Over the last three years, state and local government employment has dropped by 641,000 as state and local budgets have been squeezed as a result of the recession. With kids heading back to the classroom this fall, it’s worth considering how much of that drop has hit public schools.

Of the decline in state and local government jobs over the last three years, close to half (278,000) was in local government education, which is largely jobs in public K-12 education (the majority of which are teachers but also includes teacher aides, librarians, guidance counselors, administrators, support staff, etc). On the other hand, over the same period, public K-12 enrollment increased by 0.6 percent (using the actual and projected enrollment growth rates found in Table 1 here). Just to keep up with this growth in the student population, employment in local public education should have grown at roughly the same rate, which would have meant adding around 48,000 jobs. Putting these numbers together (i.e., what was lost plus what should have been added to keep up with the expanding student population) means that the total jobs gap in local public education as a result of the Great Recession and its aftermath is around 326,000.

This decline means not only larger class sizes, but also fewer teacher aides, fewer extra-curricular activities and a narrower curriculum for our children. Furthermore, this number almost surely understates the real gap. Between 2008 to 2010, the number of children living in poverty increased by 2.3 million, and is likely even higher today. Increased child poverty increases the need for services provided through schools. Instead, public schools have fewer personnel and fewer resources to educate more students, and more students with greater needs.

The unemployment rate is for the moment holding steady at 9.1 percent, but at the current rate of job creation, the unemployment rate will soon begin to rise again. We are mired in high unemployment with miserably low job growth. This country has 14 million unemployed people, and the job growth rate has unmistakably slowed down since the spring.

This morning’s data release shows that 103,000 jobs were added in September. That number, however, includes around 45,000 Verizon workers coming off the picket lines, so the net new jobs the economy created in September was actually around 58,000. This level of growth is in line with the dismal average of the last four months, which was 64,000, and that was a slowdown from the not-doing-much-more-than-keeping-up-with-population-growth average of 123,000 of the prior 14 months.

This past January, the Department of Labor (DOL) published a final rule establishing a new wage methodology for determining the appropriate wages to be paid to guestworkers in the “H-2B” program—a temporary immigrant guestworker category intended to help employers fill labor shortages. Among other things, U.S. law and regulation require that H-2B workers only be authorized to enter and work in the United States if the H-2B worker’s employment will not be “adversely affecting the wages” of United States workers. The DOL’s new rule will require that H-2B workers receive the average wage paid to all workers in the same occupation and geographical region in order to prevent downward pressure on the wages of U.S. workers. But for now, the rule’s implementation has been delayed—and a lobbying firestorm by businesses and members of Congress, led by Senator Barbara Mikulski from Maryland—has put its survival in doubt.

The chart below shows the difference between the hourly rate that H-2B crab pickers and landscape workers are currently paid in Maryland under the old (and still current) rule, and the statewide average for all workers in the given occupation, which is what workers should be paid in order to prevent wages from being depressed for U.S. workers. H-2B crab pickers and landscapers are underpaid by $4.82 and $3.35 per hour, respectively.

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These data suggest that employers have been using the H-2B program as a way to degrade the wages of U.S. workers. H-2B crab pickers in Maryland (i.e., workers who literally pick the meat out of a crab, like this), who fall under the occupational category of “Meat, Poultry, and Fish Cutters and Trimmers” above, are paid the federal minimum wage ($7.25), when the state-wide average is $12.07 per hour.

Another way to look at this is that a crab picker earning the state average will earn $25,105 over the course of a year, which is above the poverty line for a family of four ($22,113). But current H-2B crab pickers only earn $15,080 a year—which is about $7,000 below the poverty line. For landscapers in Maryland, the results are similar—in both cases the increase in hourly wage will literally lift the H-2B worker out of poverty.

You can read more about the H-2B program and the Labor Department’s wage rule in my new extended commentary, H-2B employers and their congressional allies are fighting hard to keep wages low for immigrant and American workers.

A few days ago, Paul Krugman noted the evidence-free “rebuttal” offered up by the American Enterprise Institute to Larry Mishel’s takedown of the “regulation is what’s holding back recovery” argument. The title of Krugman’s post -“So’s your mother. And Reagan” – captured the useful content of what I generally hear from those engaged in hand-waving about “job-killing regulations.”

On Tuesday, though, I got to hear another argument from Peter Schiff on John Stossel’s show. I was making the case that it’s hard to see how regulation is driving up costs and robbing firms of profitability given that profit margins (unit profits as a share of total costs) were at their highest  levels in either 42 or 45 years (depending on whether you looked at pre- or post-tax rates*). And, as Brookings’ Gary Burtless has pointed out, if you’re profitable now and fearful of future regulations, then you’d be doing everything you can to produce goods and services for sale now rather than later; we should see strong employment growth in the short-term.

Now, what would keep firms that were making record profits on each unit shipped from deciding to ship even more units and hire more workers to do so? A shortfall of demand (i.e., not enough customers) maybe?

Hearing this argument, Schiff made a careful, empirically-based case for why I was wrong started sneering that I had never run a business. It’s true, I haven’t. But I can look at data.

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*The data came from Table 1.1.15 of the National Income and Product Accounts (NIPA) from the Bureau of Economic Analysis – Price, Costs, and Profit Per Unit of Real Gross Value Added of Nonfinancial Domestic Corporate Business.

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On Monday, the Senate agreed to move ahead with debate on the China currency bill, approving a petition to proceed on the measure by a 79-19 margin;  this morning they voted to proceed to a final vote, also by a strong margin. Predictably, the People’s Bank of China responded by claiming that the yuan (or RMB) has appreciated “greatly” and is close to a balanced level. The best indicator that China is manipulating its currency is simply that it must buy hundreds of billions of dollar in U.S. assets each year to keep it from moving ever higher. That’s how we know that they haven’t done enough.

China’s purchases of Treasury bills and other types of foreign exchange reserves have accelerated in the past year, as I showed on Monday. In the past 12 months (ending June 30, 2011), they acquired nearly $730 billion in additional reserves. Between 2005 and 2010 their reserve acquisitions averaged between $400 and $450 billion, which indicates that the yuan is even more undervalued than it was a year ago. This is true despite the yuan’s real, inflation-adjusted appreciation of 7.4 percent in the past year.

William R. Cline and John Williamson of the Peterson Institute have produced some of the best estimates of China’s currency manipulation. In a series of annual reports on fundamental equilibrium exchange rates (FEERs), they have estimated that China’s currency manipulation increased from 24.2 percent in 2010 to 28.5 percent in 2011, despite the fact that China’s real exchange rate appreciated over the past year. Three factors explain why China’s estimated FEERs increased in 2011.

First, the International Monetary Fund has estimated that China’s global current account surplus (the broadest measure of its trade balance) will more than double from $305 billion in 2010 to $852 billion in 2016 (an increase of 179 percent), as shown in the graph below.  There is widespread agreement among the G-20 leaders (including China) that global trade flows must be rebalanced to help end mass unemployment around the world. These IMF predictions show that unless China sharply revalues, world trade flows will become even more distorted than they are today. Among the top five currency manipulators identified by Cline and Williamson (China, Malaysia, Hong Kong, Singapore, and Taiwan), China is responsible for the vast majority (83 percent) of the estimated global surpluses of these currency manipulators in 2016.

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Second, the IMF predicts that China’s current account surplus will rise from 5.2 percent of GDP in 2011 to 7.2 percent in 2016. Cline and Williamson project in their latest research China’s that current account will rise even faster, to 7.8 percent of GDP in 2016. China’s rapidly growing GDP, combined with a rapidly growing trade surplus as a share of its GDP, and its stubborn addiction to currency manipulation will, if unchallenged, destabilize both the U.S. and global recoveries, as suggested by the IMF’s own forecast of global trade imbalances shown above.

The final nail in the case against the People’s Bank is its own massive and growing accumulation of foreign exchange reserves, as noted above. China has invested trillions of dollars to prevent the appreciation of their currency to a fair market value. China’s currency manipulation is a fundamental threat to the U.S. and world manufacturing system. It artificially suppresses the value of the yuan, subsidizing China’s exports to the United States and raising the cost of U.S. exports – both to China and to every country where U.S. exports compete with Chinese products. Enough is enough. It’s time to get tough with China and other currency manipulators.

The Occupy Wall Street (OWS) protests have been spreading. In Chicago, protestors have gathered around the Chicago Federal Reserve Bank. Again, the protestors seem to have chosen an awfully good symbolic venue – over the past two years, the Fed has been under ferocious political attack from conservative politicians who want them to stop trying to reduce unemployment with monetary policy. If the Occupy Chicago protests provide counter-pressure from more progressive perspectives, this would be a great thing.*

We’ve already noted the letter from four GOP leaders to Federal Reserve Chairman Ben Bernanke last month demanding that he declare surrender in trying to help the faltering economy. This is just the latest in what has been a pretty remarkable effort by conservative politicians to stop the Fed from trying to boost the economy and to convince it to fret about the phantom danger of inflation.

It’s pretty telling that the best that prominent Democratic politicians have managed in response is some hand-wringing that such criticisms threaten the sanctity of central bank independence – essentially demanding that the GOP “leave Ben Bernanke alooooone!”

However, as Mike Konczal notes, even in the best of times, central bank independence as practiced by the Fed should hardly be a prime progressive demand. The Fed’s Open Market Committee – the body that sets the monetary policy direction of the economy – contains 12 slots. Seven of them are for Fed Governors (there are currently 2 vacancies on the Board of Governors), who are generally either economists or policymakers with some expertise in issues the Fed confronts. But five are set aside for presidents of the Fed’s regional reserve banks. These presidents are picked by the board of directors for each regional bank – and these boards are comprised of financial-sector (commercial bank) executives. Essentially, the finance sector gets to pick 5 of the 12 voting members of the FOMC. If one thinks that the interests of the financial sector are not necessarily the same as those of, say, unemployed workers (and I think they’re not) – perhaps the financial sector is more scared of inflation and less scared of unemployment – then central bank “independence” should probably be treated as less sacrosanct than it currently is in D.C.

Imagine, for example, that somebody demanded that the AFL-CIO get 5 voting slots on the FOMC. That would, of course, be considered absolutely crazy by those determined to preserve central bank independence as a principle (i.e., the vast majority of professional policymakers and analysts inside the Beltway). Of course, in practice, this would mean an FOMC that tried much, much harder to fight unemployment than the one we currently have, so crazy sounds pretty good to me.

Worse, this ingrained deflationary bias of the Fed is being reinforced in the current crisis by conservatives who want to abandon all the policy measures (fiscal, monetary and exchange-rate) that could actually help reduce joblessness. Some lonely (and admirable) voices calling on the Fed to do more are out there, but they’re few and far between (and sometimes working for the Bank of England, instead of the Fed).

Finally, however, there seems to be a little pushback. Besides Occupy Chicago, Massachusetss Representative Barney Frank wants to take away the voting power of the five rotating regional banks and replace them with political appointees that must be approved by the Senate. Given that the political appointees of the current Fed have consistently shown more concern over unemployment than their regional bank colleagues, this would be a good (if small) first step to privileging democracy over Fed “independence.”

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*It’s true that the president of the Chicago Fed has been admirably aggressive in calling for more Fed action to reduce unemployment, especially relative to his other regional bank presidents. So, maybe protests can follow in Dallas, Minneapolis, and Philadelphia?

Via Roberton Williams over at TaxVox, I see that House Majority Leader Eric Cantor has a surprising objection to President Obama’s American Jobs Act (AJA) and its pay-fors: it will hurt soup kitchens and Americans living in poverty. How? By taxing upper-income individuals, of course. Thank goodness compassionate conservatism isn’t dead.

As I noted earlier, the largest component of the revenue offsets for the AJA would limit the rate at which itemized deductions and specified above-the-line deductions and exclusions reduce tax liability for households with adjusted gross income above $200,000 ($250,000 for joint-filers). These tax expenditures increase in value with one’s marginal tax rate. The president’s proposal would cap the value at 28 percent, slightly reducing the benefit from 33 percent or 35 percent for these upper-income tax-filers. Cantor objects to the proposal on the grounds that it would further “tax charitable donations to soup kitchens, churches, and cancer research centers.”

Williams makes two excellent points: if the tax policy objective is a higher incentive to charitable giving, Cantor should 1) not object to restoring the top marginal tax rate to 39.6 percent, which he does, and 2) not support lowering the top marginal tax rate to 25 percent, which he also does. Indeed, the House Republican 2012 budget would cut both the corporate tax rate and top individual tax rate to 25 percent at a revenue loss of $2.0 trillion(some of which is theoretically offset by eliminating unspecified tax expenditures—perhaps perennial GOP targets such as the Earned Income Tax Credit), on top of continuing the regressive Bush-era tax cuts to the tune of $3.8 trillion.

From Flickr Creative Commons by republicanconference

But the Republican budget reveals much deeper hypocrisies when it comes to the interests of poor and working families than the marginal tax rate. Bob Greenstein of the Center on Budget and Policy Priorities estimated that two-thirds of the spending cuts in their budget come from programs for lower-income Americans. Food stamps are cut and federal spending on Medicaid—health care for the disabled, poor children, and poor seniors—is slashed in half over the next 20 years. Medicaid alone would be cut by $1.4 trillion this decade.

Broadly speaking, Cantor objects to a revenue offset that would only affect 2.2 percent of the population, according to the Tax Policy Center, most of whom earn at least tenfold the poverty threshold for a family of four. More critically for impoverished Americans, the $447 billion in near-term job creation would boost employment by 1.9 million jobs and reduce the unemployment rate by 1.0 percentage point next year, according to Mark Zandi of Moody’s Analytics. In 2010, the federal poverty threshold for a family of four was $22,113; a family with earned income at this level would receive a payroll tax cut of $686 under the American Jobs Act, but not under the House budget. Unemployment insurance kept 3.2 million Americans out of poverty last year; the American Jobs Act would extend emergency unemployment benefits, but the House budget would not. Soup kitchens aside, putting Americans back to work and strengthening, rather than eviscerating, the social safety net is the way to address rising poverty.

Cantor is correct that the tax incentive for charitable giving would decline, although only for 2.2 percent of households. Expressing this concern in the name of the poor is, however, irreconcilable with the budget he steered through the House of Representatives, which would represent a massive redistribution of wealth from low- and middle-income families to the so-called “job creators.”

Just a quick reminder why the actual Wall Street is an attractive place for those wanting to protest the direction of economic policy. When asked why he robbed banks, Willie Sutton famously allegedly [ed. note – Snopes tells me that Sutton denies having said this and that it was an “enterprising reporter” who attributed this quote to him. Shoot. Well, it’s a good line so I’m going to stick with it, caveat emptor and all that) replied, “That’s where the money is.”

The figure below shows the share of all corporate-sector (about 60 percent of the overall economy) salaries and profits (and profits broken out by themselves) that are claimed by the finance sector. After a very brief dip in 2008, the recovery has been fast and has continued (accelerated?) the trend of finance claiming an ever-larger share of the economy. It also shows the share of the overall economy (GDP) earned by finance – and this too has reached its highest level on record.

So why go to Wall Street to demand shared prosperity?

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In a report for the Ohio Business Roundtable, AEI’s Andrew Biggs and Jason Richwine estimate the cost to private-sector employers of Social Security and traditional pensions at just 2 percent of wages. This will come as a surprise to employers used to paying roughly three times as much for this coverage, as well as anyone who’s followed Biggs’ work over the years and knows he’s no fan of either Social Security or defined benefit pensions.

But this time, Biggs isn’t promoting Social Security privatization or 401(k)s. Instead, he and Richwine are trying to make the case that government workers in Ohio are paid a whopping 43 percent more than workers in the private sector, attempting to counter an EPI study that found government workers were, if anything, slightly underpaid. To do this, Biggs and Richwine systematically low-ball the pay of private-sector workers and inflate that of teachers and other state and local government workers in Ohio, who aren’t covered by Social Security.

Studies published by the Center for Economic and Policy Research and the Center for Retirement Research at Boston College support Rutgers University Professor Jeffrey Keefe’s research for EPI showing that public sector workers have lower salaries than comparable private sector workers and receive the same, or slightly lower, compensation once benefits and hours are factored in.

So how do Biggs and Richwine arrive at a 43 percent pay premium for government workers in Ohio? As Keefe and Amy Hanauer of Policy Matters Ohio explain, Biggs and Richwine selectively alternate between the actual cost to employers of providing fringe benefits and their supposed value to employees. So, for example, they magnify the cost of public-sector retiree health benefits by using the cost of purchasing insurance on the individual market, but they don’t do the same for life insurance provided by Social Security. According to Keefe, they also double count the cost of retiree health insurance by ignoring the fact that it’s paid for through pension contributions in the public sector, while falsely assuming that no private-sector workers receive these benefits.

Biggs and Richwine also claim that job security should be valued at 9 percent of earnings for government workers–12 percent once their supposedly higher pay is factored in–even though the evidence that state and local government workers actually have more job security is weak. Last but not least, Biggs and Richwine more than triple the cost of public pensions by projecting a very low rate of return on public pension fund assets, a favorite theme of  Biggs.

The Occupy Wall Street (OWS) protests have stretched into their third week and seem to be growing in strength and numbers. The protestors have been generally mocked by press coverage for having an inchoate message. Though this general criticism is going to be generally true of any large gathering, it’s worth noting that failure of message discipline has hardly been the death-blow to other protest movements that tend to get treated much more respectfully by the press. Further, a simple root of their protest is that U.S. economic policy is unfairly tilted towards the already affluent – and I surely would not disagree with that.

If it was decided, however, to turn the attention garnered by the OWS protests into a single policy “ask” (not saying this would be a good decision – I know nothing about effective organizing!), I’d probably nominate the financial speculation tax (FST).

Even a very small FST (say 0.25 percent on the sale or purchase of a stock, with rates on other financial assets set so as to minimize tax-arbitrage opportunities) has the potential to raise significant amounts of revenue very progressively and to reduce short-term, destabilizing financial speculation while imposing only trivial costs on longer-term, productive investments. Investing in America’s Economy, EPI’s long-run budget blueprint, proposed an FST that the Tax Policy Center estimated would raise $821 billion over the next decade—revenue that would finance more job creation, ease budgetary pressures elsewhere, and help to eventually stabilize public debt as a share of the total economy.

From Flickr Creative Commons by Mathew Knott

To put the cost of the tax in perspective, it is important to realize that an FST of this size would raise today’s transactions costs for financial speculation by less than they’ve fallen (due to market innovations and technology) since the 1980s – and nobody in that decade seemed to think that high financial transactions were strangling market participants’ ability to engage in trading.

In short, such a tax would raise money from a sector (finance) that has profited enormously in recent decades (aided by government guarantees) while too much of the rest of the economy has lagged. It would also provide a progressive and extraordinarily efficient way to raise tax revenue – providing a much less painful way to resolve much of the debate over long-run budget sustainability. Consequently, the policy is gaining momentum on the American left and abroad. In budget proposals for the Peter G. Peterson Foundation’s Solutions Initiative, the Center for American Progress and the Roosevelt Campus Network also proposed FSTs, as did the Congressional Progressive Caucus’s People’s Budget. The European Union also appears to be headed towards a uniform FST.

Given that many of today’s most enthusiastic deficit-hawks like to talk about “going after sacred cows” and “shared sacrifice,” it is odd indeed that an FST doesn’t loom larger in the U.S. fiscal policy debate, particularly among the deficit-obsessed political centrists. Maybe the OWS crowd really does have a point about how economic policy is made.