Today marks the one-year anniversary of several elements of the Patient Protection and Affordable Care Act, notably the provision allowing young adults up to age 26 to stay on or join their parents’ employer-sponsored health insurance policy.

Several folks blogged about this last week, notably Health and Human Services Secretary Kathleen Sebelius, Sara Collins, Tracy Garber, and Karen Davis of the Commonwealth Fund, and writer Jonathan Cohn. They all cited the newly released Census data on health insurance, which detailed how  the uninsured rate for young adults, 18-24, fell between 2009 and 2010 and, in fact, this was the only age group with a statistically significant decline in their uninsurance rate. They argued that the health insurance provision allowing young adults to stay on or join their parents’ employer-sponsored health insurance policy is to credit for this up-tick in coverage.

This week, Kevin Sack of the New York Times, wrote a piece reiterating their points, with more recent data through March 2011 from the National Health Interview Survey. While there’s much hand-waving about how we can credit health reform for the increase in health insurance coverage among young adults, it’s relatively easy to compare health insurance numbers with labor market statistics to find compelling evidence of initial signs of health reform success.

In this figure, I compare changes in the employment rates and the rate of employer-sponsored health insurance for various age groups between 2008 and 2009. As you can see, employment rates fell for each group as did employer-sponsored health insurance.  This is not surprising given the fact that most people find health insurance on their own job.

Click figures to enlarge

Next, I compare these same changes in employment rates and health insurance rates for various age groups between 2009 and 2010. As you can see, the job-market didn’t do young adults any favors. In fact, their employment rate actually fell further than any other age group. Given the close relationship between labor market outcomes and employer-sponsored insurance, we would expect declines in coverage for all groups.  What we see instead is that employer-sponsored health insurance actually rose among young adults, while it fell for all other groups.

So, how many young adults took advantage of this new provision? A back of the envelope estimate of what young adult coverage rates would have been if the 2008-09 relationship between employment and insurance had held for 2009-10 would be a 1.1 percentage point drop in insurance rates for young adults in 2010. Instead, we see here that insurance rates actually rose by 0.6 percentage points instead of falling by 1.1 percentage points — basically, this means that up to 490,000 young adults may have obtained coverage in 2010 because of the health reform provision.

Given the fact that the labor market continued to decline for young adults, my guess is that a closer look at the Census micro-data would confirm the fact that a greater number of young adults are gaining dependent coverage through their parents’ policies.  Even without that added analysis, these figures alone are compelling evidence in support of the argument that health reform is beginning to work.

UPDATE 9/26: Looks like the TPC has “retracted” the estimates below citing an error “which involved rollover distributions from 401(k)s and similar retirement plans, caused us to significantly overstate the income of some high-income taxpayers and thus understate the tax rates they paid.” I don’t know how much of a difference this will make, but I suspect that the overall distribution will only be moderately effected, and only at the very top. I’ll post the new results when the TPC makes their correction.

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The table below, adapted from a Tax Policy Center table here, shows the effective federal tax rate people pay in different income categories. (The “effective” rate is simply the total taxes paid divided by income, and will be lower than the statutory marginal rate because there are a variety of deductions, credits, and tax preferences in the code.)

See below as I’ve added some color to the table to help show how rates vary with income levels. Darker reds represent lower effective rates, and darker greens represent higher rates.

Paul Krugman (and others) have used this data to demonstrate that even though, on average, millionaires pay a higher effective rate than the average of those in the middle, there are still many millionaires that pay less than most in the middle class. For example, at least 25 percent of millionaires pay a lower effective rate (12.6 percent or below) than most people making between $40,000 and $50,000 (13.1 percent or higher).

When interpreting the Buffet principle, we need to decide what rate to use to set as a minimum rate for millionaires. For example, do we want millionaires to pay on average more than the middle on average? If so, we’re already there.

Click figure to enlarge

Or do we want to ensure that all millionaires pay more than the middle-class pays on average? If so, then we need to change the tax code so that millionaires pay something like a minimum of 13 percent, if we set the “middle-class” at the $30,000-$75,000 range. This would mean an increase for about a quarter of millionaires.

Or do we want to ensure that all millionaires pay at least as much as just about anyone in the middle class? In this case, the target would be closer to  a 25 percent effective tax rate, increasing taxes on about half of millionaires.

The spirit of the Buffet rule is clearly not the first category – the outrage stems from the fact that some significant fraction of millionaires do indeed pay less than a large share of the middle. This points to policy changes that would indeed increase revenue from many of those at the top (at least a quarter, and perhaps as much as half or more) that have found ways to lower their tax share to levels that are below many in the middle class.

This morning the U.S. Census Bureau released state and local data on poverty levels, income, and health insurance coverage from the 2010 American Community Survey (ACS). Echoing the national trends seen in the Census Bureau’s recent release from the Current Population Survey, many states and communities are still feeling the lingering effects of the Great Recession.

Median annual household income fell in 35 of the 50 states and the District of Columbia between 2009 and 2010, with the remaining 15 states showing no change in median household income whatsoever. According to the ACS, the nationwide median income fell by 2.2 percent, but the median income dropped by more than 5 percent in seven states: Alaska (5.2 percent), Arizona (5.8 percent), Connecticut (6.1 percent), Idaho (5 percent), Nevada (6.1 percent), Oregon (5.5 percent), and Vermont (6.1 percent).

Only 20 states now have a median annual household income above the national figure of $50,046. Maryland and New Jersey have the highest median household incomes, both above $67,000. Mississippi, West Virginia, and Arkansas have the lowest median incomes, all of which are below $40,000.

Additionally, the distribution of income became more unequal in nine states over the past year. While income inequality did decrease for three states—North Dakota, West Virginia, and Texas—this change provides little consolation. North Dakota and West Virginia saw no change in median income—West Virginia’s median income remains the second-lowest in the country—and Texas’ median income decreased by one percent. In other words, income inequality went down in these three states either because gains at the bottom of the income distribution equaled the losses at the top, or in the case of Texas, the state on the whole simply became poorer.

The survey’s poverty and child poverty numbers are also frighteningly high. The national poverty rate is at 15.1 percent, but it runs as high as 20.4 percent and 22.4 percent in New Mexico and Mississippi, respectively. The percentage of children living in poverty is at or above 20 percent in 24 states and the District of Columbia.

The data also show that some elements of the safety net have played an important role at helping families bearing the brunt of the recession. Reliance on cash assistance income has increased over the last year. In seven states, at least one in every 25 households relies on cash assistance. In both Maine and Alaska, more than 5 percent of families receive cash assistance. At the same time, in 35 states, more than 10 percent of households receive food stamps. Nationwide nearly 12 percent of households are food stamp recipients.

Finally, the data also shows that in 20 states, more than 15 percent of people do not have health insurance coverage. The highest proportion of uninsured people is in Texas, where nearly one in four residents (23.7 percent) lacks health insurance, including 14.5 percent of children.

The Great Recession may technically be over, but today’s release is a clear reminder that America’s communities are still struggling. See the full ACS release here.

Unemployment insurance (UI) benefits in this economic downturn have helped cushion the blow of job loss for millions of families. A case in point:  the Census Bureau estimates that 3.2 million people, including nearly a million children, were kept out of poverty by unemployment insurance in 2010 (see slide 25 here). But could the extensions of UI benefits over the last three years have at the same time made the labor market substantially weaker by providing a disincentive for unemployed workers to return to work quickly, as some economists (perhaps most famously here) have claimed?

The answer is a resounding no. In the most careful study to date on the effects of UI extensions on job search in the Great Recession, Jesse Rothstein finds that the unemployment rate in Dec. 2010 would have been about 0.3 percentage points lower if UI benefits hadn’t been extended.  The unemployment rate that month was 9.4 percent, up from 5 percent in Dec. 2007, an increase of 4.4 percentage points. Thus, according to Rothstein’s findings, a very small fraction – 0.3 out of 4.4 — of the increase in the unemployment rate during the Great Recession and its aftermath can be attributed to the UI extensions. And a few additional points make the case even clearer:

• Rothstein shows that at least half of the extension-induced increase in the unemployment rate comes from the fact that workers who receive UI are less likely to give up looking for work. Keeping people in the labor force actively seeking work is arguably a good outcome of UI benefits — and could actually increase the share of the long-term unemployed that later finds a job — but it raises the measured unemployment rate.  His estimates imply that less than 0.2 percentage points of the 4.4 percentage point increase in the unemployment rate over the Great Recession was due to an extension-induced reduction in the rate at which workers get a new job, which is the disincentive effect policy makers are actually concerned about. Moreover, even that may be a good thing — a small UI-induced increase in the time it takes for an unemployed worker to get a new job is an asset of the UI program to the extent that it affords unemployed workers the needed space to find a new job that matches their skills and experience or keeps individuals and families from making inefficient choices just to put food on the table and pay bills.
• Furthermore, while Rothstein documents a small UI-induced reduction in the rate at which extension-recipients find a new job, that may not translate into a higher unemployment rate, due to what he calls “congestion in the supply side of the labor market.” He is unable to account for it in his paper, but the intuition is straightforward.  Job opportunities plummeted in the Great Recession. From the spring of 2009 through the end of 2010, there were at least five unemployed workers per job opening (see Chart 1 here). In fact, there were (and are) fewer job openings than workers receiving extended UI benefits. There are simply not enough jobs to go around, extensions or no. Extensions have likely affected the mix of the unemployed, with a slight shift of jobs from UI-recipients to other job-seekers, as recipients have more room than non-recipients to take time to find a job that matches their and their family’s needs. But given the lack of job openings, it is a significant leap from a small reduction in the rate of job finding for recipients to an increase in the unemployment rate.
• Finally, Rothstein’s paper looks only at the microeconomic effect of UI extensions on job search and reemployment for recipients. It doesn’t say anything about the macroeconomic effect. Spending on UI extensions is an extremely effective mechanism for injecting money into the economy since the long-term unemployed are, almost by definition, strapped for income and very likely to immediately spend their UI benefits. This spending creates demand for goods and services and generates jobs. In 2010, spending on UI benefits for the long-term unemployed was supporting around 620,000 jobs (see Table 1 here). All else equal, these 620,000 jobs lowered the unemployment rate by around 0.4 percentage points, (and all of that reflects new jobs, not workers dropping out of the labor force).  Putting the micro- and macro-estimates together, there is no doubt that the extensions of unemployment insurance benefits in recent years have not increased the unemployment rate. There is also no doubt that these benefits have provided a lifeline to laid-off workers and their families during a time when job-finding prospects are brutally weak.

Last week, we highlighted that the vast majority of gains in wealth since 1983 accrued to the top 5 percent of households and actually declined for the bottom 60 percent. Perhaps the statistic that best illustrates the disparity is median wealth, which is the wealth of the household that has more wealth than half of households and less than the other half. If gains had been equal from 1983-2009, the typical household’s wealth would have risen to $100,900, up $29,000 from $71,900 in 1983. Instead, median wealth declined 13.5 percent to $62,200.

It is also sobering to examine the racial difference in wealth trends. Wealth for the median black household has nearly disappeared, falling from $6,300 in 1983 to $2,200 in 2009 – a decrease of more than 65 percent. This means half of black households have less than $2,200 in wealth. Among white households, median wealth has fallen substantially since 2007, but at $97,900, remains higher than the 1983 level of $94,100. White median wealth is now 44.5 times higher than black median wealth.

Racial disparities in income and unemployment have been exacerbated by the Great Recession, and the persistent high unemployment ahead of us will do more damage unless we create more jobs now.

As John Irons has already noted, the letter from four leading GOP legislators to the Federal Reserve isn’t just wrong – it’s oh-so-wrong (a jargon-y new economics term).

This post just highlights one of many wrongs – it’s hand-wringing over Fed actions that might “erode the already weakened U.S. dollar.” Weakening the dollar is just what the U.S. economy needs to do to support a real economic recovery. Since the phrase “weak dollar” is a PR disaster, let’s just call it a “competitive dollar,” or even a “lean and mean dollar;” but, whatever you call it, it’s necessary if we want net exports to be a contributor to overall growth rather than a drag.

The figure below shows the contribution of net exports to GDP growth since 2000 – an overvalued dollar has led trade flows to be a consistent drag on growth for pretty much the entire period except for the Great Recession – when spending on everything (including imports) plummeted and led trade to be a stabilizing force.

Click figure to enlarge

So, to recap – the GOP Congress is against fiscal support to the economy, is against monetary support, and thinks a lean and mean dollar is a bad thing. That’s three-for-three in arguing against the only policies we have that can create jobs and lower unemployment in the near-term. It’s going to be a very long election season indeed for Americans looking for work.

Republican leaders in Congress are trying to push the Federal Reserve towards inaction (and simultaneously demonstrating why the Fed was designed to be somewhat independent from Congress) via a stern letter to Chairman Ben Bernanke and the rest of the Federal Open Market Committee. (Read full text below).

In an effort to help my former colleagues at the Fed, I’ve put together some quick pointers to answer the demands from the letter, namely the following:

“Respectfully, we submit that the board should resist further extraordinary intervention in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people.”

Obviously, they should feel free to elaborate…

1. “Goals:” To increase the growth rate of GDP, reduce unemployment, and prevent a deflationary spiral that would damage the recovery or create a double-dip recession.

2. “Direction for success:” Not sure what the heck this means. But the theory is that monetary intervention — through an interest rate channel or other — will lead to greater business investment and consumer spending, yielding more demand, higher GDP, and lower unemployment consistent with the overall goals in No. 1.

3. “Ample data proving a case for economic action:” Fourteen million people unemployed and the unemployment rate at 9.1 percent. Zero payroll employment growth in August. A jobs gap of 11 million. GDP growth of 1 percent in 2011Q2; 0.4 percent in 2011Q1. Employment/population at 58 percent. A staggering 4.3 unemployed workers for every job opening. Poverty at 15 percent. Median incomes fell by over $1,000 in 2010, have fallen by over $3,000 since 2007, and are lower than they were in 1997. Shall I go on?

4. “Quantifiable benefits to the American People:” More jobs, higher incomes, lower poverty, more innovation and investments, higher corporate profits, more hot dogs consumed at baseball games, lower mortgage rates. The Fed’s got better macro models, I’ll let them do the actual quantification.

Full text of letter:

Dear Chairman Bernanke,

It is our understanding that the Board Members of the Federal Reserve will meet later this week to consider additional monetary stimulus proposals. We write to express our reservations about any such measures. Respectfully, we submit that the board should resist further extraordinary intervention in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people.

It is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitated economic growth or reduced the unemployment rate. To the contrary, there has been significant concern expressed by Federal Reserve Board Members, academics, business leaders, Members of Congress and the public. Although the goal of quantitative easing was, in part, to stabilize the price level against deflationary fears, the Federal Reserve’s actions have likely led to more fluctuations and uncertainty in our already weak economy.

We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy. Such steps may erode the already weakened U.S. dollar or promote more borrowing by overleveraged consumers. To date, we have seen no evidence that further monetary stimulus will create jobs or provide a sustainable path towards economic recovery.

Ultimately, the American economy is driven by the confidence of consumers and investors and the innovations of its workers. The American people have reason to be skeptical of the Federal Reserve vastly increasing its role in the economy if measurable outcomes cannot be demonstrated.

We respectfully request that a copy of this letter be shared with each Member of the Board.

Sincerely,

Sen. Mitch McConnell, Rep. John Boehner, Sen. Jon Kyl, Rep. Eric Cantor

via The GOP’s Startling Bid to Strong-arm the Fed.

While there are numerous job creation proposals that would meaningfully lower unemployment, some lawmakers are pushing counterproductive policies disguised as job creation packages. The proposed repeat of the corporate tax repatriation holiday is one such wolf in sheep’s clothing. The repatriation holiday would allow U.S. multinational companies to return foreign profits at a tax rate of 5.25 percent instead of the 35 percent corporate tax rate, repeating a 2004 corporate tax holiday that failed to produce its intended effects. Today, non-financial U.S. businesses are sitting on over a trillion dollars in cash but still aren’t hiring; increasing aggregate demand, not the supply of corporate cash, is the solution to jobs crisis.

A recent report by the Center on Budget and Policy Priorities details why another repatriation holiday would fail to create jobs, counter-productively push investment and jobs overseas, and add to the long-term budget deficit. Firms used the 2004 tax holiday predominantly to boost share prices, and many of the firms actually laid-off thousands of American workers shortly after repatriating billions of dollars at the lower rate.

Dharmapala, Foley, and Forbes (2009) estimate that every dollar of repatriated foreign earnings was associated with a 92 cent payout in stock repurchases and dividend payments even though these were explicitly prohibited (money is fungible). Inflating the S&P 500 amounts to corporate welfare, not a jobs program.

So why would lawmakers double-down on this failed experiment in corporate tax policy? A recent report by NDN argues that a repatriation holiday will generate $8.7 billion over the next decade. This finding (and the entirety of the report) rejects the Joint Committee on Taxation’s estimate that a second repatriation holiday would result in $78.7 billion of lost revenue over a decade. The NDN report arrives at a different conclusion by stripping out JCT’s behavioral assumptions that (1) repatriation would fall several years after the holiday, and (2) that firms would reorganize, shifting earnings to foreign markets and patiently waiting for the next repatriation holiday.

Regardless of past evidence related to the 2004 repatriation holiday, you cannot extrapolate behavior from a onetime to repeated event. The 2004 repatriation holiday was sold as a one-time-only event. If companies are now led to believe that every 5-8 years they can bring foreign earnings back at a negligibly low tax rate, they would be foolish to repatriate any income at the 35 percent statutory rate. The clear impact of another repatriation holiday would reduce the expected effective tax rate for foreign earnings, inducing companies to shift more operations overseas.

Economists care about moral hazard for a reason. The moral hazard associated with repeating the repatriation holiday—leaps and bounds beyond that of the first holiday—risks decreased investment and employment in the United States while exacerbating long-term budget deficits (the ones that matter). JCT’s behavioral concerns are well founded and cannot be ignored. Consequently, this policy would be bad for employment and bad for the federal budget.

Ellen Schultz’s new book, Retirement Heist, illustrates in lurid detail the failure of the American model that relies on employers to provide “fringe” benefits that may actually be life-or-death necessities. Like Michael Moore’s Sicko, which focused on health insurance shenanigans, Schultz doesn’t focus primarily on the have-nots (in this case, the roughly half of all American workers not covered by any kind of retirement plan), but rather on the erstwhile haves: people who thought they had jobs with good pension and retiree health benefits.

In the postwar decades, the system worked reasonably well for many middle-class workers. But by the Gordon Gekko 1980s, corporations realized they had a lot to gain by reneging on these promises. More precisely, the executives of these companies had a lot to gain, since their compensation was increasingly tied to short-term gains at the expense of the companies’ long-term health and reputation, a connection Schultz doesn’t quite make.

Schultz is one of the best reporters around when it comes to exposing corporate malfeasance, and Retirement Heist, despite its depressing subject matter, is a page-turner. Schultz and her former Wall Street Journal colleague Theo Francis, for example, were behind the “Dead Peasants” story Moore covered in Capitalism, a Love Story. If Capitalism left you wondering how the scam worked (how do companies profit from taking out life insurance policies on their employees?), this and myriad other tactics are detailed in her new book.

Schultz’s muckraking is first rate, but her analysis can occasionally be off. For example, she chastises corporate pension funds for supposedly low-balling rate-of-return projections in the go-go 1990s, when realized returns on pension fund assets were much higher than the 9 percent projections. Later in the book, she zings public funds for doing the opposite, using projections that (while lower than historical returns) are higher than the risk-free Treasury rate. While she’s hardly alone in picking on the public funds, I respectfully disagree.

The Washington Post’s editorial board was quick to rebuke President Obama’s recommendations to the Select Joint Committee on Deficit Reduction for not going far enough:

“The president’s plan would leave the debt at an unhealthy 73 percent of gross domestic product. The Simpson-Bowles plan would reduce that number to 65 percent, a still high but far less troubling level.”

What is driving this debt target of 65 percent, or 60 percent for that matter? Numerology comes to mind, as does austerity for austerity’s sake.

Let’s be clear – addressing the jobs-crisis is the most important near-term necessity – and if doing so drives the debt to greater than 60, 65 or 73 percent of GDP (or any other magical number), that’s fine.

Over the medium-term, stabilizing the trajectory for the debt-to-GDP ratio is a reasonable goal. But, there is no evidence at all that stabilizing it at 73 percent is more dangerous or troubling than any other number. (Click here for wonky footnote).

Reducing public debt-to-GDP by another 8 percentage points in 2021 would reduce annual debt service by roughly 0.3 percentage points of GDP. On the other hand, the steps required to achieve this fiscal contraction will also reduce economic activity in an economy that is years and years away from full employment. In fact, the economic activity suppressed by a fiscal contraction needed to achieve the Post‘s totally arbitrary target by 2021 would see foregone tax revenues and increased safety spending that would surely lead to a more than 0.3 percent of GDP deterioration in the budget. And millions of job-years lost to unemployment.

Our long-term budget blueprint Investing in America’s Economy, as adapted for the Peter G. Peterson Foundation’s Solutions Initiative, stabilized debt-to-GDP at 77 percent in 2021 and 82 percent by 2035. We thought investing $2.5 trillion over the next decade to put America back to work building a more competitive economy was more important than embracing austerity and targeting an arbitrary debt level. And again, there is no serious evidence that can be brought to bear suggesting that we’re wrong.

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Footnote: Much of the policy rationale for targeting a lower debt ratio comes from Carmen Reinhart and Kenneth Rogoff’s paper Growth in a Time of Debt, which argues that economic growth becomes hindered when government debt exceeds 90 percent of GDP, but this research fails to identify causality. Slow growth can just as easily account for higher debt accumulation. And as my colleagues John Irons and Josh Bivens explain in this paper, the Reinhart and Rogoff results are inapplicable to the United States because the data sample is entirely sensitive to the post-war demobilization, in which economic contraction was driven by large spending cuts, not contemporaneously high debt. Stripping out 1945 and 1946 from the sample yields 2.8 percent average growth for all other years in which government debt exceeds 90 percent of GDP. (Note: their specification uses gross government debt rather than the more applicable measure—debt held by the public, which dictates market interest rates and any crowding out effects—so the 90 percent threshold isn’t an apples-to-apples comparison with the public debt levels discussed above.)

Debt hysteria yanked the national policy focus away from the economic recovery, toward the counterproductive debt ceiling debacle. The policy debate is finally pivoting back to job creation, but it should never have strayed, as is demonstrated by the abysmal 0.7 percent growth in the first half of this year and recent jobs reports. When it is time to think about longer-run fiscal problems, solutions should be informed by actual evidence, not hand-waving about debt targets that sound “troubling” for some ill-defined reason.

And how is the austerity camp faring in Europe? This week’s leader in The Economist finally proclaimed austerity a massive failure: “Sharply cutting budget deficits has been the priority—hence the tax rises and spending cuts. But this collectively huge fiscal contraction is self-defeating. By driving enfeebled countries into recession it only increases worries about both government debts and European banks.” This sounds a lot like Reinhart and Rogoff’s causality reversed. Whoops.