with traditional Keynesian demand-side economic models than conservative supply-side models. In fact, this economic model (called IMPLAN) is usually used to justify government public works projects, such as sports stadiums, because this model shows that the economy can be significantly improved through government spending.

Wait, what?  Rick Perry’s using an economic model that shows that government spending helps the economy? That’s right, partner. In fact, the IMPLAN model (which we’re decently familiar with at EPI) will actually show that spending cuts reduce demand more than tax cuts boost it (because a portion of the tax cuts are saved), so the net effect is likely negative. And to be clear, JDA did assume that the plan would cut spending by the same amount as the revenue loss (page 7, footnote 7).

So how did the analysis show a positive economic impact? Simple: they assumed the spending cuts, but didn’t model them, despite the fact that it’s logically inconsistent to claim that tax cuts have an effect on demand but spending cuts don’t. The only reason they got a positive economic impact was because they did not model the entire plan. Had they, it’s pretty clear that the analysis would have shown that Perry’s overall budget plan—tax cuts paired with offsetting spending cuts—would, on net, hurt jobs and economic growth.