It was exciting to hear the president tell it like it is yesterday. After two years of trying to make nice with the interests that were most responsible for the financial collapse and which are responsible even now for the gridlock in Washington that keeps the economy from moving forward, President Obama told America’s middle class that its future is being threatened by the greed and self-interest of some of the wealthiest people in our nation.
The most important part of his speech in Kansas was probably his attack on the “collective amnesia” that allows some people to continue advocating the Bush administration’s tax cuts for the rich, despite their clear history of failure as a spur to job creation. Obama said:
“Remember in those years, in 2001 and 2003, Congress passed two of the most expensive tax cuts for the wealthy in history. And what did it get us? The slowest job growth in half a century. Massive deficits that have made it much harder to pay for the investments that built this country and provided the basic security that helped millions of Americans reach and stay in the middle class — things like education and infrastructure, science and technology, Medicare and Social Security.”
The president pointed out the folly of pursuing the same kinds of failed “you’re on your own” economic policies that got us into the worst recession in 75 years. Weak regulation helped cause the Great Recession. Why would anyone expect the same policies to get us out?
“Remember that in those same years, thanks to some of the same folks who are now running Congress, we had weak regulation, we had little oversight, and what did it get us? Insurance companies that jacked up people’s premiums with impunity and denied care to patients who were sick, mortgage lenders that tricked families into buying homes they couldn’t afford, a financial sector where irresponsibility and lack of basic oversight nearly destroyed our entire economy.
We simply cannot return to this brand of ‘you’re on your own’ economics if we’re serious about rebuilding the middle class in this country.”
Unsurprisingly, the right wing media, led by Fox News, wants to take us right back to the kind of Bushonomics that crashed the economy in 2007. Progressive taxation doesn’t sit well with Fox’s high-income anchors, let alone its billionaire owner, Rupert Murdoch. As our friends at Media Matters document nicely, Fox immediately launched a broadside against the president and the notion of tax fairness, misquoting him when it was convenient, and accusing him of class warfare and socialism.
I support raising the top marginal income tax rate to 45 percent — about half the 91 percent top rate under President Eisenhower. President Obama just wants to restore the top rate to its level under President Clinton – 39 percent. If that makes him a socialist, what was Dwight Eisenhower? Could it be that the Commander in Chief of Allied Forces during World War II and two-term Republican president from Kansas was a socialist and a class warrior? Uh… no.
In a speech Tuesday, President Obama issued a damning critique of trickle down economics and a stark defense of social insurance and public investments funded by progressive taxation. The president’s speech in Osawatomie, Kan., addressed the challenges of rebuilding the middle class and tempering income inequality, making the case that doubling down on the supply-side experiment of the last decade will fail the needs of the vast majority.
The president aptly characterized conservative economic policy as a two-pronged approach of cutting regulations and cutting taxes for the wealthy. (Note conservatives’ glaring lack of enthusiasm for refundable tax cuts or even an across-the-board payroll tax cut – tax cuts that would be pretty broad-based.) This is, of course, exactly the economic nostrum being preached by the GOP presidential field and Republican leadership on Capitol Hill. See, for instance, how the tax plans of presidential candidate Rick Perry or House Budget Committee Chairman Paul Ryan (R-Wisc.) belie any concern about income inequality, or how regulatory uncertainty is used as a phony explanation for the jobs crisis.
This supply-side snake oil is peddled on the premise that when the wealthy do well, income gains trickle down to the middle class and everyone benefits from a growing economy. But that hasn’t happened—real median income has sharply decoupled from productivity gains in recent decades (particularly since 2000) and income gains have been incredibly concentrated at the top of the earnings distribution. The president made the following salient point on the supply-side experiment:
“Now, it’s a simple theory… And that theory fits well on a bumper sticker. But here’s the problem: It doesn’t work. It has never worked. It didn’t work when it was tried in the decade before the Great Depression. It’s not what led to the incredible post-war booms of the ‘50s and ‘60s. And it didn’t work when we tried it during the last decade. I mean, understand, it’s not as if we haven’t tried this theory.” (Emphasis added.)
The record of the Bush-era tax cuts, also invoked by the president, indeed speaks volumes: “Remember in those years, in 2001 and 2003, Congress passed two of the most expensive tax cuts for the wealthy in history. And what did it get us? The slowest job growth in half a century.” That and the slowest economic growth, non-residential fixed investment growth, compensation growth, and wage and salary growth. Imagine if we had instead used the $2.6 trillion these tax cuts added to the public debt over 2001-2010 to undertake investments in areas like education, infrastructure, and scientific research—investments that would have produced much better job-growth and that have actually demonstrated high economic returns.
Since the 2001 and 2003 tax cuts didn’t generate much in the way of jobs or incomes, they failed (by miles – or should we say trillions of dollars) to fulfill the mendacious claim often made by conservatives that tax cuts pay for themselves. (Note that this assertion continues to surface despite being flatly rejected by the Bush administration’s own economists.)
Based on this abject policy failure and the clear dysfunction of a tax code that allows a quarter of millionaires to pay lower effective tax rates than middle class families, President Obama made the case for tax reform – including allowing the top individual income tax rate to revert from 35 percent to the 39.6 percent rate implemented by President Clinton (which would still be well below tax rates for most of the post-World War II era).
Since most Republicans will clearly scream about the onerousness of this proposal, it’s worth noting that the optimal taxation literature calls for a steeper schedule of marginal tax rates and a considerably higher top rate than 39.6 percent. In their recent paper on the case for progressive taxation, economists Peter Diamond and Emmanuel Saez peg the optimal top income tax rate at 73 percent, up from 42.5 percent today (taking into account Medicare payroll taxes and average state income and sales taxes). This would imply a top federal marginal income tax rate of 65.5 percent—more than 25 percentage points higher than that proposed by the president. The current top tax rate is “is optimal only if the marginal consumption of very high income earners is highly valued,” note Diamond and Saez.
Of course, the value that policymakers put on the happiness of the very rich is exactly what stands behind the failure to enact job creation measures that would be financed by a surtax on millionaires and the repeated collapse of long-term deficit reduction negotiations because of conservative intransigence over raising more revenue from upper-income households.
I applaud the president for making the case for the progressive alternative against regressive tax cuts as the lodestar of economic policy. America’s low- and moderate income families should, too. As a nation, we cannot afford to double down on the failed, plutocratic pipe dream that is trickle down economics. Another round of tax cuts for the highest-income households will not restore full employment but will exacerbate widening income inequality, blow a bigger hole in the budget deficit, and defund needed public investments and economic security programs. Any policymaker genuinely concerned with the fate of the middle class, inequality and immobility, or the budget deficit, should be focused on rolling back the last round of inequitable and ineffective tax cuts rather than digging us deeper and deeper into a new Gilded Age.
The House of Representatives is poised to vote for the REINS (Regulations From the Executive in Need of Scrutiny) bill today; this would come on top of votes on two bills last week that would also upend the regulatory process. These efforts are premised on assertions that regulations are greatly damaging the economy, and David Brooks’ op-ed today is another timely reminder that these assertions are inaccurate. He opens with:
“Republicans have many strong arguments to make against the Obama administration, but one major criticism doesn’t square with the evidence. This is the charge that President Obama is running a virulently antibusiness administration that spews out a steady flow of job- and economy-crushing regulations.”
And closes with:
“They [regulations] are not tanking the economy.”
In between, he cites a few relevant facts to support his view that “regulations are not a big factor in our short-term [economic] problems.” These include the Bureau of Labor Statistics data which show that during the first half of 2011, just 0.18 percent of mass layoffs were due to regulations. EPI President Lawrence Mishel comprehensively addresses the role of regulation and regulatory uncertainty in the economy in Regulatory uncertainty: A phony explanation for our jobs problems; he arrays a range of economic and survey indicators that demonstrate that it is a lack of demand, and not regulations or regulatory uncertainty, that is behind the painful state of the labor market.
I don’t agree with some of the information and characterizations in Brooks’ article; let me focus on the most glaring omission: he includes no discussion of the benefits of regulation. These can be large, not only in terms of health or safety benefits, but often in terms of economic benefits. Appropriate financial regulations are essential to an economy’s foundation.
Also, I’ve previously shown that two joint EPA/Department of Transportation rules which regulate greenhouse gas emissions from, and establish fuel standards for, various-size vehicles have particularly sizable economic benefits. They produce large savings to drivers in the form of reduced expenditures on gasoline. In 2010 dollars, a conservative estimate of the economic benefits from these two rules amounts from $6 billion to $20.6 billion a year. This range is above the range of estimated compliance costs for all 11 major rules finalized so far by the Obama EPA; that range is $5.9 billion to $12 billion a year.
When health benefits are also considered, the combined benefits of all EPA rules finalized so far under the Obama administration exceed their costs by tens of billions of dollars each year. In 2014, the Cross-State Air Pollution rule alone will save an estimated 13,000-34,000 lives and lead to 820,000 fewer cases of respiratory symptoms.
Brooks is right in concluding that concerns that regulations are behind the economy’s troubles are misplaced, and that’s a step towards a more reasoned and balanced discussion. Let’s hope that next time he goes a step further and discusses the benefits from regulations as well.
(Here is a summary of EPI’s research on the costs and benefits of regulation and a summary of our research on the relationship between employment and regulation.)
Youth unemployment exploded during the Great Recession and now stands at 16.8 percent for 16-24 year olds. For those not enrolled in school and possessing only a high school diploma, the unemployment rate is 21.5 percent. For teenagers 16-19, it’s nearly 24 percent. In fact, the share of young people employed in the United States in July 2011 was 48.8 percent, the lowest level of summer employment in more than 60 years. This will have long-lasting, negative impacts on young workers. Some countries, like the United Kingdom, are proactively implementing programs to put young people to work (and investing £1 billion in public funds to do so). Others, like Spain – with its 46 percent youth unemployment rate – have done little.
It is concerning that the U.S. not only is doing little to create jobs for young people, but is actually keeping young people jobless through the J-1 and H-2B guest worker programs.
The J-1 Exchange Visitor Program was created more than a half-century ago to facilitate cultural and educational exchanges in the United States between young Americans and foreign visitors. But the program has evolved into a massive guest worker program, and most of the 320,000 J-1 participants come here primarily to work. Of the 16 J-1 sub-programs, the largest, the Summer Work Travel program, last year admitted 132,000 workers, down from 150,000 at its peak.
J-1 guest workers now fill many jobs that traditionally went to high school and college students or to recent grads during the summer, including at amusement parks on the Jersey Shore and in Ocean City, Md., and national parks like Yellowstone. J-1 workers have also taken what used to be unionized jobs with decent pay and fringe benefits, working, for example, in a Hershey plant packing candy bars. Most of these jobs cannot be offshored, and were the traditional avenues for young people to enter the labor market for the first time. But instead of providing our young people with their first taste of real work, these jobs are going to J-1 guest workers. Why? Because employers have tight control over guest workers, can pay them less than the prevailing wage, and aren’t required to pay Social Security, Medicare and unemployment taxes on their behalf.
The employer preference for guest workers is contributing to high unemployment for Americans. Consider this: In Worcester County, Md., where many J-1 amusement park jobs are located, the unemployment rate normally drops sharply when the summer tourists arrive, but this past July (when most J-1 workers there are employed) the unemployment rate was double its pre-recession level. And the county unemployment rate is in double digits during the rest of the year. In addition, as the New York Times reported, even older, recently unemployed Americans have been vying for summer jobs like these at amusement parks due to a lack of other opportunities.
So how can we find jobs for 132,000 young people? End the Summer Work Travel program.
Or if Congress rejects that option, then restrict the program only to jobs that have an obvious educational or cultural value, and link the program’s size to the national unemployment rate. For example, if the unemployment rate averaged more than 5 percent in the preceding year, the SWT program could only admit 30,000 foreign workers, but if it fell below 5 percent, then the SWT limit could be raised to 50,000.Read more
The unemployment rate dropped in November to 8.6 percent from 9.0 percent in October and from 9.8 percent a year ago. This is clearly welcome news. However, the underlying dynamics of the drop-off in unemployment this last month and over the last year are disappointing and have clear implications for policy and for politicians.
The issue is a decline in labor force participation, a topic that both Jared Bernstein and Ezra Klein have picked up on. To be blunt, among groups with high voter turnout rates, the fall in unemployment has been driven by people leaving the labor force and not because of job gains: this applies to those 25 and older who have a high school credential, some college, or a college degree or further education. In contrast, job gains were responsible for falling unemployment among lighter voting groups: young people (ages 16-24) and the 8.0 percent of the labor force that lacks a high school credential. The only exception to this breakdown is that job gains lowered the unemployment rate of those 55 and older (but only 40 percent of this group is in the labor force). Among women, unemployment has fallen very little (0.3 percent) while employment has fallen as well, indicating that job growth has not driven their modest unemployment gains. Men, in contrast, have seen a large drop in unemployment (1.2 percent) but modest growth in employment, indicating a shrinking labor force as the major explanation.
Overall, the dynamics in the labor market do not point to people generally feeling happier or more prosperous because a great deal of the falloff in unemployment is not because people are earning money in newly found employment, but because people are no longer in the labor market. There are some analysts who point to demographic changes (e.g., the population aging) as a reason to expect labor force participation to not return to prior levels: however, such longer-term trends are not salient in explaining the trend over the last year because such demographic shifts occur gradually.
This morning’s news prompted me to do a bit of analysis on how much of the drop in unemployment over the last year is due to greater employment and how much is due to the shrinkage of the labor force. It is not easy to produce a clean decomposition, but simply displaying the trends in the unemployment rate, the employment rate (the share of the population employed), and the labor force participation rate (the share of the population in the labor force, meaning they are either employed or unemployed) certainly helps. The table below presents the data for key demographic groups along with the shares of the labor force of each group. The data are for the most recent three months compared to the comparable months a year ago (avoiding the volatility of one month’s data).
|Labor Force Share*||Unemployment rate||Labor force/population||Employment/population|
|Education, 25 years and older|
|Less Than High School||8%||15.5||13.7||-1.8||46.8||47.0||0.2||39.5||40.5||1.0|
|College Degree or More||31%||4.8||4.3||-0.4||76.4||76.0||-0.4||72.8||72.7||-0.1|
|* Labor Force in November 2011. Shares by race/ethnicity sum to greater than 100% because Hispanics can be of any race.|
The top line tells a clear story that unemployment fell by 0.8 percentage points but the share of the population employed rose by just 0.1 percentage point. The share of the population in the labor force fell by 0.4 percentage points. This tells you that in the aggregate it was not greater employment driving the drop in unemployment.Read more
Here’s a quiz any undergrad business major should be able to ace: Assume you invest $10,000 in an asset with an expected return of 10 percent, and another $10,000 in an asset with an expected return of 4 percent. What’s the expected annual return on your portfolio over a 30-year period?
Answer: 8.1 percent (because $10,000 x 1.0430 + $10,000 x 1.1030 = $206,928, and $20,000 x 1.08130 = $206,928)
But in a new working paper, Rochester University finance professor Robert Novy-Marx asserts that a pension fund manager following accepted accounting rules for public pension funds would assume an expected portfolio return of 7 percent in this situation (which he gets by averaging 10 percent and 4 percent). From this false premise, Novy-Marx draws outlandish conclusions about pension fund accounting, such as the claim that a pension fund with just $10,000 invested in the higher-yielding asset would appear to be better funded, all else equal, than one with $20,000 split equally between the higher- and lower-yielding asset (because $10,000 x 1.1030 > $20,000 x 1.0730). Novy-Marx concludes that these rules give public pension fund managers a perverse incentive to “burn” the low-yielding bonds in order to inflate their plan’s funding status.
If this sounds absurd, it’s because it is. To begin with, you can’t just average the two rates of return as Novy-Marx does, because over time the portfolio becomes more weighted toward the higher-yielding asset. In practice, pension funds periodically re-balance in order to prevent a portfolio from becoming too heavily weighted toward risky assets, but they would have to re-balance continuously in order to reduce returns to 7 percent, which is unrealistic. In any case, Novy-Marx doesn’t even mention re-balancing, nor any other realistic pension fund practices in his paper. If he did, he’d also have to acknowledge that public pension funds assume stable, long-run returns that vary little across plans, clustering around 8 percent—less than the roughly 9 percent these funds have averaged over the past quarter century. Thus, they wouldn’t be affected by the kind of gaming Novy-Marx conjures up in this paper.
Novy-Marx’s claims are exasperating because the accounting method he prefers would actually create perverse incentives. Novy-Marx et al. believe that since pension liabilities are guaranteed (only partially, but that’s another matter), pension funds should be required to assume a nearly “risk-free” rate of return no matter the fund’s actual asset allocation. Thus, in Novy-Marx’s example, the assumed rate of return would be the 4 percent yield on nearly risk-free Treasury bonds even if the entire portfolio were invested in stocks with an expected 10 percent return (Novy-Marx doesn’t deny the existence of an equity premium).
It’s important to note that this wouldn’t encourage prudent investment practices any more than the doctrine of predestination eliminated sin. If anything, it might have the opposite effect—incite a desperate hunt for yield—as all pension funds would immediately appear drastically underfunded. It would not guarantee that the fund would earn a 4 percent return or better, since it wouldn’t require funds to invest in Treasuries or other low-risk assets. All it would do is make pension funds look bad and cause required contributions to spike, inciting a taxpayer revolt. It would also cause funded ratios and required contributions to vary for no logical reason, since Treasury yields fluctuate with monetary policy and market conditions that may have little or no bearing on pension fund adequacy.
Elsewhere, Novy-Marx has actually suggested that state and local governments with shaky finances should be allowed to contribute less to their pension funds because their higher borrowing costs—and the greater likelihood that they renege on pension promises—should translate to a higher discount rate on future pension liabilities. Though this illustrates where his logic takes you, Novy-Marx isn’t trying to promote fiscal irresponsibility.
(However, allies like Andrew Biggs of the American Enterprise Institute want to be able to assume high expected returns on assets in 401(k)-style plans while requiring public pension funds to assume low returns on the same assets.)
Novy-Marx’s latest sally is more an effort to provoke than to persuade. But he and his allies have already had a significant impact in the policy arena. The Government Accounting Standards Board has proposed valuing some pension liabilities using low municipal bond yields, a change that will likely result in significantly lower funded ratios and higher required contributions.
More generally, Novy-Marx and a small group of other economists have succeeded in attacking public funds for supposedly engaging in aggressive accounting and ignoring risk, deflecting attention from the real problem (in states where there is one) of elected officials neglecting to make required pension contributions. Astonishingly, they have done so without presenting any actual evidence that public pensions take on too much risk or inflate expected returns, but have rather harped on arcane accounting issues until enough people have concluded that where there’s smoke there must be fire.
President Obama and many Democrats are making the case for an expansion of the payroll tax holiday primarily on the grounds of protecting middle-class families from a tax hike. This is intrinsically problematic even if it seems politically expedient.
The one-year Social Security payroll tax holiday set to expire at the end of December reduced employees’ payroll taxes by 2.0 percentage points, increasing disposable income by $112 billion in 2011 and generating upwards of a million jobs. The Senate is expected to take up an expansion of the tax cut that would provide a 3.1 percentage-point reduction for employees and partially reduce employers’ payroll taxes. The largest component of Obama’s proposed American Jobs Act, the measure would do more for employment in 2012. But framing the argument instead as taxpayer protection digs proponents of progressive job-creation efforts into a deep hole in two ways.
First, if the measure is presented as anti-tax, we could never end the payroll tax reduction since any advocate would then be accused of favoring taxing the middle class! And if we do not end this measure, it eventually will lead to scaling back Social Security, which would deliver a long-sought conservative goal and further exacerbate our already growing retirement insecurity.
Second, presenting the measure as taxpayer protection advances a false narrative. For one thing, it further reinforces the misguided notion that economic policy is about whose tax cuts are better. This is a debate we don’t want to prolong, as its pursuit over the last several decades has been the recipe leading to a shrunken public sector. It also fails to articulate the real imperative behind it: to maintain consumer spending which supports jobs throughout the economy. We are neglecting the crucial narrative that Obama’s policies are pro jobs whereas his opponents’ are not.
Finally, we are failing to distinguish between the two types of tax cuts being offered. Conservatives claim that protecting lower tax rates for the wealthy creates jobs because those folks will work harder and invest with their extra cash. This policy is really not about generating jobs in the near term—trying to lower unemployment substantially in the next year—but, at best (if it is at all true, which I doubt), about more investment and jobs in the long term. In contrast, the payroll tax holiday is about temporarily infusing some spending into the economy which, in turn, keeps people working or adds jobs as families shop and spend, raising demand for goods and services.
Of course, the payroll tax holiday is a second-best approach: job-creation through spending is far more effective. Direct spending on infrastructure or even on government hiring people to perform useful public jobs (as was done by the Works Progress Administration and Civilian Conservation Corps) is more effective in raising demand and generating jobs. Seeing temporary tax cuts put in the category of competing tax cuts rather than that of job-generating efforts makes me want to recant my support for this measure. I understand the urge to find an allegedly effective argument and call out the hypocrisy of promoting tax cuts for the wealthy but not for low-earners and the broad middle class. But right now, this argument we are waging for the payroll tax cut is just digging us into a deeper hole, which is the way Democrats and liberals seem to fight every fight. Please stop digging!
The Congressional Budget Office recently released a comprehensive report on income distribution and inequality trends of the last three decades. The report was widely viewed as an affirmation that the Occupy Wall Street movement’s concern with the distribution of economic rewards is well-founded.
Strikingly, House Budget Committee Chairman Paul Ryan (R-Wisc.) interpreted the report as an affirmation that his budget policy wish list is a panacea for the societal challenges of income inequality and economic mobility. The House Budget Committee Majority Staff’s 17-page rebuttal dodges the broad takeaway of CBO’s report by distinguishing between economic mobility and absolute well-being versus relative inequality, but Ryan’s own budget proposals belie this distinction.
As Ezra Klein points out, Ryan’s report presents a false dichotomy between closing the income gap (i.e., redistribution through a progressive tax) and growing the economic pie (i.e., regressive tax cuts for upper-income households). Implied is that redistributive policies increasing taxes on upper-income households would sharply reduce economic activity, making all households absolutely worse off. But this premise is contradicted by recent experience: President Bush cut taxes for upper-income households and we got the worst economic expansion since World War II, in which the ‘economic pie’ grew a meager 2.6 percent annually (and 65 percent of national income gains went to the highest-income 1 percent of households). The failure of the supply side experiment is unsurprising given ample evidence in the economics literature that the elasticity of taxable income is relatively low, changes in the top marginal tax rate have little impact on productive investment, and marginal tax rates are well below optimal rates.
Yet there is a more fundamental problem with Ryan’s analysis. Ryan is for redistribution, but the kind of redistribution that shifts the burden of taxation from upper-income households to the middle class. Just look at the Ryan Roadmap, his 2010 budget that served as a blueprint for the House Republican 2012 budget. The figure below depicts how the Roadmap would change shares of federal taxes paid and average federal tax rates paid by cash income levels, relative to current policy (from this Tax Policy Center table). Households with income above $1 million would see their average tax rate plummet from 29 percent to 13 percent, lowering their share of federal taxes paid by 10 percentage points. On average, households earning between $20,000 and $200,000 would see their taxes rise, subsidizing the upper-income tax cut. More than two-thirds of households would see a tax increase.
Click to enlarge
This redistribution will not close the income gap or foster economic mobility; this will merely confer a tax cut of $500,000 to households earning over $1 million annually. And for the reasons noted above, these tax changes are unlikely to spur long-term growth (any more than the public investments that Ryan’s budget would instead cut).
Finally, Ryan’s rhetorical support for economic mobility is contradicted by his oppositions to the very policies that promote mobility. Education and training provide a means by which low-income Americans can climb the socioeconomic ladder, and the social safety net helps that climb by lowering its risk. Yet Ryan supports massive cuts to these government functions and programs, such as Pell Grants helping low-income students pay for college.
Ryan’s acknowledgment that income inequality is a problem is certainly appreciated, but one wonders if the staffers who wrote this rebuttal are actually familiar with his policy positions.
The crisis in the eurozone, and the bizarre failure of the European Central Bank (ECB) to even try to manage it, has united strange bedfellows in arguing that the United States Federal Reserve should begin acting as in loco Responsible Central Bankis for the eurozone.
Brad DeLong argued a week ago for the Fed to begin buying up Italian and Greek debt to avoid a financial crisis potentially as big or bigger than the fallout from Lehman’s collapse in 2008. Dean Baker and Mark Weisbrot, often skeptical of finance-centric explanations of (and solutions to) the ongoing jobs crisis over the years since the Great Recession began … agree wholeheartedly.
Yes, as a general rule, economists agreeing with each other is usually a recipe for other people to begin reaching for their own wallets, but this group is both smart and (much) more importantly right on this specific issue. If the ECB won’t act like a central bank, and if the absence of a central bank in the eurozone threatens American economic growth (and it does – the eurozone is a crucial export market for the U.S. and fallout from U.S. banks holding eurozone could indeed be ugly), then it makes sense for the Fed to step in.
It would be really helpful, by the way, to have the two current vacancies on the Fed’s Board of Governors filled by people who were consistently arguing for aggressive actions to stem the economic crisis.
This week, the House of Representatives is expected to vote on two regulatory reform bills: H.R. 3010, the Regulatory Accountability Act (RAA), and H.R. 527, the Regulatory Flexibility Improvements Act. These bills would alter the regulatory process significantly, likely severely restricting the adoption of new regulations. In advancing these bills, proponents argue that regulations have become exorbitantly costly and are a large threat to jobs. These claims do not hold up to scrutiny, and are frequently made in a greatly exaggerated or substantially misleading manner.
EPI has issued a series of reports this year that assess these claims. The evidence we have compiled, which I summarized in two recent EPI publications, might be of particular interest this week.
“A quick guide to EPI’s research on the costs and benefits of regulations” describes three main findings:
- Government data show that over several decades, and during the Obama administration as well, the benefits of regulations have significantly and consistently exceeded their costs.
- The much-scrutinized EPA regulations fare especially well according to cost-benefit criteria. The compliance costs of Obama EPA regulations are tiny relative to the size of the economy, are neutralized by their economic benefits, and are dwarfed by their health benefits.
- Regulatory opponents often cite large cost estimates that are entirely unsupportable. This conclusion particularly applies to their repeated use of the Crain and Crain $1.75 trillion estimate of the costs of regulation, which our own research, the Congressional Research Service, the Administration’s Council of Economic Advisers, and the Center for Progressive Reform have found is unreliable and grossly overstated.
“A quick guide to the evidence on regulations and jobs,” also has three main findings:
- A huge shortfall in demand, not regulatory uncertainty, is what ails the economy.
- New EPA regulations, in particular, can be expected to have a negligible effect on the overall economy. The largest EPA regulation proposed so far (the “air toxics” rule) would, in fact, likely create a modest number of jobs.
- Academic studies of and data on the relationship between employment and regulations generally find they have a modestly positive or neutral effect on employment.
Throughout the past year, the case against regulations has been driven by inaccurate overestimates of the economic damage they cause. As Congressional debate over sweeping regulatory reform bills proceeds this week, these erroneous claims are likely to be repeated, potentially contributing to the adoption of legislation damaging to the rules necessary to promote public health and safety, as well as economic stability. It is an important time to compare these claims to the facts documented by EPI research this year.
EPI President Larry Mishel recently participated in The Economist‘s Buttonwood Gathering in New York City. In its third year, Buttonwood is a flagship event for the magazine that attracts leading financial and economic experts.
Mishel served as a panelist during the session “The backlash: Zuccotti Park and beyond.” He was joined by Jeff Madrick, senior fellow at the Schwartz Center for Economic Policy Analysis at The New School, and Terra Lawson-Remer, fellow at the Council on Foreign Relations and assistant professor of International Affairs at The New School.
Mishel used the forum to lament the lack of urgency being shown by Buttonwood attendees toward the unemployment crisis. Watch Mishel’s full remarks below:
Mishel also recently conducted a virtual teach-in with Occupied Media, where he talked about the need for a more decent and more equal society:
Before Thanksgiving dinner each year, my stepfather likes to say a prayer imploring all of us to “try to keep things in perspective.” Despite it being more than a bit stale at this point (sorry, dad), I can already hear him delivering this refrain yet again this year. So in that spirit, I think it is worthwhile—especially at a time of frustrating congressional inaction and worrisome missed opportunities—to take stock of what some government programs do achieve, while being mindful of all that still needs to be done.
As I have written previously, the Census Bureau’s new Supplemental Poverty Measure (SPM) is an attempt to better identify America’s poor, by accounting for many of the additional expenses that families face and the resources that government programs provide. As the figure below illustrates, the effect of many of these programs is significant. While the percentage of people below the SPM poverty line is already a woeful 16 percent, it would increase to 18 percent without the Earned Income Tax Credit (EITC). That would be an additional 6 million people living in poverty. If you consider the EITC’s effect on those under 18, the benefit is even more striking: from 18.2 percent in poverty with the EITC to 22.4 percent without it. That’s roughly 3.1 million children kept above the poverty line.
The Supplemental Nutritional Assistance Program (SNAP, formerly the Food Stamp Program) shows a similar impact. The overall poverty rate would be 17.7 percent versus 16 percent without accounting for SNAP, a difference of about 5.2 million people. For children, the poverty rate goes from 21.2 percent without SNAP down to 18.2 percent – roughly 2.2 million children.
These are nontrivial differences, to be sure. Yet even with these programs, the picture of America described by the SPM is one of substantial unmet need: 49 million people living in poverty, including almost 14 million children. We are the richest nation in the world, yet one-sixth of our nation is considered poor, and almost half (47.9 percent) are within 200 percent of the poverty line – what some might call “near poor.” That strikes me as a potentially “perspective altering” statistic. Maybe my stepfather is on to something.
Jason Richwine of the Heritage Foundation and Andrew Biggs of the American Enterprise Institute are at it again (following up on an earlier study for the Business Roundtable), claiming that government workers—in this case teachers—are grossly overpaid. EPI and others have expended much ink on this topic, and forthcoming EPI research will address some of the latest claims in greater detail (though maybe Jon Stewart said it all in his message to teachers about “the greed that led you into the teaching profession”).
But one of the key arguments Richwine and Biggs make is so sloppy, it should only take a blog post to rebut: the claim that “teachers exhibit low cognitive abilities compared to other college graduates” and that once you take this into account teachers suffer no wage penalty. Since all employers would love to be able to accurately assess the skills of prospective employees, it’s amazing that such a tool, if it exists, isn’t in widespread use. The miracle tool turns out to be the Armed Forces Qualification Test, which Richwine and Biggs refer to as an IQ test. Here’s what the AFQT actually tests:
- general science
- arithmetic reasoning
- word knowledge
- paragraph comprehension
- numerical operations
- coding speed
- auto and shop information
- mathematics knowledge
- mechanical comprehension
- electronics information
Is it really surprising that a future kindergarten or high school history teacher would score lower on this test than a future engineer or army officer? There are many other issues one can raise about the AFQT score, but that will have to wait for a later time.
But even if the AFQT score contained important information about teaching ability, Richwine and Biggs aren’t content to add this measure to their statistical model to explain wages as economists normally do.
|Key controls included||Teacher wage effect (%)||R-Squared|
|*Significant at 95 percent level|
That’s because adding this variable doesn’t change the basic story, which is that teachers’ earnings are significantly lower than those of similar college grads, even those with the same AFQT scores.
See the results in their table. In regressions with the traditional specification (i.e., the variables included as controls) they find teachers earn 12.6 percent less than comparable workers (see row 1). In their next specification, they add the AFQT score, thus controlling for comparable education and AFQT score (which they mistakenly refer to as IQ). Their results show that teachers earn 10.7 percent less than other workers with comparable education and AFQT scores. That means that including the AFQT score seems to reduce the teacher penalty (actually, they do not provide the statistical information to judge whether there is a statistically significant difference between these two estimates) but in no way eliminates it. So, how do Richwine and Biggs reach the conclusion that there is no teacher wage penalty? They say:
“The wage gap between teachers and non-teachers disappears when both groups are matched on an objective measure of cognitive ability rather than on years of education.”
Richwine and Biggs take this as their most important bottom-line finding and it is based on a regression, row 3, with no control for education. This is JUNK science plain and simple. If you asked any labor market economist if they could have only one predictor of wages available to them, the overwhelming choice would be to use the education level of a worker. Ask yourself, do you expect two people with the same AFQT score to earn the same amount if one has a college degree and the other has not completed high school? If not, then one needs to control for education level. That is, there is every theoretical/conceptual reason why education should be included in these wage regressions and there is no basis for excluding it just because you include another variable representing a test score. There certainly was not any empirical test offered, such as showing that education was not statistically significant once you included the AFQT score. Richwine and Biggs do not present the basic details of their regressions, such as the coefficients and standard error for each of the variables, but it is almost certainly the case that the education controls in row 2 are economically and statistically significant in a regression that also includes the AFQT measure.
Their claim that the teaching wage penalty is zero should be discounted completely. Their “evidence” only shows that teachers do not make more, or less, than others with the same test scores when the “others” being compared to have much lower education (since teachers have much higher education than the average worker). That’s not much of a compliment to the wages teachers earn. This exercise by Richwine and Biggs is nothing more than generating a result you wish to find even though you violate basic economic thinking and avoid the empirical testing (as in the removal of the education controls) that is the norm in professional analysis.
Check out EPI research on the teacher pay penalty and the updated analysis and watch this space for an upcoming blog on teacher benefits, which Richwine and Biggs claim are worth as much as teacher salaries. In the meantime, you may want to read this DailyKos blog from a teacher inviting Richwine and Biggs to join him in the public schools. We can give Richwine and Biggs a pass on the value of their research if they want to enjoy these lavish perks themselves.
Yesterday, the congressional supercommittee announced that it failed to come to an agreement to reduce the deficit by at least $1.2 trillion over 10 years. The committee’s failure automatically triggers $1.2 trillion in cuts to domestic and defense spending starting in 2013, along with the expiration of the Bush tax cuts. The failure of the committee is no surprise to observers, given the failure of past commissions, negotiations, and various other initiatives. This is especially true since congressional Republicans continue to rule out reversing Bush-era tax cuts for high-income individuals, effectively insisting that the burden of deficit reduction be borne primarily by low- and moderate-income Americans.
The commission has not only failed to address medium-term deficits, but it has passed up an opportunity to address the immediate crisis: jobs. With unemployment and underemployment remaining high and job creation remaining weak, we cannot continue to let the wounds to the labor markets fester.
Looking forward, Congress needs to immediately turn to jobs. This means continuing emergency measures to boost consumer demand by extending support for unemployed workers and preserving tax cuts targeted to low-income taxpayers (by extending the payroll tax holiday or enacting a more targeted credit). It also means providing federal assistance to prevent further pullbacks by state and local governments. Finally, this means investing in America’s future by boosting infrastructure spending, supporting our children’s education, and creating work opportunities for all.
Congress can still address the jobs crisis, and should do so immediately.
Later today, I will pass through two of our nation’s airports, where I will see ample evidence suggesting that we collectively place a very high priority on protecting our transportation infrastructure from harm. On my way through security, I will dutifully remove my shoes, and will remove from my pockets such benign items as a marker, an extra paper napkin from lunch, and the keys to my bike lock.
Yet throughout this same country, there are nearly 70,000 bridges that the U.S. Department of Transportation has identified as “structurally deficient.” We all recall with horror the 2007 collapse of the bridge in Minneapolis, yet there are thousands of such ticking time bombs throughout America today. In three states — Iowa, Oklahoma, and Pennsylvania — there are over 5,000 bridges deemed to be structurally deficient. While not every one of those bridges is in imminent danger of collapse, these remain alarming numbers.
Fixing America’s crumbling infrastructure should be a top priority for every national, state, and local official throughout the nation. It’s easier than often is the case in public policy debates to connect the dots on this one:
- Crumbling infrastucture + alarmingly high rates of unemployment (particularly amongst construction workers) + interest rates at rates that remain at unprecedented low levels = jobs plan that helps put Americans back to work today, while laying the foundation for future economic growth and prosperity.
While there’s certainly room for debate about how to proceed with infrastructure investment at this time, there really shouldn’t be any debate about whether to do this. My colleague, John Irons, testified this week before the Congressional Progressive Caucus Ad Hoc Hearing on Job Creation. In his testimony, he noted, “Congress should immediately reauthorize the Surface Transportation Act at the higher spending levels requested by President Obama … increase[ing] transportation investments by $213 billion over the next decade [thereby] add[ing] 350,000 job-years of employment over 2012-2014.”
Michael Likosky has written at length about the need to create an infrastructure bank, leveraging both public and private sector money to strengthen America’s infrastructure, and noting that, “If we don’t find a way to build a sound foundation for growth, the American dream will survive only in our heads and history books.”
American workers understand the importance of investing in infrastructure — last Thursday, tens of thousands of workers rallied in cities and towns throughout America for bridge repairs and job repair, as part of the AFL-CIO’s Infrastructure Investment Day of Action.
For state governments, investing in infrastructure through bonding is one of the few (and most effective) tools at their disposal to help spark a real economic recovery that helps working families today, while making investments that will contribute to future prosperity. Friday’s “Smart Brief” from the American Society of Civil Engineers highlights Massachusetts Gov. Deval Patrick’s plan to invest $10 billion over the next five years in capital spending, “focus[ing] on job creation through transportation projects, smart growth and construction and improvement of public higher-education facilities.” This is the sort of initiative that other states should emulate. Only through such aggressive investment in infrastructure will Americans in every state be confident that they are safe crossing today’s bridges, and that the road ahead leads to shared prosperity.
The House of Representatives voted today on H.J. Res 2, a Balanced Budget Amendment (BBA). Because it would have amended the Constitution, the BBA would have needed a two-thirds majority vote to pass. The final vote count was 261-165, with four Republicans voting against the bill (though some cast their votes because it wasn’t strict enough) and 25 Democrats voting for the bill.
This vote came about directly as a result of the August debt limit agreement, in which conservatives demanded a vote on a balanced budget amendment before the end of the year. Besides requiring the president to submit a balanced budget to Congress each year, this amendment would have required a three-fifths majority vote in order to raise the nation’s debt limit (which, in layman’s terms, would mean more playing chicken with the U.S. credit rating). A number of House Republicans would have preferred to vote on an amendment that included both a spending cap at 18 percent and a two-thirds majority vote requirement in order to raise revenue; this amendment did not include those measures seemingly in an effort to gain more Democratic support.
The term “balanced” budget amendment is misleading – it fools people into thinking it may be a responsible policy to support. This is anything but the case – a BBA would in fact be a gravely irresponsible way to go about addressing our nation’s fiscal issues. Bob Greenstein of the Center on Budget and Policy Priorities sums it up nicely:
“The amendment would raise serious risks of tipping weak economies into recession and making recessions longer and deeper, causing very large job losses. That’s because the amendment would force policymakers to cut spending, raise taxes, or both just when the economy is weak or already in recession — the exact opposite of what good economic policy would advise.”
When recessions hit, spending on unemployment insurance and various other safety net programs, like food stamps, increases as more people fall on hard times (these are called automatic stabilizers). At the same time, revenues fall due to fewer people working and paying taxes. This leads to natural deficits during recessionary times. These deficits then shrink as spending on automatic stabilizers eventually falls and revenue streams eventually pick up. A BBA would not allow this excess spending, and would instead force spending to fall along with revenues. This would be disastrous during economic downturns both macroeconomically and for millions of Americans’ living standards. The Macroeconomic Advisers, an economic forecasting firm, recently provided interesting detail in a blog post regarding what might have happened had a BBA been passed and ratified, and taken effect in 2012. They say:
“The effect on the economy would be catastrophic. Our current forecast shows a Unified Budget deficit of about $1 trillion for FY 2012. Suppose this fall the federal government enacted a budget for FY 2012 showing discretionary spending $1 trillion below our forecast, resulting in a “static” projection of a balanced budget for next year. $1 trillion is roughly two-thirds of all discretionary spending, and about 7% of GDP. Our short-run multiplier for discretionary spending is about 2, and let’s assume a simple textbook version of Okun’s law in which the unemployment gap varies inversely with, but by half as much as, the percentage output gap. Then, instead of forecasting real GDP growth of 2% or so for FY 2012, we’d mark that projection down to perhaps -12% and raise our forecast of the unemployment rate from 9% to 16%, or roughly 11 million fewer jobs. With interest rates already close to zero, the Fed would be near powerless to offset this huge fiscal drag.”
In sum, if a BBA had been in place, it would have resulted in catastrophically lower GDP growth for FY 2012 and catastrophically higher unemployment. A BBA is a bad idea that does not deserve the falsely positive term “balance” in its title.
Representative Denny Rehberg (R-MT), Chairman of the Labor-HHS-Education Appropriations Subcommittee, recently launched a massive attack on the federal government’s efforts to improve the labor standards, job prospects, wages and bargaining rights of American workers. His numerous amendments to a major bill to fund the Labor Department and other agencies would block the government’s efforts to improve enforcement of wage laws, make construction work safer, protect the jobs of U.S. workers, reduce the levels of respirable coal dust that causes black lung disease, and give workers a fair chance to have a union if they want one. And where the law is already working to ensure contractors don’t compete for federal construction projects by driving down wages, Rehberg’s amendments would undermine the existing law.
Given that a decent job is the ticket to the middle class, Rehberg’s attack looks like the 1 percent trying to slam the door on the 99 percent.
Rehberg is going after important protections that don’t cost a lot of money. One of his targets is a Labor Department program – Bridge to Justice — that does nothing more than refer workers who’ve been cheated out of wages through the American Bar Association to attorneys with relevant experience. Obviously, Rehberg isn’t trying to save the taxpayers money, he’s simply trying to protect unscrupulous employers.
Rehberg’s legislation fits neatly into the business lobby’s campaign to weaken the National Labor Relations Board, the agency created to protect the right of workers to join unions and exercise their collective bargaining rights. His bill cuts NLRB funding by $49 million and targets rules that inform workers of their rights, enable workers to communicate with each other during union election campaigns, and ensure that union elections are conducted efficiently.
The employer campaign to prevent reforms at the NLRB depends upon misinformation and the fact that the public is largely unaware that union elections look more like those in a one-party state than in a true democracy. The last thing Rep. Rehberg’s corporate allies want is a system that gives full expression to employees’ desires to join together and improve their wages, job security, and working conditions.
Finally, the bill undoes recent rule changes from the Labor Department in the H-2A and H-2B programs that favor the hiring of U.S. workers at prevailing wages over foreign guestworkers for relatively low-skilled jobs as farmworkers, hotel maids, and landscapers. The bill would thus make it harder for U.S. workers to find jobs and would depress wages.
Every one of the two dozen or so labor-related provisions in the bill is bad policy, and one can only hope that Senate Labor-HHS Appropriations Subcommittee Chairman Tom Harkin (D-Iowa) and his Senate colleagues reject them all.
Wednesday, the Congressional Progressive Caucus (CPC) held an ad hoc hearing on job creation. Ten members of the CPC, including co-chairs Raul Grijalva (D-Ariz.) and Keith Ellison (D-Minn.), listened to testimony from five economists and experts, including EPI Research and Policy Director John Irons, EPI board members Rob Johnson and Julianne Malveaux, and Jeff Sachs and Bob Borosage. They also heard from Garrett Gruener, representing the “Patriotic Millionaires.”
All agreed that the supercommittee is headed in the wrong direction. Bob Borosage, co-director of the Campaign for America’s Future, compared the supercommittee to a bus headed straight toward a cliff, with the bus driver fretting about which lane to be in. In his testimony, John Irons hit back against the notion that the supercommittee needs to “go big,” stating there is no indication that markets are worried about U.S. debt or that they would respond any more favorably to a plan that goes beyond $1.2 trillion in deficit reduction. Not only are interest rates low, but Moody’s Investor Services, one of the ratings agencies with the power to downgrade the U.S. rating outlook, stated recently that “failure by the committee to reach agreement would not by itself lead to a rating change.” Irons stated, however, that he believed the market would react if Congress fails to do anything on jobs.
The hearing concluded with Gruener, representing the Patriotic Millionaires, which are a group of very wealthy people who want to see taxes raised on those making over $1 million – people like themselves – for the good of the nation. They lobbied on Capitol Hill Wednesday, urging Congress to raise taxes on those who can most afford it. Gruener, a businessman, testified that not one of his business decisions has been a function of marginal tax rates. He said:
“Not once, and I literally mean not once, have any of my decisions – my personal investment decisions or any of the investment decisions I’ve ever seen in the venture community – been a function of marginal taxes. … We’re not trying to grow companies in which the change of a few percentage points one way or the other is going to make a big difference.”
The supercommittee would be wise to pay more attention to hearings such as these. But though the CPC invited members of the supercommittee to attend, none did.
The Judiciary Committee press release unveiling the Regulatory Accountability Act paints an alarming picture about the relationship between jobs and the economy. House Judiciary Committee Chairman Lamar Smith (R-Texas) states: “The current regulatory system has become a barrier to economic growth and job creation. Federal regulations cost our economy $1.75 trillion each year. Employers are rightly concerned about the costs these regulations will impose on their businesses. So they stop hiring, stop spending and start saving for a bill from Big Brother.”
If this picture were accurate, one might appropriately support legislation that a just-released Coalition on Sensible Safeguards study found would “grind to a halt the rulemaking process.” But it is not.
The chairman’s statement incorporates two oft-repeated but fundamentally inaccurate claims. The first is the cost of regulation finding from a study by Crain and Crain conducted for the Small Business Administration. Their $1.75 trillion estimate is a gross exaggeration. It has been debunked by the Congressional Research Service, Obama administration officials, and the Center for Progressive Reform.
A study by EPI’s John Irons and Andrew Green is especially telling. It examines Crain and Crain’s estimate of the costs of economic regulation, which accounts for 70 percent of the overall estimate. The economic regression model used to determine these costs contains a series of fundamental flaws, including reliance on an international data set rife with holes (spotty data typically produces spotty findings), as well as a misspecified regression that confuses regulatory stringency with regulatory quality. The Crain and Crain regression also produces the counterintuitive finding that increased education in a country leads to less economic growth, reason alone to be skeptical of the overall estimate.
Irons and Green correct for just one of the problems with the regression – they fill in the spotty data set – and find no statistically significant relationship between Crain and Crain’s measure of regulation and economic outcomes. This implies that the economic costs of regulation cannot be distinguished from zero, an unsurprising result since certain regulations, such as financial regulations that stabilize the economy, promote economic growth.
The second inaccurate claim of Smith’s is that the specter of additional regulation is what’s causing companies to hold back on additional hiring. EPI has released a series of reports on the relationship between regulations and jobs; one of the clearest findings is that it is a huge shortfall in demand, not regulatory uncertainty, which ails the economy.
In this report, EPI President Larry Mishel finds that data suggesting a significant role for regulatory uncertainty is altogether absent. In fact, investment in equipment and software has grown faster than during the previous three recoveries, and private sector employment has grown much faster than during the last recovery. There are no mysterious lags that might be explained by regulatory uncertainty.
In fact, Labor Department data show that in 2011, just 0.2 percent of mass layoffs have been due to regulation, while 29.7 percent have reflected the lack of demand. (This data is summarized by Bruce Bartlett.)
Of further interest, companies are not using a substantial amount of resources they already have at their fingertips; presumably, they would use these resources more fully before they would increase investment or hiring. The capacity utilization rate (the degree to which current factories and equipment are being used) is still well below its average from 1979 to 2007. Similarly, the average number of hours employed individuals are working each week is still below the pre-recession level. Substantial unused capacity is another indicator that lack of demand, not regulatory uncertainty, explains why economic trends have not been stronger.
Turning to what businesses themselves are saying, Mishel found that the percent of small businesses reporting that regulations are the single most important problem they face has not been out of its historical range during the Obama administration. For instance, the proportion reporting this concern is lower than it was during the Clinton years, when employment growth was rapid. What is unusual now is that the most common problem cited by far is “poor sales (an indicator of the lack of demand);” during the Obama administration, the average share of small businesses citing “poor sales” as the most important problem they face is more than double the average cited in the eight other presidential terms examined.
This Congress has seen many examples of unwarranted economic concerns about regulations driving legislation likely to prove damaging to the regulatory process, thereby undermining essential health, safety, and economic safeguards. The thinking behind the Regulatory Accounting Act is a case in point; bad diagnoses tend to lead to the wrong cures.
As Paul van de Water recently pointed out, some of the plans floated by supercommittee members cut non-defense discretionary spending by about the same amount as the sequestration trigger would. This is because the proposals to cut discretionary spending do not include a firewall between defense and non-defense, so it is likely that a large cut to the entire discretionary budget—such as the Democratic offer to cut $400 billion—would all end up falling on the non-defense side. Remember, the trigger was supposed to be so bad and disastrous that it would scare Congress into striking a deal. But apparently it’s just scaring Congress into making pretty much the same cuts to non-defense discretionary and just sparing defense.
Why should we care about non-defense discretionary? There are a lot of reasons to care about this portion of the budget, which includes just about every federal government function outside of Social Security, Medicare/Medicaid, defense, and net interest, despite only representing less than 20 percent of the budget. But one of my main concerns is public investments such as infrastructure, education, and research and development. Economists across the board—even presidential candidate Mitt Romney’s economic advisor!—recognize that these investments must be sustained and even expanded to ensure long-run economic growth and global competitiveness. But according to Office of Management and Budget account-level data, these investments make up 1.7 percent of GDP, or about 40 percent of non-defense discretionary. This means that it would be extremely difficult to hit the budget targets proposed without taking a decent-sized hunk of flesh from these accounts.
Second, non-defense discretionary has been on a downward path as a share of the economy since the late 1970s (about the time that income inequality really started taking off, hmmm…). The discretionary caps enacted into law as part of the debt ceiling deal would force non-defense discretionary to record lows: to just 2.7 percent of GDP, far lower than the levels of the 1990s and 2000s, and a 29 percent reduction relative to the funding in the 2000s. And both the sequestration trigger and the $400 billion cut—were it all to fall on domestic discretionary—would cut these services even further.
Mayor Michael Bloomberg of New York is in the news today for shutting down the Occupy Wall Street protests in Zuccotti Park. This reminds me that he spoke last week at a forum co-hosted by the Center for American Progress and the American Action Forum. Besides a couple of truly novel twists (comparing Social Security to OPEC?!) it’s actually useful bringing up his speech because it perfectly crystallized the dominant economic narrative that far too many policy-making (and media) elites tell themselves these days. The punchline of that narrative, presented with no evidence at all, is simply that we need to urgently move to cut the budget deficit.
Bloomberg is sure that providing more fiscal support (i.e., using larger near-term deficits to finance spending and investments) to the economy won’t work to reduce unemployment. How is he sure? Because we gave some already and unemployment remains high. This is like a fire chief claiming that pouring water on a fire won’t quench it because once there was a really big fire and his crew poured more water on it than they’ve ever poured before … but it kept burning. So, apparently we’re going to move to pouring gasoline on it. Really, it says so right in the press release – “the best stimulus is fiscal responsibility (where “fiscal responsibility” is nearly always Beltway speak for quick reduction of budget deficits through large spending cuts leavened with some tax increases).”
I know that my harping on this may be getting old, but people haven’t stopped doing it yet, so here we go again: the failure of fiscal support would leave clear footprints in economic data. The textbook case for why debt-financed fiscal support does not lead to net new jobs and economic activity in some cases is that the first-round effect of spending and tax cuts are counter-balanced by rising interest rates that “crowd-out” private investment. There has been no rise in interest rates, hence there is no crowding-out.
Bloomberg is also sure that businesses aren’t spending enough – and that their failure to spend is because of vague uncertainty:
“But as important, and the subject for today, is the broader uncertainty that exists about the country’s long-term fiscal stability… . Nearly every CEO I talk with says the same thing: If the Federal government passed a real deficit reduction plan – and we’ll talk about what ‘real’ means in a minute – business leaders would respond just as they did in the 1990s, when President Clinton and Congress adopted a long-term deficit reduction plan that gave businesses more certainty about the market.”
But businesses are spending. Actually much, much more than they did during the first two-and-a-half years of the early 1990s expansion.
Click to enlarge
And there is no actual evidence that uncertainty is constraining them. And if businesses are uncertain about the future, aren’t they at least happy enough with today’s record-high profit margins?
I guess this is the quality of fiscal policy analysis I should expect from somebody who seems to think that Congress forced banks to finance the housing bubble.
Enough for now – suffice to say that this speech could’ve been generated by a Ye Olde Beltway Centrist Cred-Producing software package from the mid-1990s. With this mindless invocation of “smaller deficits will fix everything,” is it really so hard to figure out why countries respond so poorly to financial crises?
As the deadline looms for the supercommittee to report back to Congress, some have raised the specter that “failure” would lead to a collapse in financial markets. For example, Massachusetts Sen. John Kerry has expressed concerns that a failure to reach an agreement would send a dangerous signal to markets, and the Committee for a Responsible Federal Budget has said that a “go big” agreement is needed to “reassure markets about our ability to repay our creditors.”
These concerns are misplaced.
First, even if the supercommittee fails to find an agreement, there would still be a $1.2 trillion 10-year spending reduction put onto the books via a process called sequestration that would limit annual appropriations by Congress. From a pure deficit-reduction perspective, a $1.2 trillion agreement would be no different than a so-called failure. Congress can of course revisit those cuts, but they could also revisit any other kind of spending agreement too.
Second, remember that financial markets are forward looking and respond primarily to unexpected news. Does the market believe that Democrats and Republicans will come together in a Kumbaya moment to pass $3 trillion in tax increases and/or cuts to spending? I wouldn’t bet on it. Goldman Sachs noted in a recent Q&A on the supercommittee that, “a ‘grand bargain’ to resolve this imbalance appears to be a low probability this year. Instead, the politically realistic outcomes range from no agreement to a deal reaching $1.2 trillion in deficit reduction over 10 years.” They also note that just “32% of economists polled in the November Blue Chip financial survey expected a super committee agreement to become law.” Thus a failure would merely confirm market expectations, and there should be little reaction in the markets.
Third, as I noted in an earlier post, real interest rates on federal debt are negative for some maturities, and very low for longer term bonds. There is no indication that markets are worried about U.S. debt and need to be reassured. For example, Moody’s rating agency recently stated that, “failure by the committee to reach agreement would not by itself lead to a rating change.”
Finally, the main worry for businesses is the lack of demand for their goods and services and the main worry for individuals is the lack of jobs. The markets would react if Congress fails to continue a payroll tax holiday or fails to continue unemployment insurance payments. The real, immediate crisis is jobs and economic growth – Congress needs to focus on getting people back to work. A jobs-first focus would, more than anything else, reassure markets that the U.S. economy is poised for growth, and not slipping into premature, job-killing austerity.
Today’s interesting story on the front page of The Washington Post presents a nuanced view of the reaction of companies to new environmental regulations, quoting, for instance, several utility industry representatives on the ways jobs are created during the compliance process. The main channel of job creation occurs through the construction and installation of pollution-abatement equipment, or less-polluting facilities.
The piece is a good overview of the impact of regulatory change on employment in general, but there is an important angle that it did not touch on: the positive job-impacts of regulatory changes are likely to be much more potent in today’s economic context of high unemployment and low rate of capacity utilization. In particular, the construction industry, where many jobs would be created, is in particularly dire shape, with its overall level still nearly a half million short of its level at the start of the recession.
As Josh has blogged previously, when there are large amounts of unused capital and unemployed workers, as there are today, government regulations can effectively move this capital into action in the form of investments to comply with important environmental rules. Partially because of this, Josh’s analysis of the air toxics rule found that it would be a net job producer; in essence, in 2014 the jobs generated by investments in less-polluting technologies would outweigh any jobs lost due to higher prices or plant closings by about 90,000 workers.
Plenty has been written on this by smarter people than me – but since the troubles of Greece (and now increasingly Italy) are routinely invoked by those arguing that the U.S. needs to move to rapid deficit-reduction, it can’t hurt to emphasize the salient points again.
The cautionary tale one should take from the Eurozone crisis is not the dangers of large deficits. Yes, Greece and Italy do have large public debts – but nowhere near as large as Japan. Yet nobody is talking about a yen crisis. And Spain – often fingered as a likely candidate for a run by the bond-market vigilantes – has a public debt about half as large as that of the UK. And nobody is talking about a pound crisis.
Instead, the cautionary tale one should take from the Eurozone is that the tools of macroeconomic stabilization – fiscal, monetary, and exchange rate policies – need to be taken much more seriously than they have been for decades. Since 1980 a consensus (obviously wrong in retrospect – and not adhered to in real-time by plenty of admirable skeptics) developed among macroeconomic policymakers that fiscal policy should simply aim for balanced budgets (or even surpluses) and should not be used discretionarily to fight recessions; that monetary policy should simply target very low rates of inflation; and that capital markets (including international capital markets) should be left to govern themselves and capital should flow freely across international borders. The underpinning of this consensus was the belief that capitalist economies could and would generally heal themselves quite quickly following recessions, so macroeconomic stabilization policy (the tools used to fight recessions) were mostly unnecessary and would often just impede, not aid, speedy recoveries.
This flawed consensus informed the adoption of the Euro – countries surrendered independent monetary and exchange rate policies because they were sure they weren’t really all that important.
By adopting the Euro and entering a monetary union, member countries lost the ability to print their own currency and to regulate capital flows. So, when borrowing on international markets, they were now borrowing in a currency that they no longer had the capacity to print themselves. This inability to run the printing presses to pay off debt means that they can be forced into default if financial markets players ever decide to stop lending them money on reasonable terms.
Further, the common currency means that important stabilizing forces that kick in when financial markets stop demanding a country’s assets – increased exports and reduced debt obligations driven by the now-weaker national currency – are not operating for individual members of the Euro zone. This exchange rate channel is hugely important for countries trying to recover from financial crises – as the experience of Argentina and Iceland have shown. Further, this abandonment of monetary and exchange-rate policies was not accompanied by a beefing-up of a continent-wide fiscal policy that could be used to buffer downturns. Michigan or Nevada, for example, do not have their own monetary or exchange-rate policies, but they do get lots of federal transfers (like unemployment insurance) when their economies do more poorly than the national average.
To put this simply – the Eurozone was essentially a ship constructed for the fairest weather possible – a world without recessions. Now that the weather has turned foul, the consequences of not taking macroeconomics seriously is coming clear.
Worse, the too-limited scope that Eurozone countries have for macroeconomic policy stabilization resides solely in the actions of the European Central Bank (ECB) – which is barely even trying to mute the broader economic crisis. As John Quiggin notes, the ECB has actually raised rates within the past year – raising interest rates in the midst of the worst economic downturn in a generation! Recently, the new ECB head has cut these rates – but they remain a full percentage point higher than those in the United States or Japan.
So, what do we really have to learn from the Euro crisis? That the tools of macroeconomic management matter a lot – and they should not be given up casually. Failing to heed this lesson is already hurting the U.S. economy.
The Emergency Unemployment Compensation (EUC) program, part of the American Recovery and Reinvestment Act, is a federally-funded program that provides unemployment insurance (UI) benefits to the millions of Americans who lost their jobs in the Great Recession and who have exhausted or no longer qualify for unemployment benefits through existing state programs. With the anemic pace of job growth since the recession’s end, millions of unemployed Americans are still relying on these benefits to support themselves and their families. As the country is painfully aware, the job market is not recovering quickly enough to put these people back into jobs, and the EUC program is set to expire at the end of this year.
According to the Congressional Budget Office, extending UI benefits through 2012 would cost about $45 billion. But as EPI’s Larry Mishel and Heidi Shierholz explain, this $45 billion in federal spending would translate into an additional $72 billion in U.S. economic activity, or a 0.5 percent increase in GDP, due to standard economic “multiplier” effects and the fact that the long-term unemployed—often the most desperate for resources to meet their basic needs—are apt to immediately spend any benefits received.
From a jobs standpoint, this additional $72 billion in economic activity will save or create about 560,000 jobs across the country. How would your state be affected? The table below estimates the share of these 560,000 jobs saved or created in each state based upon the size of the state’s economy and its share of previous federal EUC spending. Not surprisingly, California has the most at stake – about 80,000 jobs. New York, Texas, Florida, and Pennsylvania will each save over 27,000 jobs.
One other way to look at these jobs numbers is as a share of each state’s payroll employment to control for the differences in the size of each state’s workforce. As the highlighted cells show, New Jersey, Connecticut, Nevada, Colorado, and Massachusetts will see the largest job loss as a proportion of state payroll employment if the EUC program is not extended.
The deadline for the supercommittee is approaching, and so we welcome budget ideas from our friend and former board member, Andy Stern. But he and Reagan OMB Director David Stockman are advising the supercommittee to “go big” on deficit reduction, based on the false premise that “our debt crisis is so severe, so obvious,” in this CNN opinion piece. In Washington parlance, that means $4 trillion plus in deficit reduction, heavily weighted toward spending cuts. The economic crisis we face today is not a debt crisis at all. We have a jobs crisis, and that is why we currently have large fiscal deficits. In today’s economic context, the most compelling case for long-term deficit reduction is to finance greater efforts to create jobs in the short term. Invoking a debt crisis that is not happening, however, can only lead to a rush for changes that need not be addressed in the short, nontransparent process of the supercommittee and are likely to do needless damage to our retirement and health programs, if not the economic recovery altogether.
Our “debt crisis”: 2.05% 10-year sovereign bond yields, independent central bank
Italy’s emerging debt crisis: 7.26% 10-year sovereign bond yields, no independent central bank
Greece’s very real debt crisis: 27.33% 10-year sovereign bond yields, no access to capital markets
We didn’t have a debt problem until conservatives in Congress concocted a debt ceiling crisis this summer, “ceiling” being the operative word. We’re struggling through a huge economic shock, and bigger budget deficits have ensued as a result. And it’s still the economy that Congress should be paying attention to: well over half of this year’s budget deficit can be chalked up to the weak economy and policies to boost employment.
Our economic crisis is so severe, so obvious, that it is visible in just about every U.S. data release. Unemployment has been stuck at or above 8.8% for over two and a half years. The economy and employment are growing too slowly to lower the unemployment rate. Poverty is rising, and real median incomes are falling. The economy is running $895 billion (-5.6%) below potential, which singlehandedly accounts for roughly a third of the budget deficit.
Yet Congress ignores these data in favor of the imaginary. There is no talk of a jobs program coming out of the supercommittee, even though fiscal policy is poised to shave one to two percentage points off of real GDP growth next year. The filibuster is repeatedly used to obstruct meaningful jobs legislation in the Senate.
We do face real long-term fiscal challenges that must be addressed. Along with Demos and The Century Foundation, EPI drafted a long-term budget for economic recovery and fiscal responsibility. We should address the health cost escalation but having just witnessed a yearlong process to achieve health care reform (at the time, the biggest piece of deficit-reduction legislation in over a decade), one wonders why this supercommittee should revise our health care system again—likely undermining reform—even before we see the results of reform. Social Security is not in any crisis and there is no need for its long-term fiscal challenge to be addressed in this process, either. We must restore revenue adequacy, but the prospects of the supercommittee doing so are zilch. Stern’s piece with Stockman does contribute to that effort by getting a prominent Republican on the record for substantial revenue increases (which is presumably what the point was, at least for Stern). But if long-term fiscal challenges misguidedly produce premature withdrawal of fiscal support and near-term spending cuts, as looks all too likely, both economic recovery and fiscal sustainability will remain elusive. Those genuinely concerned with long-term fiscal sustainability should pay attention to the economic crisis at hand, the jobs crisis, since we will never have a sustainable fiscal situation with the persistent high unemployment we are facing.
Economic benefits from two fuel standard rules alone offset much of modest compliance cost of all Obama EPA rules
As Republicans in Congress intensify their attacks on EPA rules, largely on the grounds they disrupt the economy, it is important to keep in mind that in terms of the overall economy, these rules are essentially inconsequential. Previously I’ve blogged on how the total compliance costs of all the major rules proposed or finalized by EPA so far during the Obama administration amount to only about one-tenth of one percent of the U.S. economy. What I failed to quantify is how the 0.1 percent figure itself, as small as it is, significantly overstates the potential economic effect of the rules.
This can be demonstrated by looking at the economic benefits of just two of the rules finalized so far by EPA. These are joint rules with the Department of Transportation that regulate greenhouse gas emissions from, and establish fuel standards for, various-size vehicles for model years 2012-2016. The economic benefits from these two rules are particularly sizable, as they produce large savings to drivers in the form of reduced expenditures on gasoline.
In 2010 dollars, a conservative estimate (see explanation below) of the economic benefits from these two rules amounts to $6 billion to $20.6 billion a year. This range is above the range of estimated compliance costs for all 11 major rules finalized so far by the Obama EPA; that range is $5.9 billion to $12 billion a year. Even if the four major proposed rules are also taken into account, the economic benefits from the fuel standard rules alone offset much of the combined costs of the final and proposed rules ($19.7 billion to $27 billion a year).
Stated simply, the economic benefits of just two of the major Obama EPA rules offset much of the economic compliance costs of all the rules. It also bears noting that companies have several years or more to comply with the rules, diminishing immediate costs and facilitating transitions. Further, an array of economic benefits is not considered here, including the economic benefits from the other nine final rules and the four proposed rules; these economic benefits range from workers spending more time at their jobs because they or their children are healthier to reduced expenditures on health care. The modest employment gains from the largest rule, the air toxics rule, are also not considered; these gains reflect the fact that compliance expenditures generate jobs when the economy has substantial unused capacity.
So especially once offsetting economic benefits are considered, it is hard to conceive how the EPA rules advanced so far during the Obama administration could drag down the overall economy.
What is conceivable, and indisputable, is that the health benefits from these rules are large. Every year, the cleaner air and other environmental benefits from the rules will save tens of thousands of lives, prevent tens of thousands of heart attacks, and mean hundreds of thousands fewer people will contract respiratory illnesses, thereby diminishing hospital stays. When all benefits, including health benefits, are considered, the benefits from the rules dwarf any compliance costs.
Note: Explanation of calculation. For the two rules that raise fuel standards for, and reduce greenhouse gas emissions from, various-sized vehicles, this blog considers the following benefits as economic: reductions in fuel expenditures, the value of time savings from needing to refuel less often, and the value of the decreased chance of economic disruption due to reduced dependence on foreign oil. The costs of time lost due to increased congestion (due to more driving since fuel costs less) and the costs of increased crashes (also reflecting more driving) are considered economic losses. The additional value drivers attach to driving more are not considered economic, nor are the costs assigned to increased traffic noise (reflecting more driving). The method is conservative because due to technical obstacles, no economic benefits are attached to reducing carbon dioxide or other emissions. Additionally, the health benefits from these rules, which EPA calculated for 2030 and did not annualize, are not included in the calculation.
From this week’s economic snapshot:
One of the arguments marshaled by the Occupy Wall Street movement is that corporate executives have seen pay increases far in excess of those enjoyed by typical workers. To be clear, CEOs have always earned much higher salaries than the workers they manage, but the gap between CEO and worker pay has soared in recent decades.
The figure below shows the ratio of average CEO compensation to compensation of the average worker from 1965–2010. In 1978, compensation of CEOs was 35 times greater than compensation of average workers. Since then, this ratio has skyrocketed, peaking at 299-to-1 in 2000. During the Great Recession, CEO pay fell relative to pay of typical workers because much of CEO compensation is directly linked to the stock market, which fell sharply in 2008 and 2009. However, the ratio bounced back during the recovery and stood at 243-to-1 in 2010. At this rate, it likely will not take long for the gap to reach its prior peak.
Click to enlarge
—With research assistance from Hilary Wething and Natalie Sabadish