Cutting public investments to protect “the children” — or, when the cure is much worse than the malady

Policymakers in D.C. have a long history of focusing on the wrong problem (how many screamed about the housing bubble and buildup of private debt in the mid-2000s, for example?). This history continues today – you can’t follow economic debates taking place inside the Beltway for long without inevitably hearing somebody thunder about the “burdens we’re placing on our children and grandchildren” with current budget deficits. This formulation has become so common that almost nobody bothers questioning it anymore. But in fact, policies aimed at cutting today’s budget deficits are actually more threatening to our kids’ economic futures than these deficits themselves.

It may help to review the economic case for when one should worry about budget deficits. If the government begins running large deficits when the economy is healthy, this means that it must increase the money that it’s borrowing, essentially walking into the market for loans and sharply bidding up their demand. This increase in demand will cause interest rates (the “price” of borrowing) to rise, and these new higher prices will convince private companies to forego some investment projects that they otherwise would have undertaken. This results in a smaller capital stock and hence less-productive economy bequeathed to the next generation. Voila, generational theft!1

The responses to why these arguments do not apply to the current situation have been made many times before. The price of borrowing has not risen, and that’s not an unsustainable fluke. Instead, it’s precisely because the economy is depressed. So, no private capital formation is being crowded-out (and in fact, lots is probably being crowded-in as government deficits support spending and demand, and this spending and demand is actually the biggest near-term driver of private investment) – in fact, private-sector capital formation, after a horrendous fall during the teeth of the Great Recession, is one of the few real sources of strength in the latest recovery.

But is it really so bad that policymakers want to attack a non-existent problem (i.e., the federal budget deficit crowding-out private investment)?


Most importantly, near-term reductions in deficits will place a substantial drag on an already-weak recovery. Given that the economy grew at less than 2 percent in 2011, this is not the time to be sharply applying the brakes.

Further, if frantic efforts to cut spending result in reductions in public investments (and they will), then something truly perverse will happen: productive investments will be sacrificed in the name of … preserving productive investments.

Take a look at estimates of the nation’s wealth (pie chart below, from the Office of Management and Budget – and note as well that near-identical estimates (see p. 195) were made by the OMB during the Bush administration):

Half of the nation’s overall capital stock consists of human capital, or education. This is largely financed publicly. And, over a third of the equipment and structures capital stock is owned publicly. In short, when figuring out the actual wealth that we’re passing on to the next generation, one must take public investments into account.

Yet, we’ve already allowed this public investment to lag in recent decades. Cutting it further today and tomorrow actually would put a burden on our children and grandchildren (unlike, say, accommodating larger budget deficits). A new EPI paper released yesterday surveys estimates of just how much we could gain by engaging in a program of expanded public investment over the next decade. It is serious money for the economy, and even the federal government itself would largely recoup the costs of this investment through tax revenues gained by the extra growth and job-generation this public investment could boost if it was undertaken while the economy was still weak. And I’ve probably even underestimated this fiscal offset in the paper.

Despite anguished cries about the fate of “our children,” it seems clear that the rush to slash spending will continue and one obvious casualty is going to be the public investments that are actually valuable to the next generation. Sadly, public investment has become a bit of a political orphan in recent decades, largely because of a mid-1990s productivity surge that happened without an increase in public investment. What this has meant is that with no constituency advertising its benefits, too many people and policymakers are genuinely unaware of the stakes in cutting it. But these stakes are large – unless coming decades see something analogous to another IT boom, we shouldn’t expect post-1995 rates of productivity growth to be sustained in the face of further public investment cutbacks.

Lastly, the target list for aiming lots of public investment funds at in coming decades is long: basic infrastructure, early-childhood education, health care, and research and development. These are pretty common areas where it’s agreed that lots of public investment money could be productively channeled. But there is also the obvious case of investments to cut greenhouse gas emissions and mitigate the worst effects of climate change. There is overwhelming evidence that these are investments that should be done, and because making them would primarily benefit those children and grandchildren that policymakers in D.C. are so solicitous of, it seems like this should be a slam-dunk.

1. This is, strictly speaking, the “closed-economy” case for how deficits can harm the economy. The “open-economy” case has no more empirical support for it operating today, so we’ll skip it for now.

Apple’s iPhone profits dwarf its labor costs

Apple and its key manufacturing partner, Foxconn, have been justifiably criticized for their labor practices in China, which include excessive, oppressive and illegal overtime hours, hazardous conditions, inappropriate and sometimes forced labor of 16-18 year-old student “interns” on night shifts, and wages so low that 64 percent of workers claim they don’t cover basic needs.

Many observers have remarked that with Apple’s gigantic profits, it can afford to ensure better treatment of its production workforce. A close examination of the iPhone’s cost structure leaves no doubt.

Various market researchers, including iSuppli and Horace Dediu of Asymco, have broken down the costs of the iPhone, which Apple sold to wireless carriers for an average price of $630 in the fourth quarter of 2011. All agree that Foxconn’s assembly cost— approximately $15, or 2% of the total—is a miniscule part of the iPhone’s cost. Apple’s estimated $319 profit per phone is at least 20 times the cost of producing the iPhone. In fact, because the labor cost is only part of Foxconn’s costs, which include energy, property, and its own profit, Apple’s profit per phone is more than 20 times the labor cost.

With tax day upon us, file these numbers away

So far this year, the IRS has received 99 million tax returns and distributed an average refund of $2,794. If you still haven’t submitted your return, or filed an extension, you have until midnight to do so. Thankfully, there’s no such deadline for looking over these tax figures — as depressing as they might be:

1. The 400 highest income filers paid an average tax rate of 16.6 percent in 2007 (before the Great Recession). Dividends and net capital gains accounted for 73.4 percent of the adjusted gross income for these filers, explaining why their average effective tax rate is just a shade above the 15 percent preferential rate on unearned income.

2. Presidential candidate Mitt Romney, who has an estimated net worth between $190 million and $250 million, paid an effective tax rate of 13.9 percent in 2010 on $21.7 million in income because of the carried interest loophole and the preferential tax rates on capital gains and dividends.

3. In 2011, the top 1 percent of households by cash income received 75.1 percent of the benefit from the preferential treatment of capital gains and dividends. The middle class, meanwhile, received only 3.9 percent of that benefit.

4. Over the past 35 years, Congress has gradually lowered the top tax rate on capital gains from 40 percent in 1977 to the preferential rate of 15 percent today, courtesy of the Bush-era tax cuts. The Bush tax cuts also lowered the rate on qualified dividends—previously taxed as ordinary income—from 39.6 percent to just 15 percent.

5. The Bush tax cuts cost $2.6 trillion over the last decade, accounting for roughly half of the increase in the public debt over this period, while failing to generate a robust (or even mediocre) economic recovery.

6. Roughly half of the Bush tax cuts went to the highest-income 10 percent of earners, even though these earners captured more than 90 percent of national income gains between 1979 and 2007.

7. The top 1 percent of earners received 38 percent of the Bush tax cuts, despite capturing 65 percent of income gains during the Bush economic expansion (2002-2007).

8. Continuing the Bush-era tax cuts would cost $4.4 trillion over the next decade, which would single-handedly move the country from a sustainable to unsustainable fiscal path.

9. The additional tax cuts in Wisconsin Rep. Paul Ryan’s budget—beyond continuing the Bush tax cuts, which would be financed with deep spending cuts—have no offset and would lose $4.6 trillion in revenue over a decade, blowing a huge hole in the budget.

10. Massive, unaffordable tax cuts were also the currency of the Republican presidential primary race, with proposed tax cuts that would lose up to $900 billion annually—which at 4.9 percent of GDP would more than double projected budget deficits under a continuation of current policies—above and beyond the costly Bush tax cuts.

Follow Andrew Fieldhouse on Twitter: @A_Fieldhouse

Did Greg Mankiw really just brandish his $170 textbook as evidence of the benefits of unfettered competition?

There’s plenty wrong with this Greg Mankiw article (see here), but one thing I haven’t seen pointed out yet [ah, here’s somebody else pointing it out, with a little less snark than this post] is the strangeness of Mankiw using his textbook as an example of fierce competition in a crowded market, unburdened by meddlesome government.

What’s strange about this? Well, what keeps me from selling PDFs of Mankiw’s textbook for $5 each online? The same thing that keeps his own students (who are, by the way, assigned this textbook by Mankiw himself; I  wonder if he’s ever once decided, based on the merits, that anybody else had a superior text on the market?) from scanning the book and passing it back and forth for free: government enforcement of copyright law.

Is having government act as a bill collector for textbook companies and authors good economic policy? Probably not, but I think it’s safe to say that textbook authors pretending as if the price tag on their books reflects only supply and demand curves functioning in perfectly competitive markets probably shouldn’t be trusted on sweeping claims about the proper role of government in determining economic outcomes.

Tax breaks for saving

I come from a family of penny pinchers. My parents had to support themselves at young ages, and their thriftiness put them and their children through college. Though I’m a big spender compared to my parents (it would horrify them to know I’m on a first-name basis with our local Thai food delivery guy), I’m still careful to put away money for retirement.

Despite my personal predilections, I think it’s time we reexamined our knee-jerk support for tax breaks for saving. Admittedly, it’s much harder than in my parents’ day to save your way into the middle class. For instance, a new Center for Economic and Policy Research report points out that the number of hours a minimum-wage worker has to work to pay for college has more than tripled over the past three decades. Nevertheless, it’s quite difficult to design tax incentives that actually help ordinary people save—as opposed to simply lowering taxes for high-income households.

Our tax code contains a mess of contradictory provisions that both encourage and discourage saving. These range from 529 plans for college saving to the mortgage interest deduction, which subsidizes borrowing. Among the costliest of the savings incentives are those designed to promote saving in 401(k)s, IRAs and other retirement plans. According to Treasury estimates, the present value of tax breaks for 401(k) plans alone was $83 billion in 2010 (see Table 17 here), not counting payroll tax losses.

Problematically, two-thirds of these (and other) tax breaks go to taxpayers in the top income quintile (households with roughly more than $103,000 in income in 2011). Aside from the fact that upper-income households need less help saving for retirement than low- and middle-income households, these tax breaks do little to increase saving since most high-income households already save and simply steer funds to tax-favored accounts (see footnote 27 here for an overview).1

These upper-income tax subsidies are ripe for trimming. Erskine Bowles and Alan Simpson, co-chairs of the president’s fiscal commission, suggested capping tax-preferred contributions to the lower of $20,000 or 20 percent of income, as well as again taxing capital gains and dividends at the same rates as ordinary income. (The two proposals are related because the value of tax deferrals for retirement saving depends on the taxes that would otherwise be paid on investment earnings.)2

Though there’s not much else to like in the Bowles-Simpson plan, 401(k) tax breaks are a good place to look for budget savings. Even better would be reducing the contribution limit to $10,000 or less, as few people can afford a $10,000 contribution, let alone $50,000 (the maximum combined employer and employee contribution). Research by two Treasury Department analysts found that reducing the total contribution limit to $10,000 would have little effect on taxpayers making less than $75,000, but that roughly 80 percent of taxpayers with incomes greater than $150,000 (and 45 percent of taxpayers with incomes between $75,000 and $150,000) would see a tax increase. Affected taxpayers in the highest income group would lose a tax break averaging $3,166, even though the $10,000 cap would reduce their 401(k) contributions by only a third, on average.

As Drexel law professor Norman Stein points out in a working paper presented at a recent University of Virginia Tax Study Group panel, supporters of the status quo offer three less-than-compelling arguments in defense of maintaining 401(k) tax breaks: that their cost is exaggerated; that encouraging employers to offer 401(k)s on behalf of highly-compensated employees indirectly helps lower-income workers even if they reap little of the tax benefit; and that these tax incentives actually cost nothing if you believe that consumption, rather than income, should be taxed. Read more

Sure, it’s weak, but this ‘so-called recovery’ is no weaker than the last one, Greg Mankiw

On Monday, EPI labor economist Heidi Shierholz pointed out that job growth during the current recovery has been stronger than job growth during the recovery following the 2001 recession. In addition, the jobs recovery from the Great Recession isn’t too far off the pace following the 1990 recession; private sector job growth 33 months into the 1990 recovery was 3.4 percent, while it’s 2.7 percent for the current recovery. Shierholz’s main point is that it’s the historic length and severity of the Great Recession, and not unprecedentedly poor job growth in the recovery, that explains why we’re still so far from full employment 33 months since the recession officially ended.

Greg Mankiw, however, isn’t about to highlight that fact. Mankiw, who was chairman of the Council of Economic Advisers under George W. Bush from 2003-05 and currently serves as an economic adviser to presidential candidate Mitt Romney, posted the graph below on his blog last weekend with the dismissive headline, Monitoring the So-called Recovery:

The graph shows the employment-to-population ratio (or EPOP) going back to 2004. We see the EPOP drop steeply during the Great Recession, followed by a mostly flat trajectory since. But let’s add a line to Mankiw’s graph for a direct comparison of this recovery to the last one:

It’s clear from the figure that EPOP fell much further and faster during the Great Recession than the 2001 recession. But looking to the right of the vertical line, we see that EPOP growth (or lack thereof) in the current recovery follows the same trend (i.e., flat) as the recovery after the 2001 recession. In other words, the key difference between EPOP at this point in the current recovery versus the same point in the last recovery (during which Mankiw chaired the CEA) is the length and severity of the recession that preceded them.

Yes, this recovery is slow, and certainly there is no excuse for the current complacency from policymakers about the jobs crisis, but the folks over at Angry Bear have a good adage for Mankiw: “People who live in glass houses should be careful about throwing rocks.”

With research assistance from Heidi Shierholz and Hilary Wething

The utter wrongness of people who complain about double-counting Medicare savings

In a post today, the Committee for a Responsible Federal Budget reiterated its position that it is double-counting to argue that the Affordable Care Act both reduces the deficit and extends the life of the Medicare trust fund. Chuck Blahous, the Medicare actuary who started this mess, and Peter Suderman over at Reason agree.

Their position is wrong, wrong, wrong. First, let’s clarify the baseline. CRFB points out, correctly, that there are two baselines to choose from. The Trust Fund Baseline, which is used by Blahous, assumes that a program’s spending is constrained by the resources in its trust fund. If the trust fund is gone, the spending will automatically be cut. The Unified Budget Baseline, on the other hand, assumes that spending on programs will continue as scheduled, and the federal government will simply borrow money to ensure that benefits are not cut.

As many pointed out, the Blahous baseline is ridiculous. If spending is constrained by the trust fund, then we don’t have a problem. But the main purpose of the Affordable Care Act—heck, why we’re talking about deficit reduction in the first place!—is the assumption that we do have a problem. And even if—as CRFB states—both baselines are equally valid, it’s clear from the administration’s rhetoric that it is using the latter.

So, how can it be that a dollar can both be used to reduce the deficit and extend the trust fund? Well remember that under the baseline we’re using, program outlays aren’t constricted by the trust fund. Outlays have nothing to do with the trust fund. So therefore, extending the trust fund doesn’t cost anything, because it’s an accounting identity with no programmatic relevance.

Now, you might say that the Obama administration is being misleading, talking about extending the life of a trust fund, when under its own assumptions, the trust fund doesn’t matter. But while it may not have any impact on spending levels, it does matter for other reasons. While the size of the trust fund doesn’t determine how much spending can be done, it does potentially impact how the spending is financed. In the case of Social Security, for example, the trust fund commits income taxes (a more progressive revenue stream) in the future to redeem past surpluses financed by payroll taxes (a less progressive revenue stream); so declaring the trust fund meaningless in this case would profoundly affect the distribution of Social Security’s costs.

Trust funds also have political relevance. Even if you assume that Medicare outlays will be unaffected by the trust fund, having an insolvent trust fund opens a program up to political attacks. We’re seeing that right now with Social Security. So even if the trust fund doesn’t matter to the program’s operation, it still matters to shore of the program’s political strength. That’s something that seniors—and really anyone fond of Medicare—should care about.

A rising tide for increasing minimum wage rates

On Monday, the New York Times reported on the growing groundswell to raise wages for the lowest-paid workers by increasing minimum wage rates. Legislators in New York, New Jersey, Massachusetts, Connecticut, and Illinois are all looking toward raising their state minimums. At the same time, Iowa Sen. Tom Harkin has introduced a bill that—among making other critical investments, strengthening worker protections, increasing tax fairness, and reducing the federal deficit—would raise the federal minimum wage to $9.80 per hour over three years and then index it to inflation.

As Table 1 shows, increasing the federal minimum wage in three steps to $9.80 per hour, as described in the Harkin bill, would raise the wages of 28 million Americans. About 19.5 million workers whose wages are between the current minimum and the proposed $9.80 rate would be directly affected. Another 8.9 million whose wages are just above the proposed minimum would also see a pay increase through “spillover” effects as employers adjust their overall pay scales.

Table 1

Workers affected by proposed federal minimum wage increase

Federal minimum increased to $9.80 per hour in three increases of 85 cents, modeled for July 2012, 2013, and 2014
Total estimated workers in third year*  127,361,000
Directly affected**  19,485,000
Indirectly affected***  8,869,000
Total (directly & indirectly) affected  28,354,000

*Total estimated workers is estimated from the CPS respondents for whom either a valid hourly wage is reported or one can be imputed from weekly earnings and average weekly hours. Consequently, this estimate tends to understate the size of the full workforce.

**Directly Affected workers will see their wages rise as the new minimum wage rate will exceed their current hourly pay.

***Indirectly affected workers currently have a wage rate just above the new minimum wage (between the new minimum wage and the new minimum wage plus the dollar amount of the increase). They will receive a raise as employer pay scales are adjusted upward to reflect the new minimum wage.

Source: EPI Analysis of 2011 Current Population Survey, Outgoing Rotation Group

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Table 2 highlights some demographic characteristics of the affected workers. Fifty-four percent are women and 54 percent work full-time. The overwhelming majority (87.9 percent) are at least 20 years old. This may come as a surprise to some, as minimum-wage workers are often portrayed as teenagers working part-time. The reality is that only 12 percent of those who would be affected by the raise are teenagers and only 15 percent work fewer than 20 hours per week.

Table 2

Demographic characteristics of affected workers

Directly affected* Indirectly affected** Total affected % of total affected
Total  19,485,262  8,868,654  28,353,916 100.0%
Female  10,924,035  4,527,632  15,451,666 54.5%
Male  8,561,228  4,341,022  12,902,250 45.5%
Part-time (<20hrs/week)  3,327,498  918,690  4,246,187 15.0%
Mid-time (20-34hrs/week)  6,599,616  2,167,363  8,766,979 30.9%
Full-time (35+ hrs/week)  9,558,149  5,782,601  15,340,750 54.1%
Age 20 +  16,509,188  8,421,003  24,930,191 87.9%
Under 20  2,976,074  447,651  3,423,725 12.1%
White  10,959,722  4,960,138  15,919,860 56.1%
African American  2,741,079  1,285,583  4,026,662 14.2%
Hispanic  4,654,719  2,035,908  6,690,626 23.6%
Asian  1,129,742  587,025  1,716,767 6.1%

*Directly Affected workers will see their wages rise as the new minimum wage rate will exceed their current hourly pay.

**Indirectly affected workers currently have a wage rate just above the new minimum wage (between the new minimum wage and the new minimum wage plus the dollar amount of the increase). They will receive a raise as employer pay scales are adjusted upward to reflect the new minimum wage.

Source: EPI Analysis of 2011 Current Population Survey, Outgoing Rotation Group

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Furthermore, low-wage workers tend to spend rather than save an additional dollar earned, often because they have little other choice. The additional  household consumption generated by this boost to low-wage workers’ paychecks would benefit the labor market as a whole, because  the resulting economic activity translates into job growth. After controlling for a reduction in corporate profits resulting from the minimum wage increase, and assuming some of the business expense of paying higher wages is passed on to consumers, the net effect of the proposed minimum wage increase is an increase in economic activity of over $25 billion over the next three years, which would generate roughly 100,000 new jobs.

Table 3

Economic effects of proposed federal minimum wage increase

Federal minimum increased to $9.80 per hour in three increases of 85 cents, modeled for July 2012, 2013, and 2014
Increased wages for directly & indirectly affected* $39,677,170,000
GDP Impact** $25,115,648,697
Jobs Impact*** 103,000

*Increased wages: Total amount of increased wages for directly and indirectly affected workers.

**GDP and job stimulus figures utilize a national model to estimate the GDP impact of workers' increased earnings, after controlling for reductions to corporate profits.

***The jobs impact total represents full-time equivalent employment.The increased economic activity from additional wages adds not just jobs but also hours for people who already have jobs. Full-time employment takes that into account, by essentially taking the number of total hours added (including both hours from new jobs and more hours for people who already have jobs) and dividing by 40, to get full-time-equivalent jobs added. Jobs numbers assume full-time employment requires $115,000 in additional GDP.

Source: EPI Analysis of 2011 Current Population Survey, Outgoing Rotation Group. Job impact estimation methods can be found in: Hall, Doug and Gable, Mary. 2012. The benefits of raising Illinois' minimum wage. Washington, D.C.: Economic Policy Insitutute; and Bivens, Josh L. 2011. Method memo on estimating the jobs impact of various policy changes. Washington, D.C.: Economic Policy Institute.

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In a historical context, the increase proposed by the Harkin bill is long overdue. As John Schmitt and Janelle Jones at the Center for Economic and Policy Research explain, the real value of the minimum wage is far below its historical levels, despite the fact that the low-wage workforce is older and better educated than ever before. Congress has had to raise the minimum wage 17 times since its peak value in 1968 in order to combat inflation. Indexing the minimum wage, as 10 states have already done, would fix this problem once and for all.

The lingering effects of the recession make this an even more critical time to raise the wage floor. Even as employment has slowly picked up in the recovery, wage growth is still painfully weak. Moreover, recent reports show that low-wage work has been driving much of the recent job growth. (This also means that the figures here may actually understate the number of people who would be affected by an increase in the federal minimum.)  The Harkin bill, and similar state proposals, would give much-needed help to these workers and provide additional stimulus to the U.S. economy – all without costing anything to taxpayers.

Since when does each and every budget policy proposal have to singlehandedly eliminate the deficit?

In all seriousness, when did singlehandedly “fixing the deficit” become a necessary criterion for each and every tax and budget policy proposal? David Fahrenthold and David Nakamura invoke this strange new rule in an article in today’s Washington Post.

“Neither [the Paul Ryan budget nor the Buffett Rule] will fix the deficit problem anytime soon: The GOP’s proposal wouldn’t balance the budget until 2040. By itself, the Buffett Rule wouldn’t do it ever.”

There is a lot wrong in this sentence.

First, comparing a comprehensive budget proposal to a single tax reform is an apples-to-oranges (or apple-to-bushel-of-apples) comparison. Second, the Ryan budget doesn’t actually balance the budget until … well ever. The too-often cited Congressional Budget Office’s long-term analysis evoked here is based on the false premise that revenue will magically hold at 19 percent of GDP, ignoring the trillions of dollars of budget-busting, gimmicky tax cuts (Ryan assures that this money and more can be made up by “broadening the base” of taxation but offers no specifics). Lastly, nobody invokes the Buffett Rule as the single instrument for balancing the budget—very few fiscal policies have that reach. Take an extreme example: Immediately abolishing the Department of Defense would not balance the budget within a decade, relative to current policies. That’s besides the point–cutting more than $7 trillion in non-interest spending over a decade would produce a sustainable fiscal trajectory (ignoring sizable second-order cyclical budget effects from the massive hit to aggregate demand). The trajectory for debt held by the public is the relevant metric of fiscal sustainability, not a binary for budget deficit/budget surplus.

Fahrenthold and Nakamura double-down on brushing off non-trivial budgetary savings, also missing the broader fiscal implications of the Buffett Rule: “Even if it passed, the [Buffett Rule] would not likely make a serious dent in the country’s deficit. It might add up to $162 billion over 10 years. The national debt grows fast enough to wipe that out within two months.”

So $162 billion in budgetary savings is something to laugh at? I’ll remember that next time conservatives propose to reduce the deficit by drug-testing unemployment insurance recipients, eliminating the National Endowment for the Arts, or defunding Planned Parenthood. To be more concrete, these savings would more than supplant the draconian $134 billion 10-year cut to the Supplemental Nutrition Assistance Program (SNAP, formerly food stamps) proposed in the Ryan budget.

Further, the criticism that $162 billion is dwarfed by this year’s budget deficit is doubly misleading. For one, budget deficits have swelled in recent years because the economy is so weak. Comparing a 10-year cost-estimate of just about anything to the sizable but cyclical budget deficits spurred by the worst economic downturn since the Great Depression is unhelpful. Further, policymakers shouldn’t be concerned at all with reducing this year’s budget deficit; serious concerns about budget imbalance are about stabilizing debt in the medium and long-term, after the economy has recovered. Revenue from implementing the Buffett Rule would be weighted toward the out years, where savings will be larger relative to projected budget deficits than today, and that’s exactly how it should be.

Senator Orrin Hatch (R-Utah) echoed this very same misguided sentiment in a statement on the Buffett Rule: “The President’s so-called Buffett Rule is a dog that just won’t hunt. It was designed for no other reason than politics – there is no economic rationale for it. It would do little to bring down the debt…” This specious “if it doesn’t fix the entire problem, it’s not worth doing,” objection to raising more revenue and increasing tax progressivity was similarly trotted out in defense of the upper-income Bush-era tax cuts, the expiration of which would raise $849 billion over a decade. Luckily, Jon Stewart decided to smack at this bad argument. He probably won’t have time to go after this latest Washington Post article, which is a shame because it’s about as silly.

It’s true, the Buffett Rule won’t lower unemployment by itself (but it’s still worth doing)

The National Journal’s Jim Tankersley correctly points out that the Buffett Rule will not, by itself, solve the most pressing economic problem in front of us: the still far too high unemployment rate. Then, bizarrely for Beltway writers talking about the unemployment rate, he also correctly points out what would help lower this rate: increased aggregate demand.

But it doesn’t follow from here that the Buffett Rule is bad policy. In fact, for those who think that we should aggressively target a lower unemployment rate in the near-term while also simultaneously locking in commitments to reduce longer-run budget deficits, the Buffett Rule should be seen as a huge win. However, this is if (and only if) it is accompanied in the next couple of years with aggressive fiscal job-creation measures such as infrastructure spending, aid to states and local governments, and making sure that existing fiscal support (unemployment insurance, food stamps, targeted tax cuts) does not fade away.

Of course, I’m not one of those who think we must only pair near-term measures to lower unemployment with longer-term measures to close the deficit. I’d be happy to take the near-term measures, well, in the near-term and deal with longer-run issues when we can.

And, in fact, it would be optimal from a pure economics perspective to finance aggressive near-term fiscal support with debt in the short-term, rather than (even Buffett Rule-rule style) tax increases. But given the near-universally misplaced D.C. obsession with closing budget deficits, always and everywhere, financing job-creation efforts with the Buffett Rule and other high-income tax cuts makes plenty of sense to me.

Permanent tax increases on upper-income households provide very little drag on near-term recovery, whereas the intelligently-directed fiscal supports noted above have quite large effects. Moody’s Analytics chief economist Mark Zandi pegs the fiscal multiplier (i.e., the increase in GDP stemming from a dollar of spending increases or tax cuts) for infrastructure spending at $1.44, versus $0.35 for permanently extending all the Bush-era tax cuts. This implies that a dollar of infrastructure investment financed by a dollar of permanent tax increases would generate on net $1.09 in economic activity (a balanced-budget-multiplier).

Tankersley  concludes his piece, “If the Buffett Rule was a serious pitch to help the jobless, it would deal with one of those main drivers of unemployment. It would boost persistently weak aggregate demand or incentivize business investment.”

Nobody agrees with this general sentiment more than us at EPI – really. But given the mad rush to cut deficits, throwing the Buffett Rule on the table seems awfully smart. It minimizes short-run damage to jobs and growth from reducing the deficit, it can be paired with effective fiscal support to yield extra economic activity and jobs without increasing the deficit, and it locks in a policy that will make our tax system fairer, more efficient, and capable of generating the revenue needed to fund government in the long-run.

Panel on tax fairness and reform helps address common misperceptions

I had the opportunity to participate in an Americans for Democratic Action panel discussion yesterday on tax fairness. The panel, called “Tax Equity: Paying Fair,” was moderated by John Nichols of The Nation and included panelists Bob McIntyre of Citizens for Tax Justice, Mike Lapham of United for a Fair Economy, Dean Baker of the Center for Economic and Policy Research, Elspeth Gilmore of Resource Generation, and Chuck Marr of the Center on Budget and Policy Priorities. It was an honor to participate alongside them.

The panel covered a number of topics, including the Buffett Rule, the Paul Ryan budget, the George W. Bush-era tax cuts, the equalization of tax rates for capital and labor income, corporate tax dodging, and a financial transactions tax. But beyond the wonkier side of tax policy, Baker raised an important point that merits highlighting. He talked about people’s misperceptions regarding how much federal income tax they actually pay—in other words, confusion of marginal tax rates for (lower) effective rates. For example, the second highest tax bracket (33 percent) is assessed for single filers on taxable income between $174,400 and $379,150 (for the tax year 2011 returns due April 17). If you are a single filer with $180,000 in annual taxable income, you do not pay 33 percent on all of your income—as is widely  misperceived. You would pay 33 percent only on your total income (less the personal exemption, deductions, and exclusions) exceeding $174,400. In this case, only $5,600 of your total income would be subject to the 33 percent rate.

I was really glad to see Dean Baker bring up the point of marginal versus effective tax rate confusion, because I think widespread misperception unduly adds to public fears of returning to Clinton-era tax rates. Raising the top tax bracket from 35 percent to 39.6 percent will only very marginally impact what high earners pay. Most Americans simply do not make enough to be subject to top income tax rates; President Obama’s proposal to extend the Bush tax cuts for households with less than $200,000 ($250,000 for joint filers) in adjusted gross income—letting only the top two rates expire—would result in a tax increase for only 2.1 percent of households. I was hoping to make a similar point to Baker’s, had there been more time for that in our conversation. I was recently struck by a portrayal of tax rate perceptions and reality in Bruce Bartlett’s new book on tax reform, The Benefit and the Burden. Bartlett draws from a CBS News/New York Times poll from April 14, 2010, that asks the following:

On average, about what percentage of their household incomes would you guess most Americans pay in federal income taxes each year: less than 10 percent, between 10 and 20 percent, between 20 and 30 percent, between 30 and 40 percent, between 40 and 50 percent, or more than 50 percent, or don’t you know enough to say?

The results are depicted below. The respondents indicated they believed 5 percent of Americans pay less than 10 percent of their income in federal income taxes. The reality is 86.5 percent of Americans actually did, in 2010. Additionally, respondents indicated they believed 38 percent of Americans pay over 20 percent of their income in federal income taxes. The reality: Only 0.6 percent of Americans pay over 20 percent of their income in federal income taxes.

Tax percentage/income Perception Reality
Less than 10%













More than 50%


Don’t know



Source: The Benefit and the Burden, 2012

Thank God for trial lawyers

For many years, Corporate America has been waging a campaign to vilify the lawyers who bring suits against them. After decades of knowingly exposing workers and consumers to potentially fatal asbestos, the companies that had profited tried to kill asbestos litigation when lawsuits began to bankrupt them. When tort suits helped workers get real compensation for disabling injuries from unsafe machinery, the corporations moved to bar the suits. When class-action lawsuits proved to be an effective way to bring claims against giant corporate wrongdoers, Congress passed new laws to make such suits more difficult. And when doctors and hospitals began to pay heavily for medical malpractice, they started campaigns in every state and in Congress to limit the damages that could be awarded against them.

All of the harm that corporations and other actors have done to the public—the subjects of so much litigation—could have been better controlled by regulation with real teeth and effective enforcement. Asbestos could have been banned decades ago, as it was in most of Europe. Machines could have been required to have better lock-out mechanisms and better guarding as they were manufactured, to ensure that employees would never be maimed or killed. Drug tests could have been required to be conducted with more independence and transparency, with conflicts of interest prevented. And hospitals could be regulated to prevent unnecessary infections, misadministration of medicines, and surgery on the wrong patient or wrong limb.

But our political culture resists regulation, and even when we have regulation, the government does not always enforce it energetically. Thus, we do have a law and regulations that forbid for-profit employers from employing workers without paying them the minimum wage. And those regulations forbid the employment of students or anyone else as interns (except in very limited circumstances) without paying the minimum wage. The Department of Labor, however, does almost nothing to enforce the law in this area. Moreover, the token penalties in this and most areas of labor law lead companies to treat them as a cost of doing business.

So I was delighted to see the trial bar take this issue on, with a highly respected New York law firm suing Fox Searchlight and Hearst Corporation for failing to pay various employees the corporations called “interns,” including college graduates and even a CPA.

The effect of these suits has been salutary! Already, the media report that other employers have taken notice and law firms are now advising clients not to break the law. One USA Today headline read, “Fewer Unpaid Internships to Be Offered.”

I hope the headline is accurate, and if it is, it will be due to the efforts of Outen and Golden, LLP. The New York law firm is doing the work our government ought to be doing.

Thank God for trial lawyers.

Robert Lawrence misleads the New York Times on manufacturing

Last week, Eduardo Porter wrote in the New York Times’ Economix blog about a response he received on his recent piece on manufacturing from Robert Lawrence of the Kennedy School. Porter should have dug into the topic further because what Lawrence wrote was rather misleading. Here are Porter’s words:

“Prof. Robert Lawrence from Harvard makes an interesting point in response to my Wednesday column about our misplaced hopes in manufacturing as a source of new jobs: even if every single thing we bought was “made in America” — if we stopped multinationals from outsourcing production to China and closed our doors to imports — even then, manufacturing employment would lag.

The reason is simple: we are spending less and less on goods and more and more on services. In 1969, American consumers were allocating half of all their spending on consumption to goods. By 2010, that share had fallen to one-third.”

Lawrence clearly wants people to believe that manufacturing jobs are declining because “we” just don’t buy much manufactured stuff anymore, or, in economic terms that there’s less demand for goods now than in the past. But that’s wrong, for a couple of reasons. First, goods are not only produced for household consumption, they are also produced for business and public investment, and for export. Second, and more importantly, the prices of goods have fallen relative to other types of products, so the goods share of total nominal (not inflation-adjusted) spending might fall, but the share in real (inflation-adjusted) spending might not follow. Or, to put it simply, people might have more TVs in their homes than ever before even while the share of their total income they spend on TVs has fallen. But, nobody would describe this state as a declining demand for TVs.

The following graph shows the share of goods in final sales of domestic products (the Bureau of Economic Analysis provides data on major types of products, dividing final sales into goods, services and structures. See NIPA Tables 1.2.5 and 1.2.6). The goods share of final sales in nominal terms did fall from 40.8 percent in 1969 to 28.3 percent in 2011, a roughly 30 percent decline in relative spending. However, the share of goods in real final sales actually rose 50 percent from 21.5 percent in 1969 to 31.3 percent in 2011. This means that the economy was even more goods-intensive in 2011 than in 1969 and that it was not a relative decline in the demand for goods that caused the shrinkage of manufacturing employment.

In the end, manufacturing employment is a horse race between demand for manufactured goods (which boosts jobs) and productivity (which, all else equal, means fewer jobs are needed in the sector). One thing that this analysis should remind us of is that even faster productivity has its upside: As prices fall because productivity rises in this sector, people demand more manufactured goods.

It should be noted, however, that neither Porter nor Lawrence denies that lowering the trade deficit would boost jobs. Rather, Porter says that even without any imports, manufacturing employment would lag. Lawrence, meanwhile, says that even without a trade deficit, goods employment would fall. In reality, closing the trade deficit would provide millions of jobs and boost the economy. For instance, my colleague Robert Scott has shown that growing trade deficits with China eliminated 2.8 million U.S. jobs between 2001 and 2010 alone, including 1.9 million jobs displaced from manufacturing. Similarly, correcting the currency imbalances with China, Hong Kong, Taiwan, Singapore, and Malaysia could add up to $285.7 billion (1.9 percent) to U.S. GDP, create up to 2.25 million jobs over the next 18 to 24 months (most in manufacturing), and reduce U.S. budget deficits by up to $71.4 billion per year.

Moreover, as Scott’s recent blog post notes, the recent recession was especially hard on manufacturing (we lost 2.3 million jobs between 2007 and Jan. 2010) and we can get those jobs back in a robust recovery.

So, sure, manufacturing employment will not return to 25 percent of employment. Nevertheless, we can gain a lot of manufacturing jobs by strengthening the recovery and through appropriate trade and currency policy. This would provide millions of good jobs, aid many communities, and be good for the nation. No head-fakes about household consumption shares should distract us from these facts.

Latinos versus the Census Bureau: When racial categorizations clash

People create races, not nature. Different societies tend to have different systems of racial categorization. Even within the same society, there can be significant changes in racial categorization over time. We can get a sense of this from the fact that U.S. Census Bureau has made changes to the rules for racial classification system in nearly every census.

The guidelines for the 1940 Census (the full data of which was recently released to the public) instructed enumerators that “any mixtures of white and nonwhite blood” should be classified as nonwhite. Additionally, people of “mixed Negro and Indian blood should be reported as Negro” while “other mixtures of nonwhite parentage should be reported according to the race of the father.” These rules only make sense when embedded in the specific U.S. political economy of slavery and Jim Crow.

Today, in post-Civil-Rights-era America, individuals define their own race, not the Census enumerators. Also, in response to lobbying for multiracial categorization, since 2000 the Census Bureau has allowed individuals to select more than one race. In 1940, multiracial categorization in Census data was not possible.

Over the past few decades, the United States has seen a significant increase in the Latino population. Many of these Latinos are immigrants from other countries with other systems of identity and racial classification. These systems of classification may be in conflict with the official directives of the Census Bureau.

According to the Census Bureau, being Hispanic or Latino is an ethnic classification, not a racial classification. For perhaps as much as half of the Latino population, however, Latino is a racial category. A new survey from the Pew Hispanic Center illustrates this fact. When asked “Which of the following describes your race?”, 25 percent of Latinos answered “Hispanic or Latino.” Another 26 percent chose “Some other race”–rejecting the Census-Bureau-recognized racial categories of “white,” “black,” and “Asian.” While some of these “Some other races” may have been looking for “American Indian,” it is doubtful that all or even a majority of them were. They were looking for some racial category that the Census Bureau does not offer.

For many Latinos, “Latino” is understood as a racial category or as something other than an ethnic category in the sense that the Census Bureau intends. The idea of a cultural racial category is not an uncommon one. Nazi Germany, notoriously, institutionalized the category of a Jewish race. In Japan, there is the idea of a Japanese race which would distinguish them not only from non-Asian groups, but from other Asians as well. Groups that are conceptualized as cultural in the United States can be conceptualized as racial elsewhere.

Recently, NPR described George Zimmerman as a “white Latino,” but many of their listeners were confused by the term. This is interesting since according to data from the 2010 census 53 percent of Latinos are white.

The Pew Hispanic Center survey shows us that many Latinos see their group as something akin to a racial group. But the survey does not tell us how non-Latinos perceive and classify ​Latinos. Do non-Latinos perceive Latinos to be a separate race, an ethnic group, or something else? Latinos’ future in the United States depends not only on how they perceive themselves, but also on how others perceive, classify, and ultimately treat them. One hopes that a future Pew Hispanic Center survey will ask these questions.

Memo to the Times: Hold the funeral march for U.S. manufacturing

A recent commentary by Eduardo Porter in the New York Times claims that a “revolution in manufacturing employment seems far-fetched,” despite the recent recovery of manufacturing employment. Porter then proceeds to pound nails in manufacturing’s supposed coffin, claiming that “most of the factory jobs lost over the last three decades in this country are gone for good. In truth, they are not even very good jobs.” Perhaps not for a physicist like Porter, but manufacturing does provide excellent wages and benefits for many working Americans. And, with 11.9 million jobs today, U.S. manufacturing is very much alive and kicking.

Laura D’Andrea Tyson got the wage issue right in Why Manufacturing Still Matters, a post she wrote for the Times Economix blog in February. She notes that manufacturing jobs are “high-productivity, high value-added jobs with good pay and benefits.” According to Tyson, in 2009, “the average manufacturing worker earned $74, 447 in annual pay and benefits, compared with $63,122 for the average non-manufacturing worker.”1 Manufacturing wages and benefits are particularly attractive for workers without a college degree, for whom the alternative is often a job at low pay with no benefits.

Porter is also wrong to suggest that manufacturing employment has been on a downward trend for three decades (see graph below). In fact, manufacturing employment was relatively stable between 1969 and 2000, generally ranging between 16.7 million and 19.6 million workers. During this period, employment in big-ticket, durable goods industries such as autos and aerospace was more volatile than employment in non-durable goods. Starting from a peak in early 1998, U.S. manufacturing declined rapidly after the Asian financial crisis (which caused widespread devaluations in Asia), and total employment in both durable and non-durable goods began a sharp drop. This decline was associated with the rapid growth of the U.S. trade deficit, especially with China. Growing trade deficits with China eliminated 2.8 million U.S. jobs between 2001 and 2010 alone, including 1.9 million jobs displaced from manufacturing. Thus, U.S. job losses in manufacturing are really just a phenomenon of the past decade.2

Manufacturing has been hit with two distinct waves of job losses since 2000. Between 2000 and 2007, growing trade deficits were largely responsible for the loss of 3.9 million manufacturing jobs. In this period, employment declined in both non-durables (-20.3 percent) and durables (-19.8 percent) at similar rates. The great recession eliminated another 2.3 million jobs between 2007 and Jan. 2010 as the demand for cars and other manufactured goods collapsed. Employment in durable goods was hit especially hard by the recession, falling an additional 19.7 percent, while employment in durables fell 11.3 percent. However, since the end of the recession, employment in the two sectors has behaved in very different ways, as shown in the graph. Non-durable employment has remained essentially flat, adding only 5,000 jobs (0.1 percent) over the past 26 months, while durable goods industries have added 454,000 jobs (6.7 percent).

It does seem unlikely that the U.S. will recover many jobs in apparel or footwear. However, the non-durables sector also includes chemicals, pharmaceuticals, and petroleum refining. The U.S. exports large amounts of those commodities, and they certainly support the kind of high value-added, high-wage jobs Tyson described.

Durable goods industries such as aerospace products, machine tools, electronics, and motor vehicles and parts also support lots of exports, and those industries could grow with support of appropriate trade and industrial policies. Countries such as Japan and Germany have managed to support large and growing trade surpluses, especially in those sectors, because the vast majority of their exports are manufactured products. And, contrary to Porter’s assertions, they have lost a much smaller share of their manufacturing jobs than the United States. According to OECD statistics, between 2000 and 2009 (from peak to the trough of the recession), Germany lost fewer than 700,000 manufacturing jobs (an 8.3 percent decline). Japan lost 2.1 million (-17.4 percent), and the United States lost 5.7 million (-30.2 percent). The U.S. suffered nearly twice as much manufacturing job loss as Japan, and nearly four times as much as Germany.

Manufacturing employment in each of these countries has been hurt by the recession (although Germany, for example, did much more to prevent manufacturing job loss during the downturn), but the big difference is trade. In the German “Kurzarbeit,” or short work program, firms cut workers’ hours rather than make big layoffs, and the government helps make up the difference in workers’ paychecks (rather than paying unemployment compensation), thus limiting mass unemployment and stabilizing the economy. Growing trade deficits eliminated millions of manufacturing jobs in the United States, while growing trade surpluses helped support manufacturing jobs in Japan and Germany. It didn’t have to be that way, and we can recover lost manufacturing jobs in the future, especially in high-wage, durable goods industries. Read more

Social Security privatizer Pozen attacks public employee pensions

I don’t have any argument with the investment advice Robert Pozen and Theresa Hamacher gave readers of the Washington Post this past Wednesday. Diversification and investment in high-quality funds seems like common sense.

But the highly politicized trashing of public employee pension plans they indulge in along the way is based less on common sense than ideology. Pozen was an investment banker when George W. Bush appointed him to the President’s Commission to Strengthen Social Security. The commission launched Bush’s plan to privatize Social Security, which would have replaced the security of a guaranteed, regular monthly benefit check by making a large portion of their benefit contingent upon the returns from risky investments in the market. Why? Pozen and his fellow commissioners argued that the stock market historically yields much better returns on investment than the average worker gets from their contributions to Social Security:

“It is relatively straightforward to show that, for a given level of funding, a personal account system can offer higher total expected benefits than the current system.”

To illustrate, the commission helpfully provided a chart showing the average real returns (i.e., returns over and above inflation) of stocks from 1802 to 1997. For 20-year and 30-year holding periods, the real return was 7 percent, a nominal rate of about 10 percent. The implication was, of course, that these returns (having persisted for almost 200 years) would go on forever.

Shortly after the commission issued its report, the stock market crashed (a good lesson for a public that had been seduced by years of skyrocketing market values), and it crashed again, even harder, in 2008. Dean Baker points out that when Pozen was trying to cut public funding for Social Security and reduce benefits, he touted the potential returns of the market even though the price-to-earnings ratio was at historic highs (meaning that stocks were historically expensive to buy and unlikely to provide high returns going forward from that point).

Now, when price-to-earnings ratios are relatively low and stocks might be expected to do well for a few years, Pozen considers the market too risky for public pension plans. This seems contradictory (not to mention economically innumerate), but if one’s real goal is not to improve retirement security but to instead simply reduce benefits in public pension plans, there is no inconsistency.

Pozen argues that public employee pension plans are in crisis, or at least that a crisis is “looming.” He says we know this because even though plan liabilities are only about 4 percent of annual GDP according to standard accounting measures, those measures “rely on the existing, deficient rules for pension accounting” and understate the problem. They depend on the plans getting strong returns on their investments – generally about 8 percent in nominal terms and about 5 or 6 percent in real, inflation-adjusted terms. That of course, is less than the stock market returns Pozen and his fellow commissioners cited as the historic average for all 20 and 30-year periods. Pozen says a rate near 8 percent “seems unrealistic based on recent investment returns. Over the past 10 years, the Standard & Poor’s 500-stock index has achieved only a 1.9 percent annualized return.” Remember, Pozen was arguing the exact opposite about the expected returns from stocks when it was (a) convenient to push his policy preferences, and (b) clearly wrong, as P/E ratios meant that stocks were more expensive (and hence had lower expected returns) back then.

Pozen wants public employee plans to use a discount rate of 4 to 5 percent, lowballing their expected investment returns and magnifying their potential underfunding. He joins Andrew Biggs at the American Enterprise Institute and a host of anti-government, anti-public employee conservative commentators whose twin goals are to reduce compensation for public employees and discredit government.

Whatever one thinks of Pozen’s investment advice, his advice on public policy has a dismal track record and deserves skepticism.


The worst recession in 70 years, not the worst recovery

In the Wall Street Journal last week, Edward Lazear penned a column titled The Worst Economic Recovery in History. Let’s take this claim to the data. The figure below directly compares job growth in the recovery from the Great Recession (labeled “2007 recession”) to job growth in the recoveries from the three prior recessions:

It’s clear from the figure that jobs fell much further and faster during the Great Recession than in previous recessions. But looking to the right of the dotted line, we see that job growth in the current recovery is actually stronger than job growth in the recovery following the recession of 2001, and not that much weaker than the recovery following the recession of 1990. The recovery following the 1981 recession outpaces all three by far, but that should not be a shock. The 1990, 2001, and 2007 recessions were all associated with financial crises (savings and loan crisis, dot-com bubble, and housing bust, respectively) and it’s obvious by now that recoveries from such recessions require much stronger medicine. The 1981 recession, by contrast, was largely caused by the Federal Reserve Board raising interest rates to curb inflation. This gave the Fed lots of room to lower rates to provide a boost from interest-sensitive goods, (namely housing and durable goods,) leading to strong job growth. With interest rates currently near zero, that lever has not been available in the Great Recession and its aftermath. (As an aside, it’s worth mentioning the extraordinarily fast growth of government spending that buoyed the 1981 recovery.)

The above figure underscores that the key difference between the job situation at this point in the economic recovery, compared with the same point in the last two recoveries, is the length and severity of the recession that preceded them. In other words, it’s not that job growth in the current recovery is uniquely terrible—it is pretty much in line with the weak recoveries following the last two recessions—it is the Great Recession (and in particular the job loss from Sept. 2008–June 2009) that was uniquely terrible.

Of course, this in no way lets today’s policymakers off the hook; the nation’s labor market remains incredibly weak and the current pace of job growth will needlessly condemn millions of Americans to joblessness for years to come. The key problem in the current economy is depressed demand for goods and services, which (since workers provide goods and services) translates into depressed demand for workers. Effective responses, however, have been hamstrung by destructive orthodoxy. I strongly agree with Lazear that we must “move to a set of economic policies that are aimed at growing the economy.” But his list of policies are either irrelevant (regulatory burden) or actually destructive (cutting government spending) to prospects for a rapid recovery.

Were some of ARRA’s jobs eaten by rising hours?

Speaking of rising hours, it’s also interesting to note that the atypically large rise in average hours since the recession’s trough happened to coincide with the period during which the American Recovery and Reinvestment Act (ARRA) was providing its peak boost to economic activity (see the figure below).

Between the first half of 2009 and first half of 2011, ARRA boosted GDP by roughly 1.3 percent. All else equal, this should have been associated with employment in the first quarter of 2011 that was roughly 1.5 million higher and unemployment that was a full percentage point lower by the first quarter of 2011 than would’ve happened without ARRA.*

But, over this same period, average hours worked rose by 1.4 percent. All else equal this implies that about 1.5 million new workers were not needed to absorb rising demand for labor.

To be clear, everybody who tries to translate additional economic activity spurred by ARRA (or anything else) into an increase in employment makes an adjustment for average hours increasing as the economy exits a recession and begins growing again – it’s a pretty typical pattern. But, as pointed out before, the rise in hours in the recovery following the Great Recession was atypically large and the GDP-to-employment translations may have been off because of it.

Of course, the most common criticism levied against ARRA by its critics was some version of the argument that “you guys saying it’s boosting the economy, but job-growth is really slow and unemployment is rising.”

So does the fact that rising hours may have crowded out  potential new hires while ARRA was creating new demand then mean that the critics are right about the Recovery Act’s ineffectiveness?

Nope. ARRA created new demand for labor by boosting economic activity. Period. American workers as a group worked more and earned more money because of ARRA.

But it does tell us that we might not be so sure about how this new labor demand was allocated – and in fact it seems like more of it went to increasing the hours of incumbent workers and less went to increasing new hires than we may have thought.

One metric does not change, however: the estimate of full-time equivalent jobs created by ARRA. This measure holds hours constant by design. In short, this seems like the safest bet for having a solid assessment of what ARRA did. And for the record, at its peak during the last half of 2010, full-time employment was between 1 to 6 million higher because of ARRA, regardless of what was happening to hours.

The possibility that lots of the new employment opportunities created by ARRA were filled by increasing hours of incumbent workers rather than new hires may, of course, have meant that that ARRA was less effective from a political perspective. Had more of its boost to economic activity shown up in top-line labor market indicators like new hires and lower unemployment, its proponents (like me) might have had an easier job demonstrating just how important it was.

*All numbers on ARRA’s effectiveness in this post come from the CBO

Washington Post misdiagnoses causes of retirement insecurity

The Washington Post published a story earlier this week by Jia Lynn Yang that had all the information needed to conclude that the 401(k) isn’t working out. She reports that the 401(k) has caused serious stress for working Americans and cites some scary financial data from the Center for Retirement Research. Since Congress created the 401(k) about 30 years ago, financial unpreparedness has gotten much worse: In 1983, researchers found that 31 percent of working age households were “at risk” of losing their standard of living when they retired; by 2009, it was 51 percent. The average worker who retires should have more than $300,000 in their 401(k) account, but in 2007 – even before the markets crashed and wiped out trillions in savings – the average person about to retire had only $78,000. The story didn’t mention that the cumulative underfunding of retirement accounts is nearly $7 trillion.

But instead of fingering the 401(k) as the cause of the stress and retirement insecurity most of us are facing, or even blaming Congress or the employers replacing pensions with a cheaper, badly designed personal account, Yang and her editors conclude that the fault lies with the many employees who are just too “clueless,” as Ms. Lang puts it, to deal with financial responsibility.

This lets the real villians off way too easily. Essentially, the big retirement-policy experiment of the past three decades has been replacing guaranteed pensions with … a tax cut, called 401(k)s. Since the 401(k) is failing so badly to achieve the most important goal our retirement system should have – the achievement of retirement security for most Americans – it should be replaced with something better, and we can put the money gained by closing the 401(k) tax expenditure to better uses. I also disagree with Yang’s statement that “even the program’s biggest critics concede that the system … is here to stay.” Not necessarily. The 401(k) is essentially a tax loophole that over-rewards the well-off for saving money they would have saved anyway. More than 70 percent of the tax deductions are taken by people in the top 20 percent by income. Every member of Congress claims we need to close tax loopholes and non-performing subsidies, and if tax reform ever happens, the 401(k) should be a fat target.

The article suggests that the 401(k)’s failures are really our own: ignorance, irresponsibility, making mistakes. It never mentions the effect on these accounts of the fees charged by plan administrators, investment advisors, and mutual funds, which can shave 25 percent off an account over a lifetime of work and investing. Yang never mentions that employers tend to put far less money into 401(k) plans than they do into pensions, that employers often reduce their contributions or freeze them altogether when times get tough, and that some employers make their contributions in company stock – often a poor choice and one that can lead to insufficiently diversified investments.

Yang does mention that it isn’t easy for individuals “to manage your investments intelligently through stock market highs and lows.” But I’m not sure she understands just how difficult it is, even for a former Assistant Secretary of the Treasury like Alicia Munnell, whom Yang quotes as saying “managing your own money is just horrible.” Market risk is out of one’s control, to a certain extent. To illustrate, Gary Burtless of the Brookings Institution estimated that a 401(k) participant retiring in 1974 would have a retirement income 64 percent lower than that of a worker who retired in 1999 if both workers contributed the same amounts over 40 years to a portfolio split equally between long-term government bonds and stocks (Burtless 2008). In short, two workers pursuing the exact same (and generally sensible) strategy achieve wildly different retirement income possibilities simply because of good or bad timing.

The tens of billions of dollars taxpayers are wasting to subsidize 401(k) savings each year would be much better spent on the more egalitarian, safer, and more nearly universal Social Security retirement system.


Business groups lobby to relax rules on much-abused guest worker program

The L-1 visa, a guest worker category relatively unknown to the general public, has received a lot of attention in the past couple of weeks from businesses that use it, news outlets that cover the technology sector, and now, from organized labor. U.S. Citizenship and Immigration Services (USCIS) is currently developing new interpretive guidance which has the potential to make this dysfunctional temporary work visa category dramatically better or dramatically worse.

The L-1 allows a multinational company to transfer personnel stationed abroad into the United States if it has a parent, subsidiary, or affiliate company located on U.S. soil. Such a company can petition to hire either a manager or an executive at its U.S. office (known as the L-1A subcategory), or a worker with “specialized knowledge” (L-1B). In 2010, nearly 75,000 L-1 visas were approved, and although they are available to companies in all industries, according to the Department of Homeland Security’s (DHS) Office of Inspector General, “the positions L-1 applicants are filling are most often related to computers and IT.”

But there are a number of serious and systemic problems that have been identified with this visa category.

For example, the L-1 visa has no prevailing or minimum wage requirement, and no requirement that companies first check to see if there is an unemployed U.S. worker available for the job the L-1 worker will fill. There have also been documented cases of companies hiring an L-1 worker, forcing a U.S. worker to train the L-1 worker on how to do their job, and then firing and replacing the U.S. worker with the L-1 temporary worker. The fired worker is then prohibited from speaking a word of this to anyone as a condition of receiving a severance package. The employer is even allowed to pay home country wages to the foreign L-1 worker, which is likely to be tens of thousands of dollars less than what is paid to a similarly skilled U.S. worker. L-1 workers are also unlikely to complain about these low wages or any employer abuse that may occur, because if they speak up and get fired as a result, they are not allowed to take a job with another employer and become instantly deportable. This gives employers access to a lower-paid foreign workforce that has no bargaining power in the workplace.

The huge financial savings and unequal power relationship that employers enjoy when hiring L-1 workers – but especially L-1B workers who are not in executive or managerial positions – is the reason that the U.S. Chamber of Commerce and dozens of multinational companies are lobbying USCIS heavily, urging the agency to make it easier to hire L-1B workers. But that’s also exactly why Professor Ron Hira and I have harshly criticized the negative impact the visa has on the wages and employment opportunities of U.S. workers, and asked USCIS director Alejandro Mayorkas to refrain from expanding the L-1B category at the expense of decent-paying high-tech jobs in the United States.

On Tuesday, as reported in Computerworld, 20 unions that represent workers in high-tech occupations sent a letter to President Obama urging him to do the same. In addition, the IEEE-USA, the largest engineering professional society in the world (representing 210,000 engineers in the U.S.), sent a letter to Mayorkas expressing their concern about how the “L-1 visa program continues to be used in ways that exploit L-1B workers and adversely affect employment opportunities, wages and working conditions for U.S. citizen and permanent resident workers.” The IEEE-USA letter also reminds Mayorkas that the program should “exclude … outsourcing companies whose business models are based on workers acquiring skills, knowledge and contacts in the United States for the purpose of moving American jobs overseas.” Unfortunately, the data reveal that it does not.

The crux of what USCIS is considering has to do with better defining what constitutes a potential employee’s “specialized knowledge” – the legal requirement for the L-1B category. This definition has been problematic for a number of years. Multiple interpretations and guidance from the executive branch and judicial decisions have muddled and expanded the meaning, making it so broad “that adjudicators believe they have little choice but to approve almost all petitions.” This broadening of the legal standard makes it difficult for government officials to reject applications even when they believe them to be fraudulent.

No one disputes that multinational companies should have the right to bring in their brightest, best, most essential and talented personnel to help manage and run their offices in the U.S. But first, they have to show that the workers they bring to the U.S. are indeed highly skilled, and the government must implement basic protections that would prevent adverse effects on the wages and employment of U.S. workers. Since these requirements and protections are not yet part of the L-1 visa program, the L-1B category should not be allowed to grow or expand until they are in place. Instead, it should be curtailed drastically. The new USCIS guidance on L-1B specialized knowledge could help keep good jobs from being sent abroad and protect skilled high-tech workers in the United States – but only if Mayorkas and the Obama administration side with workers instead of the Chamber of Commerce and the high-tech offshoring industry.

Unemployment rising too fast, then falling too fast … going forward, it should (unfortunately) be just right

Has the unemployment rate fallen “too fast” given underlying output growth over the past 18 months? Applying a simple Okun-type relationship between changes in unemployment and the difference between growth rates of actual and potential GDP (or, changes in the output gap) would indicate so. Between the fourth quarter of 2009 and fourth quarter of 2011, the output gap shrank by less than 0.8 percent per year – which historically would only have been associated with a 0.4 percentage-point decline in the unemployment rate. Instead, the unemployment rate fell by 1.2 percentage points – or three times as much as our Okun regression might suggest should’ve happened.

Federal Reserve Chairman Ben Bernanke noted this “too low” unemployment last week (so have Tim Duy and others). While there’s definitely some interesting stuff to examine here, we should first point out the one thing that nobody disagrees about. Going forward from now, the best estimate for what another 24 months of 0.8 percent average output gap reduction will buy us is the one provided by the classic Okun-style relationship:  A very slight fall – about 0.4 percentage points – in the unemployment rate.

This cautionary tale about what to expect going forward is sometimes lost as people point out that the too rapid fall in unemployment recently is the mirror image of the too-rapid rise in unemployment in late 2009 and 2010. The graph below shows the actual unemployment rate and the one predicted by regressing two-year changes in unemployment on the two-year change in the output gap, as well the square of the change in the output gap (included to capture a non-linear effect pointed out by Zach Pandl at Goldman-Sachs; no link available, I’m afraid).

The graph clearly shows the too-rapid rise and fall of unemployment relative to predictions over the past couple of years. While interesting, this doesn’t change the most important thing that such an analysis tell us: If we want the unemployment rate to continue falling at the same rate that characterized the past year-and-a-half, we better see much faster GDP growth. As Bernanke said:

“However, to the extent that the decline in the unemployment rate since last summer has brought unemployment back more into line with the level of aggregate demand [note: i.e., recent too-rapid declines “making up for” earlier too-rapid gains], then further significant improvements in unemployment will likely require faster economic growth than we experienced during the past year.”

To be concrete, the Congressional Budget Office is projecting growth in potential GDP of 1.8 and 1.9 percent in 2012 and 2013, respectively. Mark Zandi of Moody’s Analytics is projecting actual GDP growth of 2.5 and 2.9 percent in those years, respectively. This means the two-year change from 2011 is right back at that 0.8 percent difference between actual and potential GDP growth that has characterized the last two years, which means we should expect unemployment to fall by only 0.4 percentage points over that time. This is what people should really know about unemployment changes going forward: absent serious measures to boost growth, they will be excruciatingly slow.

Lastly, it’s worth examining if there’s any odd economic development that might explain the too-rapid rise in actual unemployment between the second quarter of 2009 and the last quarter of 2010 – the time period that saw predicted unemployment begin lagging actual unemployment by more and more.

One pretty clear suspect is fingered in the graph below, which shows the rise in average hours across economic recoveries. For the most recent recovery, the index begins in the second quarter of 2009 (the official trough of the recession).

One can see clearly that the rise in average hours worked was atypically fast in the current recovery. In fact, compared to previous averages, the length of the work-week rose by about 2 percent. This is a big deal, representing about 2.3 million workers that did not have to be hired because rising demand was absorbed by rising hours of incumbents instead.

But shouldn’t this change in hours be soaked up in our Okun regressions by the output gap variable (since hours always tend to be procyclical)? Not this time. A regression of the change in hours on the change in the output gap (and a time trend) under-predicts the rise in hours between the second quarter of 2009 and second quarter of 2011 by nearly 2 percent. Between the second quarter of 2011 and the fourth quarter of 2011, the predicted rise is actually slightly greater than the actual rise.

So, what to make of all this?

First, going forward, the best predictor of what will happen to unemployment remains the Okun-based estimates based on GDP growth. Given that most estimates of GDP growth in the next couple of years do not see it beating growth in potential output by much, there is little reason to expect that the recent rapid declines in unemployment rates will continue.

Second, rising average hours might explain a lot of the too-rapid rise in unemployment in 2009 and 2010.

Lastly, given this large rise in hours, an aggressive program to promote work-sharing instituted during the recession could have been a big help in not allowing rising hours to soak up so much of the extra labor demand, and would’ve allowed the economic activity spurred by the American Recovery and Reinvestment Act to translate more directly into higher head counts and lower unemployment. The Center for Economic and Policy Research’s Dean Baker had a good real-time proposal that would have been a real help. It’s not totally too late either – work-sharing pilot programs were included in the recent extension of payroll tax cuts.

Apple’s employees in China don’t work 70 hours a week because they want to

The most annoying responses to the revelations about Apple’s inhumane and exploitative factory pay and working conditions in China are the variations on the theme that the Chinese workers are grateful (or ought to be) to have the work and even the grueling overtime hours. “Sure, it looks like exploitation to Westerners, but really, Apple is lifting their living standards.” No. Apple is exploiting these young Chinese workers, grinding them down, forcing them to work for pay so low they can’t survive on it without working far beyond anything fair or reasonable – or even legal under Chinese labor law. And the workers don’t have a choice; they either work the overtime or they’re fired.

The Fair Labor Association, Apple’s hand-picked auditor, found that Apple’s most important supplier, Foxconn, works employees far beyond the hours permitted by Apple’s code of conduct (a maximum of 60 hours per week), let alone Chinese law, which limits work hours to 49 per week. The FLA reports that “in November and December 2011, 34% and 46% of the workforce respectively worked up to 70 hours per week.” Students and Scholars Against Corporate Misbehaviour (SACOM), a Hong Kong-based labor rights organization, has documented Foxconn employees working 140 hours of overtime a month.

Keith Bradsher’s recent “news analysis” in the New York Times, “Two Sides to Labor in China,” blamed the workers for these sweatshop hours and tried to portray them in a positive light. Bradsher wrote: “But one reason that workweeks of 60 hours or more have been possible at factories run by Foxconn and others is that at least some laborers already on the payroll have wanted the extra hours.”

Bradsher believes the employees have a choice about working 60-70 hours a week. He writes that “the added expense of hiring additional workers can make it cheaper to ask employees for extra overtime…” Ask? When Foxconn employees were throwing themselves out of dormitory windows, committing suicide in reaction to the harsh conditions at Foxconn, the company reduced work hours to 60 a week, but it didn’t give workers a choice about working them. As an Oct. 2010 SACOM report revealed, “Despite fatigue, workers cannot reject overtime work, because Foxconn requires workers to sign a Voluntary Overtime Pledge.”

Bradsher cites the FLA’s survey of Foxconn employees, 34 percent of whom reported they “actually wanted even more hours.” How can workers want more than 60 hours a week? Bradsher says they’re young and bored, have nothing better to do, “and were eager to make as much money as possible so as to return to their home villages.” He never suggests that their pay is so low they can’t survive working the legal maximum number of hours. But that is exactly what SACOM found in 2010 when it compared the cost of living in Foxconn’s factory cities with Foxconn’s pay. Without overtime, the average Foxconn production employee earned about 60 percent of what was required to meet basic needs. Today, after wage increases that have been offset by higher food prices and what Bradsher admits are “soaring rents,” 72 percent of Foxconn employees at Chengdu told the FLA their salaries did not cover basic needs.

So when Apple apologists tell you that “the Chinese are different, they want to work long hours,” don’t buy it. The richest corporation in the world is grinding its workers to the bone because it can get away with it, not because the workers want to live that way.

What to do about the eurozone?

Is the eurozone in recession? Eight consecutive months of rising unemployment indicate that the region could indeed be facing another economic downturn.

According to Eurostat, the European Union’s version of the Bureau of Labor Statistics, the unemployment rate in the 17 countries that use the euro climbed to 10.8 percent in February, its highest level since the currency’s introduction in 1999. Seven eurozone countries have unemployment rates of more than 10 percent; in comparison, the United States’ unemployment rate is 8.3 percent. Past historical periods have also seen lower unemployment rates in the United States than in most of Europe, but the difference over the last couple of years is that joblessness in the eurozone is obvious collateral damage stemming from the embrace of fiscal and monetary austerity.

“Europe’s leaders just haven’t been nearly as committed [as U.S. leaders] to boosting demand with expansionary macroeconomic policies, either fiscal or monetary,” says EPI macroeconomist Josh Bivens.

“To be clear, the United States hasn’t provided adequate support to its economy and job market—but Europe has been even worse,” he continued.

In Spain, nearly a quarter of the labor force is unemployed, including more than half of workers under age 25. Spain’s plan to combat its troubles? A $36 billion austerity package passed by its new conservative government. As EPI has argued before, austerity measures are inappropriate solutions to unemployment crises. This is clearly the case in Greece, Ireland, and Portugal, all of which had to enact austerity measures as a condition of receiving bailouts. In these countries, austerity has compounded economic troubles and failed to improve staggeringly high unemployment rates.

The aftermath of clashes between protesters and police in Barcelona on March 29 by workers participating in a general strike against the Spanish government's economic reforms. (From Flickr Creative Commons by Sergio Uceda)

So how can the eurozone avert another crisis? Bivens thinks there are two separate questions that need to be answered. First, how are countries like Greece (and if we’re unlucky, Ireland, Italy, Portugal, and Spain) going to pay their debts (and how much of their debts will be written off by creditors)? Second, how are these same countries going to see growth in the next decade sufficient to ward off disastrous unemployment levels?

Bivens believes the second question gets much less attention—but is far more important.

“A key barrier to a country like Greece achieving growth in the coming decade is the lack of an independent monetary and exchange-rate policy,” says Bivens. “Greece absolutely needs to gain competitiveness in global markets as part of its medium-term macroeconomic strategy.”

He continued, “There are two paths there, exchange-rate adjustment or ‘internal devaluation’ [i.e., having Greek wages and salaries grow painfully slow for years]. The latter course is much more damaging; just look at Latvia, which fully embraced that strategy. The real lesson of the euro crisis is that all the tools of macroeconomic management need to be taken much more seriously than they have been.”

Nothing screams fiscal charlatan like a $4.5 trillion tax cut financed by gimmicks

Note: Since this blog post was first published, the Tax Policy Center has updated its revenue scoring of the tax provisions in the Ryan budget. Numbers and figures have been revised to reflect the more recent score.

House Budget Committee Chairman Paul Ryan’s (R-Wis.) budget, which passed the House of Representatives on a party-line vote last week, continues to receive deserved criticism for its thoroughly dishonest treatment of the sweeping tax cuts it proposes. In a scathing critique, Paul Krugman honed in on its “fraudulent” nature: “The Ryan budget purports to reduce the deficit — but the alleged deficit reduction depends on the completely unsupported assertion that trillions of dollars in revenue can be found by closing tax loopholes.” William Gale of the Brookings Institution similarly concluded that “Ryan is gaming the system in creating budget estimates. … This is smoke and mirrors.

The contours of the Ryan budget’s tax cuts, as scored by the nonpartisan Tax Policy Center (TPC), are as follows:

Tax cuts:

  • Cut and consolidate individual income tax rates to 25 percent and 10 percent brackets: $2.5 trillion
  • Repeal the alternative minimum tax (AMT): $670 billion
  • Repeal the surcharges included in the Affordable Care Act: $351 billion
  • Cut the corporate rate to 25 percent and end taxation of multinationals’ foreign income: $1.1 trillion


  • Allow Recovery Act expansion of refundable tax credits to expire: $210
  • ???

=     $4.5 trillion in revenue loss


Ryan’s budget blueprint describes these offsets this way: “Broaden the tax base to maintain revenue growth at a level consistent with current tax policy and at a share of the economy consistent with historical norms of 18 to 19 percent in the following decades.” And the budget totals in the Ryan budget reflect revenue averaging 18.3 percent of GDP over FY2013-22; similarly, the Congressional Budget Office’s long-term analysis of Ryan’s budget is predicated on the false assumption—provided by Ryan’s staff—that revenue will somehow total 19 percent of GDP over the long run (FY2025 and beyond).

This is simply dishonest. TPC’s analysis of the Ryan budget shows revenue averaging only 15.5 percent of GDP over FY2013-22, short of unspecified offsets.1 Yet Ryan wanted nearly $5 trillion in tax cuts and wanted revenue levels above 18 percent of GDP. Honest budgeting would force Ryan to choose between these two preferences (trade-offs being the whole point of budgeting). So Ryan chose dishonest budgeting, instead of changing the policy, he just changed the numbers.

We do know one thing about Ryan’s magic asterisk: it wouldn’t come anywhere close to raising revenue equivalent to roughly 3 percentage points of GDP over the decade (or roughly $6 trillion). For starters, he’s ruled out eliminating the preferential tax treatment of capital gains—the tax loophole most skewed toward the very top of the income distribution and estimated to cost $533 billion over the next decade, according to Citizens for Tax Justice. Furthermore, a new analysis by Jane Gravelle and Thomas Hungerford of the Congressional Research Service concluded that, “given the barriers to eliminating or reducing most tax expenditures, it may prove difficult to gain more than $100 billion to $150 billion in additional tax revenues through base broadening.” Adjusting for this range of feasible base broadening, the Ryan tax cuts would still require somewhere between $2.6 trillion and $3.2 trillion of deficit-financed tax cuts.2 Look at what happens to Ryan’s fiscal trajectory based on three alternative scenarios adjusting for: 1) no base broadening; 2) the low-end of feasible base broadening; and 3) the high-end of feasible base broadening.3

By 2022, public debt under the Ryan budget would be between $3.0 trillion (+19.6 percent) and $5.3 trillion (+34.2 percent) higher without the magic asterisk—a significant margin of dishonesty. This is not meant to breed fiscal alarmism or validate Ryan’s purported debt target; big budget deficits are inevitable in the aftermath of the Great Recession and premature fiscal retrenchment would jeopardize economic recovery. This is merely to prove that Ryan’s entire claim to fiscal responsibility rests on his tax gimmick.

With these tax cuts blowing the lid off of Ryan’s deficit reduction, his proposed evisceration of Medicaid, the social safety net, and public investments is exposed for what it really is: An attempt to gut the federal government and refund the tax bill to the highest-income households, not reduce the deficit. Some $5.3 trillion in non-defense spending cuts—nearly two-thirds of which come from programs for lower-income households—would roughly finance the $5.4 trillion cost of maintaining the Bush-era tax cuts, reduced estate and gift taxes, and the AMT patch. Ryan’s additional $4.5 trillion in tax cuts—two-thirds of which would go to households earning over $200,000—would be financed with a combination of increasing deficits and reducing tax expenditures other than preferential rates on unearned income, thereby shifting the distribution of the tax burden toward the middle class. Nothing screams fiscal charlatan like trillions of dollars worth of tax cuts skewed toward the affluent but financed by gimmicks and abdication of longstanding commitments to seniors, children, and the disabled.

1. TPC’s analysis is based on CBO’s Jan. 2012 baseline, whereas the Ryan budget is modeled from the March 2012 baseline. Adjusting TPC’s estimate of the Ryan plan for legislative and technical changes since the January baseline, the Ryan plan would see revenue average 15.6 percent of GDP over FY2013-22.

2. The $100 billion low-end and $150 billion high-end for base broadening are both set in FY2013 and held constant as a share of GDP thereafter.

3. The baseline for revenue comes from table S-1 of the Path for Prosperity (rather than TPC’s lower revenue baseline) and has been adjusted for lines 2-6 of TPC’s revenue estimate of the Ryan budget (T12-0123). Baseline outlays and debt held by the public are also taken from S-1, and debt service has been revised accordingly.

Fair Labor Association report leaves big questions about change at Apple/Foxconn

The Fair Labor Association (FLA), Apple’s auditor for its labor rights problems in China, issued a report last week that received widespread praise, including in the New York Times, whose reporting about workplace deaths, employee suicides and grueling overtime forced Apple to conduct the audit in the first place. This is not the first time Apple has commissioned such an audit, and it’s not the first time the auditor found serious problems.

In 2006, after British newspapers wrote about labor standards violations at Apple’s suppliers, Apple said an audit of a Foxconn facility revealed that more than a third of its employees worked more than the 60 hours-per-week limit imposed by Apple’s code of conduct. According to CorpWatch, Apple admitted that about 25 percent of the time, employees worked more than six days straight without a day off.

Apple vowed to clean up the violations it found and hired an outside consultant, Verite, to conduct ongoing audits of all of the factories where Apple’s products are assembled.

Fast forward to 2012, and Apple is once again telling the public it intends to improve, in precisely the same areas. But why should anyone think Apple’s commitment is any greater today than it was in 2006? Two important signs make me skeptical.

The first sign of trouble is the fact that the FLA’s “Remediation Plan” focuses exclusively on Foxconn and its scheduling, compensation, health and safety and industrial relations practices. Nothing in the plan makes Apple responsible for changing Apple’s own key behavior, the price it pays for Foxconn’s production. If Apple’s pricing is so tight that Foxconn can’t meet its profit targets without exploiting its employees, who’s responsible for their exploitation? If, as Apple claims, it truly wants to reduce the overtime hours Foxconn’s employees work to legal norms, without reducing the pay the workers receive, Apple can make that happen by paying more for each unit of production – enabling Foxconn to pay more more for each hour worked. But Apple hasn’t pledged that and the FLA doesn’t even mention the economics of Apple’s contracts with Foxconn. Apple’s public attitude is akin to saying: “We’re as pure as the driven snow, and our only taint comes from Foxconn’s sins.” But Apple has tolerated or compelled these practices for six years.

The second sign of trouble is that Apple and Foxconn have agreed to keep violating the law for the next 15 months, with the FLA’s blessing. Chinese labor law limits overtime per month to 36 hours, yet Apple and Foxconn have agreed to wait until July 1, 2013 to live within the law (page 12 in FLA’s report). As outrageous as this is, it seems to have gone unnoticed in all of the reporting on the FLA report. Perhaps the companies are right to think that Chinese law is a joke that can be ignored. But why doesn’t the FLA require the companies to comply with the law today, rather than next year? The FLA hours of work standard permits employees to work 60 hours per week — 80 hours of overtime a month, 44 hours longer than the law permits. How is this different or more acceptable than a standard that permits paying 25 percent less than the legal minimum wage?

Finally, I recommend that any of Apple’s customers who care about the well-being of the people who make their iPads take a few minutes to read the FLA report before taking comfort in Apple’s new commitment to decent labor standards. Almost three-quarters of Foxconn’s workers in Chengdu “said their salaries did not cover their basic needs (report page 9).” It’s no wonder so many are willing to work 80 hours a week; they can’t afford not to. Yet the FLA does not call on Apple and Foxconn to raise wages.  Rather, “Given the concerns expressed by workers about whether wages cover their basic needs, the FLA recommends a follow-up study to document spending patterns and the actual costs of the components of a basic needs wage (report page 12).”

Now that’s a tough audit!

Who’s guarding Apple’s Foxconn chicken coop?

Last week, the Fair Labor Association released a report on its “independent investigation” of Apple supplier Foxconn, which employs 1.2 million workers and is China’s largest private employer and single exporter. I discussed the FLA report, and labor rights in the U.S. and China, trade, jobs and currency with C. Fred Bergsten, Director of the Peterson Institute for International Economics, and Judy Gearhart, Executive Director of the International Labor Rights Forum, on NPR’s Diane Rehm Show this morning.

There are serious questions about the “independence” of the FLA report, which was commissioned by Apple to conduct the investigation; Apple is a major contributor to FLA’s activities.  Furthermore, although the report raised important issues such as excessive and unpaid overtime and health and safety concerns, it failed to address others, such as Foxconn’s harsh management practices and public humiliation of employees (well documented by groups such as the Hong Kong based Students and Scholars Against Corporate Misbehavior), Foxconn’s systematic abuse of forced interns, and China’s refusal to permit free, fair and independent trade union elections (although the report does acknowledge that company officials dominate local unions in Foxconn plants and it calls for open, democratic elections of union officials, it fails to address the  fact that all unions in China must belong to the All China Confederation of Trade Unions, which is controlled by the government). Without the protections afforded by free, independent trade unions, it is unlikely that Apple or Foxconn will ever make good on the promised improvements in wages and working conditions in these factories.

Problems with excessive overtime, widespread safety problems and the absence of worker safety and health programs have been well known at Foxconn since 2006. Apple publicly promised at that time that it would correct these problems. The new FLA reports promise that excessive overtime will be eliminated by July 2013, 15 months from now. Apple could end this problem in a matter of weeks, not months or years, simply by raising the prices it pays for Foxconn’s products and then directing Foxconn to raise wages and hire more workers. The solutions are obvious. Engrained behaviors, however, are hard to change.

–The author thanks Ross Eisenbrey  and Scott Nova for helpful comments. 

One million workers stand to benefit from NY’s proposed minimum wage hike

A report released today by New York State Sen. Jeff Klein discusses the economic benefits of raising the New York state minimum wage to $8.50 per hour, and indexing it to inflation thereafter. This would put New York in line with 19 other states with minimum wages above the federal minimum, and 10 other states that have some form of minimum-wage indexing.

As we have done for other proposals to raise state minimum wages, we calculated the number of people who would be affected by the New York State proposal, and the increase in economic activity that would result from this pay raise for low-wage workers. The table below outlines the results.

Roughly 609,000 minimum-wage workers in New York would directly get a raise, while another 473,000 who currently have wages just above the proposed new minimum would also see a wage increase due to “spillover” effects as employers adjust overall pay structures to reflect the new minimum. On average, affected workers in New York would receive an additional $880 over the course of a year.

That may not seem like a lot, but it translates into an estimated $600 million in additional economic activity, and that increased economic activity means more jobs. In the table, the final two rows model what we might expect in increased employment as a result of this boost to regional economic activity, after controlling for any decrease in corporate profits. New York stands to gain about 4,700 payroll jobs, or about 5,200 full-time equivalent jobs (essentially accounting for the additional hours that some currently employed workers will receive). Obviously, these job numbers will not be a silver bullet for solving any state’s employment problems, but an additional several thousand jobs—at no added cost to state budgets—certainly would help.

The country as a whole has seen flat wage growth over the past four years as high unemployment levels have put tremendous downward pressure on wages. This lagging wage growth, combined with the fact that the federal minimum wage is now only 79 percent of what it was in 1968, means that low-wage workers nationwide could desperately use an increase in the wage floor. Given that Congress is unlikely to enact proposals to raise the federal minimum anytime soon, it’s encouraging to see states like New York taking steps to help low-wage workers on their own.

Table 1

Effects of proposed New York minimum wage increase

New York: Single increase to $8.50, modeled for July 2012
Size of increase  $1.25
Total Estimated Workers1  7,900,000
Directly affected2  609,000
Indirectly affected3  473,000
Total Affected  1,082,000
Total Affected as % of Workers 13.7%
Increased wages for directly & indirectly affected4  $950,612,000
Average Individual Increase in Annual Income  $880
GDP Impact5  $601,738,000
Jobs Impact – Full-time employment growth6  5,230
Jobs Impact – Payroll Jobs growth  4,740

Notes: Annual Population growth: NY: 0.71%, (state projected average annual rate from 2000 to 2020, according to Census). No assumed wage growth from 2011 wage values.

1 Total estimated workers is estimated from the CPS respondents for whom either a valid hourly wage is reported or one can be imputed from weekly earnings and average weekly hours. Consequently, this estimate tends to understate the size of the full state workforce.

2 Directly Affected workers will see their wages rise as the new minimum wage rate will exceed their current hourly pay.

3 Indirectly affected workers currently have a wage rate just above the new minimum wage (between the new minimum wage and the new minimum wage plus the dollar amount of the increase in the 2012 minimum wage). They will receive a raise as employer pay scales are adjusted upward to reflect the new minimum wage.

4 Increased wages: Annual amount of increased wages for directly and indirectly affected workers, assuming they work 52 weeks a year.

5 GDP and job stimulus figures utilize a national model to estimate the GDP impact of workers' increased earnings. Thus the total state stimulus may be lower than this amount because workers in each state will not necessarily spend all of their increased earnings in-state. However, we can assume that most of the increased earnings will be spent in-state, and thus most of the jobs created will be in-state. Jobs numbers assume full-time employment requires $115,000 in additional GDP and payroll employment requires an additional $127,000 in GDP.

6 The increased economic activity from these additional wages adds not just jobs but also hours for people who already have jobs (work hours for people with jobs also dropped in the downturn). Full-time employment takes that into account, by essentially taking the number of total hours added (including both hours from new jobs and more hours for people who already have jobs) and dividing by 40, to get full-time-equivalent jobs added. Simply counting new payroll jobs misses all the added hours for people with jobs.

Job impact estimation methods can be found in: Bivens, Josh L. 2011. Method memo on estimating the jobs impact of various policy changes. Washington, D.C.: Economic Policy Institute.

Source: EPI Analysis of 2011 Current Population Survey, Outgoing Rotation Group

Copy the code below to embed this chart on your website.

Infrastructure is win-win-win-win

Yesterday, I participated in a National Journal panel discussing budget issues with Steve Bell from the Bipartisan Policy Center and Laura Peterson from Taxpayers for Common Sense. One of the exchanges got to the topic of tradeoffs, with Bell arguing that, “if you take a look at the American public, they want what they want and they don’t want to pay for it.” [1:33:00 in the video below]

My response, which I’d like to flesh out a bit more here, is that just because budgeting is all about tradeoffs doesn’t mean that win-win policies aren’t out there. One notable example is infrastructure investment, which both creates jobs in the short run and raises long-run economic growth. In fact, the situation today is especially ripe for infrastructure for a number of reasons:

Low financing costs: The cost of borrowing is at historically-low levels, with interest rates on five-, seven-, and 10-year inflation-protected securities (TIPS) actually negative. This means the markets are paying the government to borrow money. But this is a temporary situation—as the economy picks up again, private returns will increase and the government will be forced to offer more generous borrowing terms to remain competitive.

Great deals: As state and local governments remain stuck in fiscal straitjackets, private commercial construction contractors are desperate for work, and their asking prices for projects has gone down. In fact, the Department of Transportation estimates that more than 2,000 additional transportation projects were funded due to competitively low bids or projects completed under budget. In other words, we’re getting much more bang for our buck than we usually do.

Fixing infrastructure costs less than rebuilding: Neglecting our infrastructure needs only makes the cost of inevitable repair compound over time.  It’s a lot cheaper to repair a bridge than to rebuild one from scratch.  For every $1 spent on preventative pavement maintenance, between $4 and $10 is saved on rehabilitation.

Right now we’ve got an amazing opportunity to do something that we need to do anyway at record-low costs, we’re practically being given the money, and if we delay investments, their eventual cost will be much higher. Oh, and it will create jobs. This isn’t win-win, this is win-win-win-win.

Harkin bill would revive the American Dream

Iowa Sen. Tom Harkin, the Chairman of the Senate Committee on Health, Education, Labor and Pensions, has introduced a bill that shows the way to a better economic future for most Americans. The Rebuild America Act tackles many of the biggest problems that hold back the American economy and shut off opportunity for working families.

It’s an omnibus bill that will increase employment by making big infrastructure investments, developing renewable energy systems, addressing unfair foreign trade practices, providing assistance to state and local governments to retain police, firefighters and teachers, ending tax breaks that encourage companies to move jobs offshore, and promoting manufacturing in the United States.

It will help workers get a decent return on their education and their work by strengthening the minimum wage and overtime laws, better protecting the right to join a union and bargain collectively, enhancing retirement security, and guaranteeing paid sick leave.

It improves education by helping states improve teacher effectiveness and by investing in school modernization.

And it both reduces the federal deficit and increases tax fairness by closing loopholes that favor the rich, taxing Wall Street speculation, better balancing taxation of earned and unearned income, and instituting the Buffet Rule’s minimum 30 percent income tax on million-dollar-a-year incomes.

The bill would add millions of jobs to the economy, raise the typical family’s income and enhance its retirement security. The tax changes would shift the burden of hundreds of billions of dollars of federal taxation from working- and middle-class families to those who can afford to pay – the rich and ultra-rich.

We want to particularly applaud Sen. Harkin for his courage in swimming against the tide in two critical areas: Social Security and labor policy. The Rebuild America Act rejects the notion that Social Security is too expensive and that we can’t afford to meet the promises we made to America’s workers: That if they worked hard for a lifetime, they could retire with guaranteed benefits and inflation protection. Too many other politicians are ready, if not eager, to cut Social Security’s cost of living protection and to reduce benefits by raising the retirement age, no matter that such changes have the biggest impact on the retirement security of women and blue-collar and low-income workers, many of whom have seen little or no increase in life expectancy. By contrast, Sen. Harkin knows workers need more help, not less; that fewer and fewer workers have pensions; that 401(k) accounts are insufficient and undependable sources of retirement income; that Social Security is steadily replacing less and less of pre-retirement income; and that the Social Security COLA is not too generous, but rather too skimpy to keep up with the cost of health care inflation that drives the spending of older workers.

The Rebuild America Act therefore replaces the Social Security COLA formula with one that better accounts for cost inflation in the products and services that older workers pay for. It raises benefits across the board. And it pays for these improvements and addresses the program’s long-term revenue shortfall by “scrapping the cap” – eliminating the loophole that shelters incomes above $110,100 from Social security taxes.

In the area of labor law, the Rebuild America Act would make the most significant change in the minimum wage in our history by indexing it to inflation after raising it to a more adequate $9.80 an hour over a period of three years. The bill will also correct the gross injustice of freezing the minimum wage for tipped workers at $2.13 an hour, a problem that Congress ignored in both of the last increases it made to the minimum wage. Many states have acted on their own to address this problem, and Sen. Harkin is right to end this disgrace.

The Act will also address the continuing erosion of overtime protection, which is both the legal underpinning of the weekend and the best defense workers have against abusive schedules and worsening work-family conflicts. As long as employers have to pay 150 percent of regular pay for each hour worked beyond 40 in a week, they will be reluctant to force excessive overtime. But the Department of Labor has let the coverage of the overtime law erode steadily over the years, to the point that workers earning near-poverty salaries can be treated as exempt executives or administrators. The Rebuild America Act raises the income threshold for exemption back to historic levels and would guarantee overtime coverage for millions of workers who are unprotected today.

Congressional Progressive Caucus budget would boost employment by millions—unlike the Ryan budget

The values and policies embodied by the Budget for All, the budget of the Congressional Progressive Caucus (CPC) for fiscal year 2013, offer a stark contrast with those of the budget put forth by House Budget Committee Chairman Paul Ryan (R-Wis.). First, the Budget for All protects Medicare, Medicaid, the Affordable Care Act, and other elements of the social safety net. Second, it boosts public investments in education, infrastructure, and research and development. But the Budget for All and the Ryan budget are perhaps most diametrically opposed in their approach to economic stewardship over the weak recovery.

As my colleague Rebecca Thiess highlights, the Budget for All would finance a direct jobs program, infrastructure investments, targeted tax credits, and increased nondefense discretionary spending to ameliorate the ongoing crisis in the U.S. labor market. The Budget for All proposes increasing spending by $786 billion for job creation measures and public investments over the next two-and-a-half years (FY2012-14), relative to current law. This is critical: Expansionary fiscal policy remains the single best lever to fill the gap in aggregate demand and put Americans back to work. The Budget for All would accelerate economic recovery by increasing near-term budget deficits even while reducing longer-term deficits and sustaining primary balance over the second half of the budget window.

The Budget for All would increase mandatory and discretionary spending (excluding overseas military operations) by $259 billion in FY2013 and $261 billion in FY2014, boosting GDP by 2.3 percent and 2.2 percent, respectively, relative to current policy (the relevant baseline for aggregate demand). Net of the much smaller fiscal drag exerted by progressive tax reforms being gradually phased in, we estimate that the fiscal expansion proposed by the Budget for All would increase GDP by $280 billion (+1.8 percent) and $167 billion (+1.0 percent), respectively, in FY2013 and FY2014. By substantially boosting near-term aggregate demand, we estimate that the Budget for All would increase non-farm payroll employment by 2.1 million jobs in FY2013 and 1.2 million jobs in FY2014.

Conversely, the Ryan budget would accelerate the looming economic drag from contractionary fiscal policy with deep, aggressive spending cuts—failing the “first, do no harm” principle and sharply impeding job creation. My colleague Ethan Pollack recently estimated that the Ryan budget would reduce employment by 1.3 million jobs in FY2013 and 2.8 million jobs in 2014.*

On net, non-farm payroll employment would be roughly 3.4 million jobs higher by the end of FY2013 and 4.0 million jobs higher by the end of FY2014 if Congress adopted the Budget for All instead of the Ryan budget. To put this in perspective, the economy has gained 2.0 million jobs over the last 12 months but needs more than 10 million jobs to restore pre-recession unemployment and labor force participation rates. Going forward, the CPC budget would markedly accelerate the rate of rehiring, while the Ryan budget would drastically slow—or entirely wipe out—new hiring.

Immediately slashing government spending, as Ryan has proposed, is not a game or a joke—it’s economically irresponsible budget policy that has backfired across much of Europe and would seriously aggravate un- and underemployment. And as proven by the Budget for All, racing down the austerity path isn’t required for a fiscally responsible budget. The CPC budget would reach the same debt level as the Ryan budget without jeopardizing the economic recovery.

Fiscal responsibility demands sound economic stewardship, which means addressing the jobs crisis and closing the gap between potential output and actual GDP (the economy is currently running $883 billion—or 5.4 percent—below potential). While a large output gap persists, government spending cuts will have a particularly adverse impact on aggregate demand and fiscal sustainability will remain elusive. (Again, just look to Europe.)

The Congressional Progressive Caucus has proposed a credible budget that would prioritize jobs first and phase in deficit reduction as the economy strengthens (with emphasis on policies that will have relatively little deleterious impact on aggregate demand). Ryan has produced a budget that would choke off economic recovery in an attempt to gut government and refund the tax bill. The CPC budget is credible and economically viable; the Ryan budget is not. And literally millions of jobs hang in the balance between these two competing visions for the United States of America.

*The employment impact of the Budget for All is meant as an apples-to-apples comparison with these estimates for the Ryan budget, which were also calculated relative to current policy excluding spending on overseas military operations (which has a relatively small impact on domestic output).