The Commerce Department released another depressing report on the U.S. trade deficit this morning, our monthly reminder of the huge gap between globalization’s economic reality and American economic policymaking.
In March, we bought about $52 billion (28 percent) more from the rest of the world than we sold. From first quarter 2011 to first quarter 2012, the deficit on goods and services rose almost 8 percent, with China representing almost two-thirds of our non-oil deficit with the rest of the world.
Yet, over the past year or so, a drumbeat of analysis in the establishment business press has been telling us to stop worrying; our chronic trade imbalance with China will soon disappear. New York Times columnist Eduardo Porter last week summed up the happy scenario: Chinese wages and transpacific transportation costs are rising and the Chinese are allowing their currency to appreciate. The implication is that rather than exerting unpleasant political pressure on China, we should trust in the natural workings of the market and the good common sense of the Chinese leaders who “appear to understand the need for change.”
Don’t hold your breath.
Porter is correct that wages are rising in China faster than they are in the United States. But to get a perspective, check out the Bureau of Labor Statistics’ numbers on international labor costs in manufacturing, where the latest data—for 2008—is that Chinese manufacturing costs are a little over 4 percent of U.S. levels. Yes, they probably have risen since then, but the gap is still immense and will clearly not be closed anytime soon.
Moreover, the narrowing of the gap may have as much to do with U.S. workers getting less as Chinese workers getting more. The corporate poster boy for looking at the bright side is General Electric, which has moved some production of a few heavy appliances back to the U.S. from China. What the poster leaves out is that GE workers who used to make $22 an hour are now making $13.
It is also true that rising fuel costs are making it more expensive to import large, heavy products from across the Pacific. But that hardly means that production will move back to the U.S. Thanks to the North American Free Trade Agreement, multinational producers of big appliances and autos and parts who find importing from China too expensive, are moving to Mexico where labor costs are 18 percent of what they’d pay in the U.S.
Finally, Porter writes that the Chinese strategy of manipulating their currency to keep their exports cheap and imports expensive “may be turning the corner.” He notes that the Chinese, while they don’t want to appear caving to American pressure, have quietly allowed the renminbi to appreciate 40 percent against the dollar since 2005.
Just so. And over that time our trade deficit with China has grown by over 45 percent, suggesting how large China’s comparative advantage in trade has become. Moreover, despite the endless parade of American officials to Beijing pleading for more currency appreciation, the Chinese apparently think they’ve already done enough. Porter himself quotes China’s premier Wen Jiabao to the effect that the dollar-renminbi now may “have reached equilibrium level.”
Thus, there is little evidence that either the market or the Chinese leadership intend to rescue the U.S. from its trade quagmire.
Unfortunately, neither is there evidence that American leaders—from either party—intend to take responsibility for doing it themselves. Not only do they have no strategy to deal with the trade deficit, but President Obama and congressional Republicans are busily preparing for yet another of the so-called free trade agreements—this one to a group of countries around the Pacific rim—that have allowed our multinationals to off-shore production for the American consumer for over three-and-a-half decades.
But the market will not be denied; eventually we will balance our trading account. So, in the absence of a proactive policy, GE will be the model—the relentless lowering of American wages and living standards until the gap with workers in China and Mexico is closed.
There was a great article in Monday’s Wall Street Journal that discussed the tough job market the Class of 2012 is facing. Many of these new graduates will be competing with the graduating classes of 2011 and 2010 just to get on the bottom rungs of the career ladder. While it’s well-documented that graduating into a depressed labor market lowers lifetime earnings potential on average, today’s young graduates have additional hurdles to worry about: rising higher education costs and crippling student debt.
At EPI, we, with economist Heidi Shierholz, recently released an analysis of the labor market for recent high school and college graduates. The results are predictably grim, with unemployment rates for both sets of graduates spiking at the beginning of the Great Recession and falling very slowly in the recovery.
The report also highlighted the rising cost of obtaining a college degree. The figure below shows that the cost of higher education has been rising faster than family incomes for decades, making it harder for families to pay for college. From the 1981–82 enrollment year to the 2010–11 enrollment year, the cost of a four-year education increased 145 percent for private school and 137 percent for public school. Median family income only increased 17.3 percent from 1981–2010, far below the increases in the cost of education, leaving families and students unable to pay for most colleges and universities in full.
Unsurprisingly, a large majority of students and recent graduates take on debt to pay for college. Two-thirds of recent college graduates have student loans, and trends indicate that the number of student loans is increasing. Between 1993 and 2008, average student debt for graduating seniors increased 68 percent, from $14,410 to $24,238. Average debt for graduating seniors at public universities was $21,105 in 2008, and average debt for graduating seniors at private non-profit universities was $28,888 (authors’ analysis of Project on Student Debt 2010). In taking on these loans, students are taking a risk and hoping that they will be able to quickly secure work to begin paying them off after graduation. In recent years, and through no fault of their own, a growing number of graduates have been on the wrong side of this risk, with harsh consequences. Although most student loans have a grace period of six months before repayment begins, recent graduates who do not find a stable source of income may be forced to postpone payment though deferment or forbearance, miss a payment, or worst of all, default altogether on their loans. Deferment and forbearance are short-term fixes, however, and ultimately increase the amount borrowers owe once each period ends. Missed payments and default can ruin young workers’ credit scores and set them back years when it comes to saving for a house or a car.
Even worse, these young workers do not have a strong safety net on which to rely during the volatile job-seeking process.
Young workers are often ineligible for unemployment insurance, for example, because they must first meet state wage and work minimums during an established reference period—a reference period during which they are often in school and not working. Many new graduates are likely turn to their families for assistance. In 2011, 54.6 percent of 18- to 24-year-olds were living with their parents, an increase of 3.4 percentage points since 2007. This option is not, obviously, available to all young graduates. In short, young workers are being squeezed from multiple angles and their plight constitutes yet another instance of how damaging our tolerance of an underperforming economy truly is.
Additional findings and more analysis on the labor market facing young high school and college graduates can be found in our report, The Class of 2012: Labor market for young graduates remains grim.
The Pew Fiscal Analysis Initiative has released an addendum to its 2010 report A Year or More: The High Cost of Long-Term Unemployment, and the update isn’t pretty. Using data from the Bureau of Labor Statistics’ Current Population Survey, Pew’s addendum finds that 29.5 percent of unemployed Americans in the first quarter of 2012 have been jobless for a year or more. That means 3.9 million working-age Americans haven’t been able to find a job in 12-plus months.
In 2008, during the first quarter of the Great Recession, 9.5 percent of the unemployed had been jobless for at least a year. While this percentage of the long-term unemployed peaked at 31.8 percent in the third quarter of 2011, it’s still very high and remains more than three times greater than at this point four years ago. Note also that BLS defines long-term unemployment as someone who has been unemployed for more than half a year (27 weeks or more). By this measure, 41.3 percent of the jobless still qualify as long-term unemployed.
Some other findings from the Pew analysis:
- Age: Older workers are less likely to lose their jobs, but much more likely to be jobless for a year or more once they do (see Figure 3 in the addendum).
- Education: Workers with higher levels of education are less likely to lose their jobs, but they’re no better off once they do as long-term joblessness is fairly even across all education levels (see Figure 5).
- Industry: No industry or occupation has gone unscathed due to long-term unemployment (see Table 3).
Continued high levels of long-term unemployment have a damaging impact on the economic situations of both individuals and families, and more broadly, on the economy as a whole. As EPI has documented before, the outcome of such long-term joblessness is “scarring,” which carries severe and long-lasting consequences for our economy and society.
The Atlantic‘s Derek Thompson had a nice write-up on the Future of Work paper that EPI released April 27. In his article, Thompson included a bar chart illustrating “where poverty lives,” showing the 10 states with the highest share of workers making less than poverty-level wages, as defined in the paper. Thompson’s chart also included the share of workers in these states making between 100-200 percent of poverty wages. His bar chart clearly demonstrated that in these states, between 70-80 percent of workers earned less than twice the official poverty threshold for a family of four in 2010, or around $46,000 annually. (As a side note on poverty measures, my colleague David Cooper did a nice blog post explaining how a more dynamic method of assessing poverty—the Census Bureau’s Research Supplemental Poverty Measure—both defines millions more Americans as being impoverished and shows a far greater proportion of people living at very modest means, when compared with the official measure.)
A few commenters on Thompson’s piece brought up a good point in regards to comparing wages by geographic location (in this case by state). Some were quick to point out that the 10 states with the highest shares of workers earning at or below poverty level wages were “red states,” while others pointed out that the analysis did not take into account purchasing power parity—that is, the fact that the purchasing power of a dollar may be different in Manhattan than it is in rural Kansas. Their point was simply that a worker earning $10 per hour in Kansas may actually fare better than someone earning far more who has to pay rent and buy goods and services in a traditionally pricey market such as New York City, San Francisco, or Washington, D.C.
The table below adjusts for this by inflating the poverty wage used in the paper—$10.73 per hour in 2010—by a regional price parity index calculated by the Bureau of Economic Analysis (I actually averaged their measures for 2005 and 2006 that come from a BEA Research Spotlight titled Regional Price Parities: Comparing Price Level Differences Across Geographic Areas). The table shows the adjusted poverty wage level by state and the share of people in each state earning at or below that level. While Hawaii is somewhat of an anomaly due to its geographical separation from the lower 48 states by 2,500 miles of ocean, the next three states with the highest shares of workers earning less than the adjusted poverty wage are New York, California, and New Jersey; all states that contain very large metropolitan areas (as well as more rural areas). An even more accurate breakdown of regional purchase parity would show differences between rural and urban areas, as well as safety net services available for low-wage workers by region, but that is beyond the scope of this blog post.
Adjusted share of workers earning poverty wages by state, 2010
|State||0-100% poverty wages||Adjusted poverty wage|
|District of Columbia||13.1%||$10.61|
Source: Author's analysis of Current Population Survey Outgoing Rotation Group microdata, Bureau of Economic Analysis data
Note: Data were calculated using poverty data for a four-person household
The bottom line in this state-by-state comparison is not whether the states that show a high share of low-wage workers are red or blue; it’s rather to illustrate the often-enormous shares of people earning very low wages. As this National Low Income Housing Coalition report points out, for full-time individuals earning what they call the “renter wage,” a two-bedroom unit is unaffordable in nearly every state. The report also has some really interesting data, broken down by state, metropolitan area, and county, that shows how many full-time minimum wage jobs a household would need to hold to afford at two-bedroom fair market rent (FMR) unit. The data shows that whether or not low-wage workers are living and working in New York County (3.8 full-time minimum wage jobs to afford a FMR two-bedroom) or Wichita, Kan. (1.7 full-time minimum wage jobs to afford a FMR two-bedroom), their wages are likely not sufficiently covering their expenses.
From 2007 to 2011, 70 percent of the jobs lost in the state and local public sector were jobs held by women. This amounts to roughly 765,000 jobs. Since 2011, we have continued to see public-sector job losses, and, unfortunately, it is a good bet that the declines will continue.
The Obama administration has provided aid to state and local government in a variety of ways. For example, the American Recovery and Reinvestment Act (ARRA) injected more than $180 billion into state and local government. This aid has helped preserve significant numbers of jobs held by women. Women can be found in all types of public-sector jobs, but they are overrepresented in the public sector, in part, because they are more likely to be teachers. So far, $90 billion from ARRA has gone to education.
Out of a desire to appeal to women voters, Mitt Romney’s campaign has been making misleading statements about President Obama’s record. One way for Romney to show legitimate support for working women is to promise that, if elected, he will provide ample federal aid to state and local government. Unfortunately, Romney’s current commitment to shrink government means that he will put even more women out of work.
As readers of this blog are well aware, the labor market remains in terrible shape in the aftermath of the worst downturn since the Great Depression; this is evident in a wide array of economic data and is not disputed in the economics profession. Graduating into said labor market (in which the level of voluntary quits remains weak) with little to no work experience or wage history isn’t an enviable position, as my colleagues Heidi Shierholz, Natalie Sabadish, and Hilary Wething detail in their new paper The Class of 2012: Labor market for young graduates remains grim. Which is why I was flabbergasted by Abigail Johnson’s and Tammy NiCastro’s recent Forbes.com blog post Get Over It: The Truth About College Grad ‘Underemployment.’ Their title is plenty revealing, but here’s the gist of their argument:
“In recent weeks, there have been a slew of articles that reported how difficult things will be for this year’s college graduates because they can expect to be unemployed or “underemployed” … It’s not clear where the concept of being “underemployed” came from. But it’s damaging and counterproductive.”
The Bureau of Labor Statistics’ (BLS) U-6 Alternative Measure of Labor Underutilization—often referred to as the underemployment rate—is not a myth. It’s defined as such: “Unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force.” EPI’s State of Working America website even tracks it on a monthly basis across educational attainment, gender, and race and ethnicity. Here’s what it looks like by educational attainment:
Not a pretty picture. Since the onset of the recession more than four years ago, underemployment has roughly doubled across all educational attainment levels (a clear indicator that the economy suffers from a sheer lack of aggregate demand—the economy is running $853 billion below potential output—rather than “structural” employment problems). With so much excess slack in the labor market, employers have all the bargaining power, hence anemic wage growth and the “employed part time for economic reasons” (i.e., involuntarily) part of the underemployment rate. Horatio Alger can’t set his hours worked—there simply aren’t enough hours of work being demanded in the depressed economy.
And as Shierholz, Sabadish, and Wething detail, it looks much, much worse for recent high school and college graduates entering the labor market. Over the last year, the unemployment rate averaged 31.1 percent for recent high school graduates and 9.4 percent for recent college graduates. The underemployment rates averaged 54 percent and 19.1 percent, respectively. High unemployment and underemployment, and accompanying depressed earnings early in career, will result in long-term economic scarring, particularly diminishing lifetime earnings. Beyond underemployment as measured by the BLS, skills/education-based underemployment (so called “cyclical-downgrading”) will contribute to lifetime earnings scarring; as my colleagues note, “entering the labor market in a severe downturn can lead to reduced earnings, greater earnings instability, and more spells of unemployment over the next 10 to 15 years.”
In suggesting that college grads should be grateful to take a job at Starbucks because they aren’t “entitled” to anything more, the authors blithely overlook that recent college graduates working at Starbucks part-time for economic reasons are likely displacing hours from someone with lower educational attainment. This is in no way an indictment of any such recent graduates. This is to say what’s truly damaging and counterproductive is economically illiterate “thought pieces” breeding complacency about the state of the labor market and the policy response to the Great Recession. Neither a college degree nor government can guarantee recent grads “good jobs” or full-time employment, but between the Great Depression and the Great Recession, government prioritized stabilizing the economy and targeting full employment—to the benefit of workers of all educational attainment levels. Underemployment of recent graduates is not a myth being cooked up to breed entitlement as the authors imply; it’s a reality and tragic failure of policymakers to address the jobs crisis.
Yesterday, Nobel-winning economist and New York Times columnist Paul Krugman spoke at EPI about his new book, End this Depression Now! A key point of the book and his speech is that there’s a common and very wrong belief that the economy is like a morality play: Lots of people made irresponsible decisions in the run-up to the economic collapse, and, like a hangover, they must now suffer the consequences of their actions.
As Krugman points out, the majority of the people who have been hurt by this crisis do not deserve the blame. Over eight million people lost their jobs and, with an unemployment rate of more than 8 percent for more than three years now, many of those same workers, along with new entrants to the labor market, have been unable to find jobs. Their jobs disappeared through no fault of their own, and the pace of their return is nowhere near sufficient to get everyone back to work anytime soon.
More importantly, Krugman points out that, unlike a hangover that needs to be waited out, we could easily fix the economy now and put these millions of people back to work. First, we should halt the fiscal austerity efforts that recently doomed the British economy. Second, we should embark on aggressive fiscal expansion to boost consumer and business spending, stimulating demand for goods and services and creating jobs. As Krugman notes, this is basic Econ 101. All we need is the political will.
Michael Gerson’s recent op-ed in the Washington Post hailed Rep. Paul Ryan (R-Wis) as the champion of “Reform Conservatism,” largely out of admiration for Ryan’s budget. In doing so, Gerson displayed a remarkable misunderstanding of both Ryan’s budget and fiscal policy at large. This adulation of Ryan—totally divorced from the policy specifics supposedly legitimizing Ryan—is exactly the inside-the-Beltway nonsense driving Jonathan Chait apoplectic (see his New York Magazine piece on Ryan).
Gerson’s major offenses are twofold, but he manages to hit both in the same sentence: “[The Ryan budget] deals seriously with the fiscal crisis — which, driven by demographics and cost increases, is a health entitlement crisis.” Let’s take these one at a time.
First off, Ryan’s budget is not serious—it’s gimmicky above and beyond the point of credibility. The Ryan budget proposes $4.5 trillion in tax cuts financed with a giant asterisk that wouldn’t come close to raising that much revenue and then simply “assumes” its desired revenue level (and forces the Congressional Budget Office to do the same in their long-term analysis). Under more reasonable assumptions about feasible “base-broadening,” the Ryan budget would push public debt north of 74 percent of GDP by the end of the decade, and roughly 84 percent of GDP if the tax cuts were entirely deficit-financed. (Ryan claims to hit 62 percent—we’re not talking rounding errors.)
Secondly, our long-run fiscal challenges overwhelmingly stem from the dual problems of escalating national health care expenditure and an addiction to tax cuts. Demographic change and health care inflation will certainly drive up federal health expenditure, but these trends are a broader national economic challenge with ramifications for the federal budget, not vice versa. And demographic change can’t be reformed away—it compels more revenue, not less.
So how seriously does Ryan deal with these underlying economic challenges? Not at all: He offers an accounting solution for the federal government—turning Medicare into a voucher system and slashing Medicaid—that would exacerbate national health expenditure. Economists Dean Baker and David Rosnick estimated that Ryan’s FY2012 budget would increase national health expenditure by $30 trillion over 75 years if seniors purchased Medicare-equivalent plans on the private market; that’s because Medicare is 11 percent cheaper than an equivalent private plan and is projected to be 28 percent cheaper by 2022. (The more likely result is more health expenditure as well as worse coverage and care.) Forsaking the economies of scale and purchasing power of Medicare would shift costs from the federal balance sheet to businesses, households, and state governments, while worsening the economic challenges at hand. Incidentally, the Affordable Care Act took the opposite approach—using government’s market share to lower costs—and it’s showing early signs of working; as the New York Times reported last week, national health spending has slowed markedly over the last few years. While much more can be done on this front, the latter is a serious approach to an economic problem, unlike slashing health care for the impoverished and disabled as the Ryan budget proposes.
Furthermore, long anticipated demographic change is a reality that compels looking at both sides of the budget ledger and viewing historical benchmarks as poor guides for setting policy. Gerson even acknowledges that revenue must realistically rise above a post-war historical average of around 18 percent of GDP (versus 17.8 percent under current policy and 18.3 percent magically assumed in the Ryan budget, over the next decade); but he then turns a blind eye to the reality that, short of unspecified offsets, the Ryan budget would drop revenue to 15.5 percent of GDP over the next decade according to the Tax Policy Center. Deficit-financed tax cuts also increase spending on debt service, which—like Gerson argues of health care—threatens to crowd out other government functions (under current policies, net interest spending—swollen by deficit-financed tax cuts—will exceed nondefense discretionary spending by the end of the decade). Gutting health care spending to partially finance massive, regressive tax cuts in no way equates to “addressing the fiscal crisis,” as Gerson adamantly claims Ryan is doing.
Gerson wants to believe the Republican Party cares about deficits, but their diametrically opposed focus is reducing taxes—overwhelmingly for those at the top of the income distribution. Ryan’s budget would indeed deeply cut health care spending, but it is neither focused on deficits nor serious; it’s about doubling-down on the Bush-era tax cuts. And the only serious things about the Bush-era tax cuts were the hole they blew in the federal budget and their dismal economic legacy.
I had the privilege of attending the W.K. Kellogg Foundation’s America Healing Conference last week. The America Healing initiative promotes racial healing to address racial inequity, and, in doing so, works “to ensure that all children in America have an equitable and promising future.”
At the conference, the honorable Mitchell J. Landrieu, the mayor of New Orleans, gave a moving, passionate, and brave speech about homicide in black communities. He challenged us to consider whether we devalued black lives by not paying sufficient attention to the more common forms of homicide in black communities, and instead reserved our activism for homicides that could be conceived of as involving racism.
Landrieu made an important point, but I think he also missed a number of other significant points. The black homicide victimization rate is six times the white rate, so this is clearly a worthy issue to address. But, it is important to note that the black homicide victimization rate was cut in half from 1991 to 1999. It declined 49 percent while the white rate declined 39 percent. Too often we assume that things are always getting worse. It is beneficial to acknowledge this dramatic positive change, while also acknowledging that there is much more to be done. Since the 1990s, however, the black and white homicide rates have basically been flat.
Landrieu failed to acknowledge that much of the work done by the participants of the conference, if successful, is likely to reduce homicide rates. Homicide rates are driven by a very complex mix of psychological and sociological factors that are not yet completely understood by criminologists. Probably the majority of the conference attendees work in areas that have the potential to reduce homicide rates.
Some of the participants work to improve educational outcomes for blacks. Research suggests that increases in the educational attainment, particularly of males, will reduce homicide rates. (Males are more likely to commit homicide, and it is likely that their social and economic circumstances may play a big role in homicide rates.)
Healthy children do better in school and also have lower rates of criminal offending. All aspects of health, especially in the early years, probably matter, but we should be especially concerned about the very high rates of black children’s exposure to lead. There are strong links of lead exposure to violent crime. Thus, the participants who are concerned with reducing racial disparities in children’s health can also be seen as working to reduce homicide rates.
Concentrated economic disadvantage, poverty, and unemployment have all been found to be predictors of homicide rates. Participants working to improve the economic conditions of black communities can also be said to be working to reduce homicide rates.
A number of other aspects of racial inequity that the attendees to the conference work on are also likely to be drivers of higher black homicide rates. Thus, it is not accurate to say that the participants of the conference were not regularly working to address homicide.
Finally, while the mechanisms to reduce homicide rates are not yet completely understood, the response to bad policing, bad laws, and racial-biased individuals is clearer. In part, it may be for this reason that there can be highly visible mobilizations around these issues. A relatively quick mobilization might change bad police practices, undo a bad law, or change the behavior of a specific racially-biased person. Undoing racial inequity in all of the factors found to drive homicide rates—health, education, economics, and more—will require a longer and deeper struggle. Read more
That the incomes of the top 1 percent have fared fabulously is well known, and deservedly so. But it was not until the analysis of tax returns by Jon Bakija, Adam Cole, and Bradley Heim that it could be documented that the doubling of the income share of the top 1 percent could be directly traced to executive compensation and finance-sector compensation trends. The new EPI paper, CEO pay and the top 1%: How executive compensation and financial-sector pay have fueled income inequality, which previews some of the findings from the forthcoming State of Working America, does exactly that.
Between 1979 and 2005 (the latest data available with these breakdowns), the share of total income held by the top 1.0 percent more than doubled, from 9.7 percent to 21.0 percent, with most of the increase occurring since 1993. The top 0.1 percent led the way by more than tripling its income share, from 3.3 percent to 10.3 percent. This 7.0 percentage-point gain in income share for the top 0.1 percent accounted for more than 60 percent of the overall 11.2 percentage-point rise in the income share of the entire top 1.0 percent.
The increases in income at the top were largely driven by households headed by someone who was either an executive or in the financial sector as an executive or other worker. Households headed by a non-finance executive were associated with 44 percent of the growth of the top 0.1 percent’s income share and 36 percent in the growth among the top 1.0 percent. Those in the financial sector were associated with nearly a fourth (23 percent) of the expansion of the income shares of both the top 1.0 and top 0.1 percent. Together, finance and executives accounted for 58 percent of the expansion of income for the top 1.0 percent of households and an even greater two-thirds share (67 percent) of the income growth of the top 0.1 percent of households.
The paper also presents new analysis of CEO compensation based on our tabulations of Compustat data. From 1978–2011, CEO compensation grew more than 725 percent, substantially more than the stock market and remarkably more than the annual compensation of a typical private-sector worker, which grew a meager 5.7 percent over this time period.
One way to illustrate the increased divergence between CEO pay and a typical worker’s pay over time is to examine the ratio of CEO compensation to that of a typical worker, the CEO-to-worker compensation ratio, as shown in the figure. This ratio measures the distance between the compensation of CEOs in the 350 largest firms and the workers in the key industry of the firms of the particular CEOs.
CEO-to-worker compensation ratio, with options granted and options realized,1965–2011
Note: "Options granted" compensation series includes salary, bonus, restricted stock grants, options granted, and long-term incentive payouts for CEOs at the top 350 firms ranked by sales. "Options exercised" compensation series includes salary, bonus, restricted stock grants, options exercised, and long-term incentive payouts for CEOs at the top 350 firms ranked by sales.
Sources: Authors' analysis of data from Compustat ExecuComp database, Bureau of Labor Statistics Current Employment Statistics program, and Bureau of Economic Analysis National Income and Product Accounts Tables
Though lower than in other years in the last decade, the CEO-to-worker compensation ratio in 2011 of 231.0 or 209.4 is far above the ratio in 1995 (122.6 or 136.8), 1989 (58.5 or 53.3), 1978 (29.0 or 26.5), and 1965 (20.1 or 18.3). This illustrates that CEOs have fared far better than the typical worker over the last several decades. It is also true that CEO compensation has grown far faster than the stock market or the productivity of the economy.Read more
Apple’s latest “blowout” quarterly report, as well as an examination of its executive pay levels, underscores how easy it would be for the company to improve the working conditions of the Foxconn workers in China assembling Apple products. As Ross Eisenbrey and I summarized recently: “Apple workers in China endure extraordinarily long hours (in violation of Chinese law and Apple’s code of conduct), meager pay, and coercive discipline.”
Apple could insist that Foxconn pay these workers more and treat them fairly, and could easily pay for any additional costs. (The workers in question are employed in factory lines dedicated only to producing Apple products.) To offset these costs, Apple could modestly raise the price of its products to be sure, but it could also readily offset these costs through some combination of tiny reductions in profits, small trims in its cash balance, or adjustments in its pay to executives.
- The total compensation of the investigated Chinese workers making Apple products amounts to just 3 percent of Apple’s profits. In its most recent quarter Apple’s after-tax profits equaled $11.6 billion. By comparison, over an overlapping three-month period, the total compensation of the 288,800 Foxconn workers making Apple products equaled an estimated $350 million – or 3.0 percent of its after-tax profits. (I calculated this figure based on the average monthly pay of all Foxconn factory employees, including supervisors, found by the Fair Labor Association; the number of workers are those working in the three factories investigated.) This finding parallels a finding in a recent blog by Ross: labor costs at Foxconn are a “miniscule part of the iPhone’s costs.”
- The total annualized compensation of the investigated Chinese workers making Apple products amounts to just 1 percent of Apple’s cash/securities surplus. At the end of the most recent quarter, Apple had $10.1 billion in cash and cash equivalents, $18.4 billion in short-term marketable securities, and $81.6 billion in long-term marketable securities, for a total balance of $110 billion. By comparison, the total annualized compensation of the 288,000 Foxconn workers making Apple products is about $1.4 billion – or 1.3 percent of Apple’s cash/securities surplus.
- In 2011 and 2012, the top nine members of Apple’s executive team had total compensation equal to about 90,000 Chinese factory workers making its products. My just-released analysis found that in 2011, Apple’s nine-person executive leadership team received total compensation of $441 million. This was equivalent to the compensation of 95,000 factory workers at Foxconn assembling Apple products (making an estimated $4,622 per year).
In 2012, the executive team is on track to receive compensation of at least $412 million. This conservative estimate is equivalent to the compensation of 89,000 of the Chinese factory workers making Apple products.
I thought I’d never say this, but I think my colleague Andrew Fieldhouse is being soft on Glenn Kessler, writer of the Washington Post‘s Fact Checker column. Long story short, Mitt Romney and the Republicans are criticizing the Buffett Rule for only raising $47 billion. Democrats say that score is bogus because it’s measured against a current law baseline in which the Bush tax cuts expire, and instead are using a $162 billion score that is measured against current policy (all the Bush tax cuts are assumed to continue). Kessler ends up defending the current law score and criticizing Democrats and other Buffett Rule supporters for using the current policy score.
Kessler’s wrong on both points. For conservatives to claim that the Buffett Rule only raises $47 billion over a decade is simply nonsense. The only groups that measure policy impacts with the assumption that the Bush-era tax cuts will expire are those that are legally required to do so: the Joint Committee on Taxation and the Congressional Budget Office. In contrast, Wisconsin Rep. Paul Ryan, President Obama, and even Romney, all use an adjusted current policy baseline that assumes the Bush tax cuts will be extended.
Second, Kessler, argues that progressives are wrong to use the $162 billion score against current policy because it overlaps with other tax policies they support, namely expiration of the upper-income Bush tax cuts. This is ridiculous, but complicated, so bear with me.
Let’s start with the very basic point that most policies have interaction effects with other policies. That’s why it’s important when creating a budget to consider the order in which you want to layer policies on top of a baseline. In other words, each policy is scored against a changing baseline in which all the previous policies have already been adopted. It doesn’t matter to your top-line deficit impact, of course, but the scoring of many policies depends on whether they are preceded by other policies with which they interact—particularly when it comes to tax policy.
But scores for individual policies outside of the context of a larger comprehensive package are always scored against the same baseline. Kessler is implying that the Democrats and Republicans should use different baselines reflective of their policy preferences. But this would undermine the entire purpose of a baseline, which is to make sure that everyone’s numbers are calculated using the same assumptions so that the differences reflect only the policy differences. In other words, Kessler is defending Romney and the GOP for using a baseline that they use in no other circumstance, and criticizing progressives for using a baseline that they—along with everyone else—use consistently.
Since Kessler is seemingly the closest thing our political system has to a court of law, let’s examine the legal holding he’s just created: Scores must be measured against a baseline that reflects your other policy proposals. This creates a number of problems. First off, not everyone that supports the Buffett Rule supports all the same policy proposals. Let’s say I’m a congressman who opposes letting any Bush tax cuts expire—am I allowed to use the $162 billion score? What if I’ve been vague on the subject of the Bush tax cuts but strongly support the Buffett Rule, what score would I use then without violating Kessler’s rule?
Second, as I mentioned earlier, the order of the policies matter. Kessler argues that the $162 billion overlaps with the $849 billion from the top two rates, so the $162 billion is wrong. But that assumes that Democrats intend to layer the Buffett Rule on top of the rate increase—if they do the Buffett Rule first, then the $162 billion score is accurate.
See how complicated this gets? Heck, I probably lost most of you once you read the word “baseline” in the third sentence. So let’s make it simple. Right now, pretty much everyone uses a current policy baseline. They may differ around the margins—for example, should the baseline assume tax provisions like the research and experimentation credit get extended?—but they’re mostly the same. Generally, when people are using scores that aren’t against this baseline, they’re intentionally being misleading. And rather than encouraging that behavior, Kessler should call it out. After all, isn’t that his job?
One of the key dynamics of our economy for more than 30 years has been the divergence between productivity growth and compensation (or wage) increases for the typical worker. This divergence between pay and productivity has been increasingly recognized as being at the heart of the growth of income inequality. I am proud that Jared Bernstein (yo, Jared!) and I were the first ones to call attention to this, which we did in the introduction to The State of Working America 1994/1995, which was published on Labor Day in 1994. At that time, we were responding to the oft-repeated claim that wage stagnation experienced by most workers was caused by the post-1973 productivity slowdown. Get productivity up and all would be OK, we were told. Bob Rubin told us reducing the deficit would help accomplish that. By plotting productivity and median wage growth together, we were able to demonstrate that even though productivity growth was indeed historically slow in the preceding two decades, the growth of the median wage had substantially lagged even this anemic productivity growth. As it turns out, productivity growth accelerated in 1996 and has remained higher than in the 1973-1995 period since. Interestingly, the gap between productivity and median hourly compensation growth has grown at its greatest rate over the 2000-11 period despite productivity growth that continued to outpace the 1973-95 rates.
Understanding the driving forces behind the productivity-median hourly compensation gap is the subject of a new paper, The wedges between productivity and median compensation growth, that previews a portion of the analysis in the forthcoming State of Working America. This research reflects the results in a more technical paper, Why Aren’t Workers Benefiting from Labour Productivity Growth in the United States, that I co-authored with Kar-Fai Gee, an economist at the Canadian Centre for the Study of Living Standards (CSLS). The paper is in the spring 2012 issue of the International Productivity Monitor(edited by Andrew Sharpe and published by CSLS, on whose board I am proud to serve).
During the 1973 to 2011 period, labor productivity rose 80.4 percent but real median hourly wage increased 4.0 percent, and the real median hourly compensation (including all wages and benefits) increased just 10.7 percent. These trends are shown in the table below. If the real median hourly compensation had grown at the same rate as labor productivity over the period, it would have been $32.61 in 2011 (2011 dollars), considerably more than the actual $20.01 (2011 dollars). Consequently, the conventional notion that increased productivity is the mechanism by which living standards increases are produced must be revised to this: Productivity growth establishes the potential for living standards improvements and economic policy must work to reconnect pay and productivity.
The objective of our new paper is to provide a comprehensive and consistent decomposition of the factors explaining the divergence between growth in real median compensation (note the paper focuses on median wages while I have simplified the analysis here to focus on median compensation) and labor productivity since 1973 in the United States, with particular attention to the post-2000 period. In particular, the paper identifies the relative importance of three wedges driving the median compensation-productivity gap: 1) rising compensation inequality, 2) declining share of labor compensation in the economy (the shift from labor to capital income), and 3) divergence of consumer and output prices.
The following table is based on this paper and will be in the new edition of State of Working America that will be released on Labor Day. This decomposition is of economy-wide productivity growth, real average hourly compensation growth of all workers (including the self-employed), and the median real hourly compensation of workers age 18-64. See the paper for technical details.
Reconciling growth in median hourly compensation and productivity growth, 1973-2011
|A. Basic trends (annual growth)|
|Median hourly wage||-0.26||-0.15||1.50||0.05||0.10|
|Median hourly compensation||0.56||-0.17||1.13||0.35||0.27|
|Average hourly compensation||0.59||0.55||2.10||0.95||0.87|
|Productivity-median compensation gap||0.52||1.46||1.21||1.53||1.30|
|B. Explanatory factors (percentage point contribution)|
|Inequality of compensation||0.02||0.72||0.97||0.59||0.61|
|Shifts in labor’s share||0.03||0.23||-0.40||0.69||0.25|
|Divergence of consumer and output prices||0.46||0.51||0.64||0.24||0.44|
|C. Relative contribution to gap (percent of gap)|
|Inequality of compensation||4.8%||49.6%||80.0%||38.9%||46.9%|
|Shifts in labor’s share||5.5%||15.4%||-32.5%||45.3%||19.0%|
|Divergence of consumer and output prices||89.7%||35.0%||52.5%||15.8%||34.0%|
New data from the United Kingdom indicates that its economy has seen six consecutive months of economic contraction—the rule of thumb definition of recession.
Let’s be even more concrete: If the U.K. had just followed the fiscal stance of the United States over the past two years, they would not have re-entered recession. Adam Posen of the Bank of England recently estimated that the U.S. fiscal stance has contributed about 3 percent extra to overall GDP growth compared to a scenario where they had followed the U.K. stance. And this gap has actually widened in more recent years (and is projected to widen even further for 2012).
Posen’s estimate crucially includes the drag from state and local governments in the U.S., so it’s not like this overall fiscal stance in the U.S. over this time has been wildly expansionary. Just matching the U.S. fiscal support over this time period would have been a pretty modest goal.
But of course, this goal was rejected by the conservative government elected in mid-2010, and instead the U.K. has followed a plan based on austerity.
There is plenty to lament in policymaking responses to the crisis of the past four years, but the U.K. fiscal tightening may well be the single most avoidable own-goal over the period. Greece, for example, really can’t run expansionary fiscal policy right now (at least not without help from the core countries of the eurozone) without getting savaged by bond markets that will push up interest costs on debt.
The U.K., on the other hand, faces no such constraints. They print their own currency so they cannot be forced into default by bond markets, and there has been no upward pressure at all on their debt-servicing costs since the Great Recession began (see chart below). There is, in short, no actually-existing macroeconomic problem that austerity addresses. Instead, the swing towards it has been driven by ideology. And it has not turned out well.
For most of the last year, Washington business lobbyists and various right-wing organizations have been engaged in an all-out war against the National Labor Relations Board, the agency that protects the right of employees to join a union if they want to. The NLRB has been excoriated for an enforcement action against Boeing, for requiring employers to post a notice letting employees know what their basic rights are under the law, and for trying to modernize its 65-year-old procedures for union representation elections. In addition, congressional Republicans have taken extraordinary steps to block President Obama from appointing a full five-member board to lead the agency and decide cases.
Yesterday, Republican senators failed in an effort to block the NLRB’s election modernization rule. The Senate defeated a resolution of disapproval 54-45, with all Democrats opposed and all but one brave Republican, Sen. Lisa Murkowski of Alaska, crossing party lines. The resolution would have repealed the new rule and prevented the NLRB from adopting a new one to replace it.
One of the ironies of these right-wing attacks on the NLRB’s attempt to streamline representation election procedures is that it belies conservatives’ supposed dislike of excessive bureaucracy and frivolous litigation. Typically, business leaders and anti-government activists charge that government processes are plagued with unnecessary delays, for example in FDA approval of new drugs or medical devices. When it comes to rushing a product to market that might cause disabling injuries or even death, conservative critics usually side with speed over lengthy review.
Likewise, when the issue is the prevention of illegal immigration and the preservation of jobs for American citizens, leading businesses and trade organizations call for limited review and speedier determinations. Recently, for example, 40 multinational corporations wrote President Obama to complain that the State Department takes too long to issue visas to companies that want to bring foreign workers to the United States. The companies object to having government officials ask for evidence about the need for particular foreign computer techs, even though the Inspector General has found widespread fraud and abuse in visa applications. And nothing is more common than to hear officials of the Chamber of Commerce complain about frivolous litigation and laws that enrich attorneys–“full employment for attorneys!”–when the purpose of a law is to allow average citizens to sue after their health or safety has been jeopardized by corporate misbehavior.
So here, in the case of a regulation designed to reduce the opportunities for lawyers to delay representation elections through frivolous litigation, the Chamber is showing its real agenda. Efficiency no longer matters; the more time bureaucrats spend reviewing legal arguments that add nothing to a decision, the better.
Here’s a recent example involving T-Mobile: A union petitioned to represent a unit of 14 technicians in Connecticut. T-Mobile argued that five engineers should have been added to the unit. The law is clear that an employer cannot require that professional employees be added to a unit of non-professional employees, and engineers are regularly found to be professional employees. T-Mobile claimed that these engineers were different, forcing four days of hearings that wasted government resources. The new rules would have given the NLRB’s Hearing Officer the authority to require the employer to make an offer of proof as to how its engineers were “different” from the hundreds of cases in which engineers with college degrees were found to be professional employees, thus eliminating at least three of the four days of hearings and needless legal expenses.
Why are business lobbyists suddenly in favor of inefficiency and delay? Because delaying the date of the election gives the employer more time to harass and intimidate workers who otherwise might vote for a union.
Cornell researcher Kate Bronfenbrenner and her colleague Dorian Warren examined thousands of union representation cases and documented that employers engage in intense campaigns of abusive anti-union activity. They also found, as the NLRB put it, “a longer period between the filing of a petition and an election permits commission of more unfair labor practices with corresponding infringement upon employee free choice, while a shorter period leads to fewer unfair labor practices.”
Employers call the NLRB’s new election rules the “ambush election” rules because they remove various automatic appeals and such built-in delays as an arbitrary, automatic 25-day delay after the board issues an order for an election. This waiting period alone gave an extra three weeks to employers to hold captive-audience meetings (even to require employees to attend them outside of normal work hours), to subject employees to repeated one-on-one sessions with their supervisors, and to figure out which employees support the union and which do not.
The NLRB has realized that its old rules tilted the playing field toward anti-union employers and ultimately discouraged employees from exercising their right to choose without interference. An honest assessment and a modest amount of consistency would lead most observers to agree that the new rules are fair and sensible.
Wednesday morning, the House Budget Committee is holding a hearing on “Replacing the Sequester”—the sequester being the automatic spending cuts established by the debt ceiling deal that are scheduled to kick in next year. It’s a safe bet that Republicans will scream about defense cuts being bad for jobs, but let’s just remember that ALL these cuts are bad for joblessness in the short-run. (Defense and nondefense spending are split roughly evenly on the sequester chopping block.) We’ve been asked many times “how much” of an impact sequestration would have on near-term employment and here are our best estimates:
These estimates reflect the impact of sequestration on total nonfarm payroll employment at the end of each fiscal year. They assume a fiscal multiplier of 1.4 for general government spending, which is Moody’s Analytics most recent public estimate of the government spending multiplier. While we use the same multiplier for all cuts, we’d guess that these likely slightly overstate the adverse economic impact resulting from defense spending cuts and understate job losses from domestic spending cuts. Budgetary programs for lower-income households in the discretionary budget—such as housing assistance and the special supplemental food program for women, infants, and children (WIC)—as well as infrastructure spending have particularly high multipliers. And to the extent that cuts to spending by the Department of Defense come from capital-intensive weapons acquisitions rather than reductions in personnel strength, the impact on employment would be milder. Regardless, any cuts in the near-term (unless they are ploughed into more spending somewhere else) are going to constitute a drag on the still-weak recovery.
Cutting government spending reduces aggregate demand and worsens joblessness while the economy is running well below-potential output. Conservatives’ selective Keynesianism—which pops up in their advocacy for defense spending and tax cuts, among other priorities—applies to the rest of government spending and the national income and product accounts, too.
Via the Washington Post‘s Fact Checker by Glenn Kessler, I see that Mitt Romney has adopted the specious “if it doesn’t fix the entire problem, it’s not worth doing,” objection to the Buffett Rule. Romney brushed aside the Buffett Rule because the $5 billion in revenue it would raise for fiscal 2013 relative to current law would only fund government for 11 hours.
First, it’s interesting to note that Romney and other individuals deriving the vast majority of their income from investments benefit tremendously from the lack of a Buffett Rule (which is more accurately characterized as the Romney Rule). The Paying a Fair Share Act—the Senate’s legislative version of the Buffett Rule that was filibustered last week (in spite of 72 percent public support)—would serve as a millionaires’ alternative minimum tax. When fully phased in, it would apply a minimum tax rate of 30 percent on adjusted gross income less charitable contributions (modified by the limitation on itemized deductions—temporarily repealed as part of the Bush tax cuts—if reinstated).
Mitt Romney’s 2010 tax return showed $21.6 million in adjusted gross income and $3.0 million in charitable giving. Had the Paying a Fair Share Act been fully in effect, Romney would have paid roughly $5.6 million in taxes for an effective tax rate of 25.8 percent, instead of the $3.0 million in taxes and 13.9 percent effective tax rate he paid for the year. That’s because the Buffett Rule is an indirect way to close the preferential rates on capital gains and dividends, as well as the carried interest loophole, that produced Romney’s rock-bottom tax rate.
Second, there’s an enormous amount of hypocrisy and insincerity going on here. As I recently noted, this ice-thin defense against popularly supported progressive tax policies is often used by the same people who spend inordinate amounts of time on defunding the National Endowment for the Arts, National Public Radio, Planned Parenthood, or other small budgetary line-items. Romney himself devotes eight full pages in his economic plan to his proposal to cut job training programs, which together represent one-half of 1 percent of the budget.
Furthermore, the Buffett Rule would raise far more than advertised. The cited estimate by the Joint Committee on Taxation (JCT) is based on current law, meaning that the Bush-era tax cuts are assumed to expire. Kessler notes that liberals have been pointing to a different JCT score based on current policy showing $162 billion in new revenue. But Kessler dismisses liberals’ use of the current policy score because other tax policies they support—namely expiration of the upper-income Bush tax cuts—would overlap with the $162 billion. True. But then you need to talk about the entire package and give the Democrats $47 billion in addition to the $849 billion that would be raised over the next decade by letting the upper-income tax cuts expire. Conversely, if we’re adjusting baselines for stated policy preferences, conservatives should be citing the $162 billion figure with regard to the Buffett Rule, reflecting continuation of all the Bush tax cuts.
Regardless of revenue scores, conservatives will again trot out the “if it doesn’t fix the entire problem, it’s not worth doing” line—but it’s ludicrous to argue that $896 billion is such a trivial sum that it’s not worth pursuing. That’s more than the first round of Budget Control Act spending cuts and caps conservatives’ extracted by hijacking the statutory debt ceiling. Accounting for net interest savings, the Buffett Rule coupled with expiration of the upper-income Bush tax cuts would save more than $1 trillion over a decade and reduce the debt-to-GDP ratio by 4.2 percentage points by 2022, relative to current budget policies. By all objective accounts, this is serious deficit reduction that would seriously improve fairness in the tax code. Strange, how purported concerns about the public debt fade into the ether when tax increases—or tax cuts—are on the table.
Here’s an ad (chosen at random), typical for the fashion industry these days, that brazenly flouts the federal and state minimum wage laws:
The Cynthia Rowley Production Team is currently looking for interns for Summer 2012. [We are also looking for interns to start IMMEDIATELY as well!!] — Summer 2012 interns would be expected to start at early-mid May to August. [if you can start sooner, that is even better]
Cynthia Rowley has long been a fashion and style authority, with a namesake collection that includes women’s wear, beachwear and wetsuits, men’s wear, eyewear, handbags, shoes, baby, home sewing products, tools, legwear, shapewear, and ‘dress-up’ band-aids.
Cynthia has appeared on “Project Runway” and “America’s Next Top Model,” and her work has been featured in nearly every major magazine and newspaper domestically and internationally. She is also a judge on the new show “24-Hour Catwalk” with Alexa Chung.
The intern would be required to work closely with the production team and would have a range of responsibilities which include running errands from our studio/offices to the garment district in midtown, working on tech packs, specing garments, organizing production pieces that come in, deal with showroom/runway samples and fit samples, source trims & fabrics for production, taking pictures of garments, assisting in fittings etc.
-Interns should have basic knowledge of Adobe Photoshop and Illustrator, Microsoft Office programs (Word & Excel)
-Interns should be familiar and comfortable with specing garments
-Comfortable doing light pattern work & pattern corrections
-Know how to cut patterns and fabric for samples
-Interns need to be energetic and outgoing… they will be interacting with many people within our offices (design team, PR team, etc), cutting rooms, and domestic factories in midtown
-Organized and responsible
-Have good time management
**THIS IS AN UNPAID INTERNSHIP, but it would be a great hands-on experience in the fashion industry and a resume booster! If you need the internship for school credit we would be more than happy fill out any required paper work and/or complete letters of recommendations.
Please send all resumes and cover letters ASAP to: CRProductionInternship@gmail.com (please do not send cover letters and resumes as attachments… put them in the body of the e-mail)
Plainly, this should be a paid, entry-level position. It requires computer skills and fashion industry knowledge. There’s no pretense of close mentoring or vocational education. The intern will “be required to work.” This is employment, and this is exploitation.
But it’s a “resume booster!” That’ll help pay your rent, your student loans, and the cost of food and transportation. Not!
According to the brand’s website, its fashions are “sold in better department, specialty, and online stores, as well as approximately sixty Cynthia Rowley retail shops around the world. … Cynthia Rowley’s collections have been featured in nearly every major national and international fashion publication, and she maintains a regular celebrity clientele including: Julia Roberts, Scarlett Johansson, Parker Posey, Kristen Wiig, Rebecca Romijn, Anne Hathaway, and Maggie Gyllenhall.”
Cynthia Rowley and most other employers in the fashion industry can afford to pay the minimum wage to their skilled, organized, and responsible employees. The New York Department of Labor should monitor “internship” postings by the fashion industry and begin enforcing New York’s minimum labor standards.
On Tuesday, Senate Budget Committee Chairman Kent Conrad (D-N.D.) marked up, but didn’t vote on, a budget modeled off of the report by National Commission on Fiscal Responsibility and Reform co-chairs Erskine Bowles and Alan Simpson (often called the “Bowles-Simpson” report), which failed to garner the requisite support of a super majority of the Fiscal Commission’s members in Dec. 2010.
A budget alternative based on (albeit significantly to the right of) the Bowles-Simpson report recently went down in flames in the House of Representatives—by a crushing vote of 382-38. Stan Collender recently published an excellent piece on the cult-like efforts and failed politics of resurrecting the Bowles-Simpson report since its demise. Essentially, politicians and pundits cling to the Bowles-Simpson report as a talisman to signal their “seriousness” about reducing budget deficits. But it’s worth looking at the dismal economic fundamentals behind the Bowles-Simpson grandstanding, because the report’s recommendations were and remain terrible economic policy. It’s just one more reminder that “popular among Washington pundits” rarely correlates with “good economic policy.”
In Dec. 2010, my colleague Josh Bivens and I estimated that the Bowles-Simpson report would have sharply reduced aggregate demand and employment by failing to accommodate near-term stimulus and prematurely moving toward deficit reduction:
“One of the guiding principles of the Co-Chairs’ plan reads “Don’t Disrupt a Fragile Economic Recovery,” but the details make clear that this is nothing but lip service to the persistent economic challenges this country will face for years. Rather than budgeting for more desperately needed fiscal stimulus in the near-term, their sole acknowledgement of the Great Recession and the painfully slow recovery since it ended over a year ago is to “start gradually; begin cuts in FY2012.”
That diagnosis has only solidified in the interim. Here was the Bowles-Simpson four-pronged approach to supposed economic stewardship:
- Reduce the deficit gradually, starting in FY2012
- Put in place a credible plan to stabilize the debt
- Consider a temporary payroll tax holiday in FY2011
- Implement pro-growth tax and spending policies
How prudent would it be to have begun deficit reduction in fiscal 2012? At the start of the fiscal year (Oct. 2011) the unemployment rate stood at 8.9 percent and real GDP had grown a meager 1.6 percent in the year to 4Q 2011—not exactly the robust recovery that could accommodate deep fiscal retrenchment. Fiscal stimulus required more than consideration and a fully paid for payroll tax holiday—bigger deficits and a mix of spending measures and targeted tax cuts were needed (and actually enacted, albeit on a vastly insufficient scale). And it’s downright disingenuous to pawn off big spending cuts, particularly to the non-security discretionary budget, as a pro-growth spending policy. Collectively, this amounts to economic pain with little to no budgetary gain: Berkeley economist Brad DeLong estimates that in light of current growth and interest rates, fiscal expansion is entirely self-financing with regard to the long-run fiscal outlook; conversely, fiscal contraction would be largely to entirely self-defeating.
Beneath this pretense, Bowles-Simpson proposed $50 billion in primary spending cuts for FY12 and $138 billion for FY13 (as well as $4 billion and $29 billion, respectively, in tax increases which would have exerted a much smaller fiscal drag per dollar than spending reductions). Further obstructing recovery, the Bowles-Simpson report would not have accommodated the piecemeal stimulus that Congress has enacted since Dec. 2010, including $227 billion for payroll tax cuts, $95 billion in emergency unemployment compensation, $44 billion for expanded refundable tax credits, and $22 billion for (admittedly less effective) business investment incentives.
Relative to the course Congress has taken, the adverse economic impact proposed by the Bowles-Simpson report is stark. The Moment of Truth Project rescored the Bowles-Simpson report based on the Congressional Budget Office’s March 2011 baseline. For an apples-to-apples comparison, I’ve adjusted non-interest outlays and revenue for economic and technical—but not legislative—changes to the CBO’s budget projections since that March 2011 baseline. Relative to current budget policy, the Bowles-Simpson plan would have reduced non-interest spending by $53 billion in FY12 and $79 billion in FY13 and increased revenue by $107 billion in FY12 and $167 billion in FY13 (largely reflecting the payroll tax cut). As a result, economic output would be 1.3 percent lower in FY12 and 2.0 percent lower in fiscal 2013. This shock to aggregate demand would reduce nonfarm payroll employment by 1.6 million jobs in FY12 and 2.4 million jobs in FY13, again relative to current budget policies.
Piecemeal stimulus was far from optimal—but also unequivocally preferable to a deficit reduction grand bargain that would have thrown recovery off track. This isn’t to suggest that Congress has done a bang-up job with economic policy since Dec. 2010; the Budget Control Act (i.e., debt ceiling deal) was terrible fiscal policy and passing the entire American Jobs Act would have done substantially more to reduce joblessness than merely continuing the payroll tax cut and emergency unemployment compensation. But the public should be relieved that American policymakers haven’t fully embraced European-style austerity, thereby choking off economic recovery with nothing to show for it. It’s time for Washington to stop trying to breathe life back into the Bowles-Simpson plan and let it die the obscure death it deserves.
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 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.
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.
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
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.