A couple days ago, Harvard economist Gregory Mankiw tried his best to defend the carried interest tax loophole by blowing smoke at the debate and hoping no one would notice. The carried interest loophole allows hedge fund and private equity managers to reclassify their compensation for management services—a hefty slice of the return on their investors’ capital—as capital gains, which are taxed at a preferential 15 percent rate instead of the top marginal income tax rate of 35 percent. Mankiw is an economic adviser to former Massachusetts Gov. Mitt Romney, who inadvertently thrust the carried interest loophole into the spotlight with his 13.9 percent effective tax rate. But no amount of smoke or sand can cover up Romney’s tax return or a tax code that throws fairness out the window for the millionaires and billionaires in high finance.

Rather than defending carried interest outright, Mankiw muddies the water by leading readers through five examples of varying business arrangements and their respective tax treatment, attempting to illustrate that the line between labor and capital income is often blurred. Fair point. The tax code is complicated and similar modes of economic activity are often taxed differently, violating the principle of horizontal equity. Indeed, the tax code grossly violates the principle of horizontal equity when compensation is reclassified as investment income, as the carried interest loophole allows. Inadvertently, Mankiw is making a strong case for again equalizing the tax treatment of income derived from wealth and income derived from labor (as was done under the Tax Reform Act of 1986). After all, why should the tax code incentivize one compensation arrangement over another?

And Mankiw brushes off the second half of the fairness question: The carried interest loophole and the preferential treatment of capital gains it confers also violate the principle of vertical equity (the basic tenet of a progressive tax code that effective tax rates should rise with income). Instead, he compares Romney to a carpenter specializing in business fixer-uppers, implying that this tax question is about fairness to the middle class. But this is about someone with a net worth between $190 million and $250 million paying less than 15 percent on $21.7 million in income and the principle of vertical equity being undermined where it is most needed (where the money is).

This flaw in the tax code spans well beyond the presidential campaign trail: Private equity firm The Carlyle Group recently disclosed that its three founders each received in 2011 a $275,000 salary, a $3.5 million bonus, and roughly a $134 million share of investment profits, much of which is carried interest. Additional returns on their personal investments in Carlyle ranged from $57 million to $78 million. With so much income taxed at a 15 percent rate, it’s hard to imagine their effective tax rates landing in a different ballpark than that of Romney. The carried interest loophole helps the wizards of high finance to undermine the basic principles of fairness in the tax code. And unless repealed, this Wall Street subsidy will cost taxpayers $13 billion to $24 billion over a decade (the range of estimates in President Obama’s four budget requests, all of which have proposed repealing the carried interest loophole to no avail).

As Alec MacGillis notes, Mankiw’s half-hearted defense of the carried interest loophole is odd because he had previously concluded that, “Deferred compensation, even risky compensation, is still compensation, and it should be taxed as such.” But that was before he became an economic adviser to Romney. One of Mankiw’s famous “10 Principles of Economics” is that people respond to incentives, as he’s aptly proving.

The carried interest tax loophole is simply indefensible, as demonstrated by Mankiw’s fickle muddy-the-water defense. There are certainly gray areas in the tax code, but no amount of smoke can shroud this particular loophole as anything but an egregious subsidy to high finance.

John Conyers, ranking Democratic member of the House Judiciary Committee, has called for hearings that could lead to the impeachment of chief federal district Judge Richard Cebull of Montana. Common Cause president Bob Edgar called for Cebull’s resignation last week. A New York Times editorial has now weighed in with a similar call. Cebull acknowledges having sent an email to friends with a racist “joke” about President Obama, suggesting that the president could well have been born from the union of a drunken white woman and a dog.

Whatever the future holds for the judge himself, the best broader outcome from these events would be congressional hearings or other national discussion about the country’s historic and ongoing racial segregation. Unless we can come to a national understanding of the public policies that have produced a segregated society, there is little chance of developing consensus around policies to address it.

Montana’s experience is on point. At a time when, as we have recently reported, racial segregation persists, and may even be intensifying, such discussion is urgently needed. It is unlikely that the country can address the twin and mutually reinforcing crises of economic and racial inequality if it fails to examine how we arrived at this juncture.

Few blacks now interact with Judge Cebull and his circle in Helena, Mont., or in the state as a whole. This is not because blacks never settled in Montana but because, early in the 20^th century, African Americans in Montana and its neighboring states were forcibly removed by the formal and informal actions of public officials and an organized white community.

In Helena, Montana’s capital where Judge Cebull now holds court, there was a black literary society founded in 1906 that heard presentations by local black poets, playwrights, and essayists. The society’s weekly attendance of 100 was about as large as the entire black population of Helena today.

In that same year, Helena’s chief county prosecutor told a jury, “It is time that the respectable white people of this community rise in their might and assert their rights.” Such incitement was successful in Helena, elsewhere in Montana, and throughout the nation during the first few decades of the 20^th century.

As blacks were driven from towns in Montana and elsewhere, a series of federal, state, and local policies reinforced their concentration in urban ghettos. The public has largely forgotten this history of segregation that has bequeathed us, in the words of a 1968 presidential commission, “two societies, one black, one white—separate and unequal.” Unless we can come to a national understanding of the public policies that have produced a segregated society, there is little chance of developing consensus around policies to address it.

Read more on this issue in my commentary published earlier today.

Paul Krugman and Jared Bernstein have written recently of the seemingly contradictory forces at work today in government policy. On the one hand are the stimulus efforts of the Obama administration and the federal government, which have had a measurable impact in reducing unemployment and aiding the recovery. On the other hand are the dramatic cuts to state and local budgets that these governments have made in the wake of the Great Recession. States have had to deal with the largest drop in state revenues ever recorded, and the resulting deficits have meant huge jobs losses among state and local workers.

I have commented on these job losses a few times before, so this time around I want to highlight the gender dynamics a bit. These cuts to state and local government workforces, while a significant drag on the economy as a whole, are particularly damaging for women. In 2011, women made up 46.6 percent of the overall labor force, but among state and local workers, about 60 percent are women. Because women are so disproportionately represented in state and local jobs, they also have taken the brunt of the job losses in state and local governments. Of the net change in total state and local employment between 2007 and 2011—a decline of roughly 765,000 jobs—70 percent of the drop is from female employees. Today, there are about 540,000 fewer women in state and local jobs than in 2007, compared with about 225,000 fewer men.

One other way to look at this is through the proportion of people from state and local jobs currently unemployed.  According to the Current Population Survey, in 2011 women made up about 62 percent of those who reported that they were unemployed and that their most recent job was from the state or local government sector. This is lower than the female share of the net change in state and local jobs mentioned above, suggesting that some of the women who lost state and local jobs since the recession have either found private sector work or exited the labor force.   Nevertheless, it is still larger than the overall female share of state and local employees.

It’s worth noting that since the recession began, men have faced larger job losses than women in the private sector. But as of Jan. 2012, the overall unemployment rate for both genders is the same at 8.3 percent. In fact, when you look at the gender breakdown of the employment to population ratio—the proportion of the total population currently employed—the most recent figures show improvement only for men. The ratio for men declined from 69.8 percent in 2007 to a low of 63.3 percent in Dec. 2009. It has since risen a bit, up to 64.5 percent in Jan. 2012 (still one of the lowest percentages on record.) For women, however, the employment to population ratio in 2007 was 56.6 percent and it has fallen virtually every month since then, hitting 52.9 percent in Jan. 2012. It has not been that low since 1987.

Emmanuel Saez updated his valuable series on income trends to include 2009 and 2010 and finds, not surprisingly, that those in the top 1 percent started seeing a strong recovery in 2010 and have recouped some of the ground lost in the downturn.

I reached the same conclusion a while back based on my analysis of wage data for the top 1 percent through 2010 which showed: the recession and financial crisis crunched the wages at the top from 2007 to 2009 but the top 1 percent experienced wage gains in 2010 while the bottom 90 percent actually saw losses. (See the graph.)

The trends in capital gains is another important piece of all this. In response to the misguided claim that the financial crisis ended concerns about income inequality (“We don’t want to spend years focused on income inequality, only to learn that the financial crisis fixed it for us,” said one observer), Nicholas Finio and I showed that realized capital gains trends are volatile and correspond to the stock market. This historic pattern would have led top incomes to fall over 2007-09 and then start recovering in 2010. So, with wages of the top 1 percent recovering and the stock market growing, it makes sense that the incomes at the top fared well in 2010 as the Saez data show, regardless of whether the income measures include or exclude realized capital gains.

Paul Krugman has already commented and Mike Konczal  has offered his analysis. I am going to focus on what segments of the income distribution have recovered and by how much, as the following table does, showing the income shares of the top 1 percent and the rest of the top 10 percent for the recession years and for 1979, which is a useful historic benchmark.

The top panel shows the changes in income shares using an income measure that does not include realized capital gains. Note the income share of the top 1 percent fell 1.6 percentage points between 2007 and 2009 with the largest fall among the very top 0.1 percent. Equally interesting is that almost of the income share lost by the top 1 percent was captured by the next 9 percent, those in the 90^th to 99^th percentiles. That is, the great redistribution that occurred happened almost totally among the top 10 percent and did not benefit the bottom 90 percent of households. From 2009 to 2010, the top 1 percent recouped almost half the income share lost in the downturn (gaining 0.7 percentage points of the 1.6 percentage points lost) and the 90-99^th percentiles gained a bit more, up 0.1 percentage points. That means, by the way, that the bottom 90 percent saw their income share fall by 0.8 percentage points from 2009 to 2010. As for inequality reversing itself, note that even at the low point following the recession, 2009, the income share of the top 1 percent was 16.7 percent, still more than double the share in 1979 of just 8.0%. Not quite a reversal.

Income losses for the top 1 percent when realized capital gains are included in the income measure (in the bottom panel) were steeper. This follows from the fact that the top 1 percent receives a huge share of all capital gains. Using this measure, the lower income shares of the top 1 percent corresponded to an increased share among both the next 9 percent and the bottom 90 percent (seen by the fact that not all of the losses of the top 1 percent were gained by the next 9 percent). With this more inclusive income measure, the top 1 percent has recouped in 2009-10 only about 30 percent of what was lost from 2007 to 2009. Even with a shrunken income share in 2009 of 18.1 percent, however, the top 1 percent still has a substantially higher income share than 1979’s 10.0 percent. Again, not quite a reversal.

The top 1 percent may not regain the extraordinary income shares obtained in 2007 or in 2000, so it may be that income inequality peaked in those earlier years. Nevertheless, we can count on a few things. One is that the top 1 percent will see its share of income expand in the current recovery. A second is that income inequality, at least as measured by the income shares at the very top, will remain very high and much greater than what prevailed at the end of the 1970s. The forces at work driving up income inequality are still in place.

Last year, Mitt Romney released a budget plan that achieved a remarkable trifecta: massive cuts to the social safety net, higher taxes on low-income households, and a roughly $2 trillion increase in debt over 10 years relative to a continuation of current policies. He pulled this off by boosting defense spending by $1.6 trillion and cutting taxes (mostly for high-income taxpayers) by $1.4 trillion, which together were so costly that they consumed all of the aforementioned savings and then some.

Last month, he revised this proposal. Did he pull back on his tax cuts, realizing that they’re too expensive and unfair in light of the huge sacrifices that he’s demanding of middle- and lower-income Americans? Or perhaps he reversed his defense build-up, now cognizant of the fact that the international challenges of tomorrow will have more to do with economic competitiveness than the size of the Seventh Fleet?

Hahahaha… no. Instead, he concluded that his tax cuts for high earners weren’t enough. So he doubled down—actually, tripled down—by proposing another $3.4 trillion tax cut, reducing marginal income rates by 20 percent (the top rate would fall from 35 percent to 28 percent) and eliminating the Alternative Minimum Tax, which is mainly paid by high earners.

From Flickr Creative Commons by NewsHour

His campaign states that this new tax cut will be fully paid for with a combination of tax expenditure limitations on high earners, spending cuts, and economic growth. We don’t know the details of the tax expenditure limitations, but we do know that the Feldstein proposal—popular in conservative circles—would only cover about 15 percent of the cost of these new tax cuts, and likely less. His spending cuts are already more than offset by his previous tax cuts, so that’s out. That leaves economic growth.

Problem is, there’s no way his tax cuts can generate enough additional economic growth (and associated revenue) to cover anywhere near 85 percent of these tax cuts’ price tag. Even the most favorable studies, with the most favorable assumptions, find that economic growth effects may offset a maximum of 10-20 percent of tax cuts’ static cost. Under the George W. Bush administration, the Treasury Department found that the Bush-era tax cuts recouped only 7-10 percent of their cost through macroeconomic effects. The Congressional Budget Office, under noted Republican and supply-sider Douglas Holtz-Eakin, found that the economic impact of a hypothetical across-the-board tax cut could only cover 19 percent at best (more if it were financed by tax increases after 10 years, but Romney’s anti-tax pledge rules that out) and -3 percent at worst (in this case, the tax cut would be a net drag on the economy). Most tellingly, Romney’s own economic advisor, Greg Mankiw, found that a hypothetical cut to ordinary income rates would offset less than 15 percent of its own cost over 10 years.

And each of those estimates assumes that households have unlimited foresight (likely false) and ignore the long-run impact of budget deficits on the economy by magically assuming that the deficit is stabilized. Estimates using more realistic assumptions often find that permanent, deficit-financed tax cuts skewed to high-income taxpayers actually slow long-run growth.

In Romney’s Wall Street Journal editorial accompanying his tax plan revisions, he stated that “offering gimmicky proposals that rely on implausible levels of economic growth and blow huge holes in the budget is easy. Fixing our very serious problems is not.” Clearly, he’s taken the easy route.

My appearance on The Colbert Report and an earlier blog post about unpaid internships have generated a lot of thoughtful comments and some heartbreaking stories about how hard it is to find a paying job today, even with a graduate degree. I’d like to respond to some of the comments, remind readers that this is an international problem, and point out some resources for interns who feel abused by their employers.

First, the comments. A few readers were still confused about what is legal and what isn’t, and about what legal changes I am advocating.

Certain nonprofits do not have to pay volunteers, including interns. I think there are ethical problems with nonprofits that pay their executives hundreds of thousands of dollars a year but can’t scrape up the funds to pay their interns the minimum wage. And I think it limits access to full political participation and social mobility when entry-level positions in government or nonprofits are taken by the sons and daughters of well-off parents, who support them while they work unpaid. Working class and poor kids don’t have that option and will be denied important opportunities if congressional and executive branch internships or internships in nonprofit organizations that are pre-requisites for formal, paid employment are unpaid. But I am not advocating changes in the law.

Rather, I am calling for enforcement of the law as it already is and for employers to abide by the law, which says that work performed for the benefit of a private sector, for-profit business must be paid at no less than the federal minimum wage ($7.25/hour). In the District of Columbia, Santa Fe, N.M., San Francisco, and in many states, the minimum wage is higher than $7.25 an hour. Unpaid internships in for-profit businesses are already illegal unless they meet every element of the strict six-part test provided by the U.S. Department of Labor.

My blog post sparked a lively debate about the role of universities in promoting unpaid internships. One commenter, Heather Krasna, disagreed strongly with my statement that “universities have a cozy deal collecting tuition for semesters in which their students get farmed out as free labor to employers.” Heather’s response? The fault lies with employers, not the schools:

“The deal with college credit is not that it benefits universities. It absolutely does NOT benefit the universities. The reason students have to take credits for internships is that employers believe that it absolves them of the 6 prong minimum wage test– i.e. if a student gets college credit for their work, they are no longer an unpaid slave laborer, instead they are a “trainee” and the internship is proven to be a “learning experience” (i.e. college credit=proof the internship is not a job). So, the reason universities often allow/accept students’ getting credit for unpaid internships is that the university is being directly and loudly pressured by students who want desperately to get work experience and are being told by an employer that they can’t work for free unless they get credit. Universities, rather than telling their students that they are not going to be allowed to get relevant work experience, cave in and push their faculty to offer credit to avoid students (and their parents) from making a fuss that the university “is standing in the way” of the students’ career experience.”

But another commenter, FiredCareerCounselor, disagrees and puts the blame squarely on the schools:

“Make no mistake that unpaid internships are advocated by institutions of higher education as a means of generating huge revenue by exploiting students.  The college where I work recently mandated internship for ALL students. When I expressed concern about the legal and ethical ramifications, I was replaced. Even at our small, public university, students leave with staggering student-loan debt.  To think we’re MANDATING a work-for-free policy, is shameful.  Here’s hoping for precedent-setting in the Hearst case, so students can earn tuition money via internship, and career centers can return to the business of getting students jobs, not volunteer positions!”

Ross Perlin, in his seminal book, Intern Nation, cites Gina Neff, a professor at the University of Washington who has studied communications internships and calls internship tuition credits a significant revenue stream for colleges and universities. “It’s a dirty little secret” that internships represent “a very cheap way to provide credits…cynically, a budget balance.” But whether universities are being thrown into the briar patch or climbing in themselves, the result is the same: Students are effectively forced into paying for work (by paying for course credits) that they ought instead to get paid for doing. Read more

The blogosphere has batted around a good graph recently (from Antonio Fatas to Mark Thoma to Paul Krugman) showing the weakness of direct government spending (i.e., not including transfers) in the current recovery.

This is worth repeating, and not just because I said it a while back, but because the economic implications are huge. If government spending after the 2007 business cycle peak had seen the 19 percent cumulative growth that characterized the 16 quarters after the 1981 recession, this would have led to government spending that was higher by 3.2 percent of overall GDP by the end of 2011. Assume a reasonable multiplier of around 1.25 for government purchases (it’s probably higher than that) and you get a 4.1 percent boost to GDP. This translates into over 4 million jobs, or, more than a third of the total “jobs gap” that remains today after the Great Recession.

There are plenty of lessons to be learned from the rapid recovery after the early 1980s recession (among them – start with short-term interest rates at over 15 percent, so there’s lots of room to cut, rather than starting from right around zero), but one that is too often missed is that big government spending contributed a lot. That’s right, Reagan was a big Keynesian after all.

I happen to love Kevin Drum’s blog, so I hope he takes this as a helpful correction. In a post yesterday, he echoed the very important point from the Center on Budget and Policy Priorities that there hasn’t been an “explosion of government’s size,” but rather that over the last few decades, health costs and demographics have driven primary (i.e., non-interest) spending trends. But then he went on and veered toward an issue very near and dear to my heart: domestic spending. Quote:

“Assuming I did my sums properly, federal spending on ‘everything else’ — that is, everything except Social Security, Medicare, and interest on the debt — has indeed gone down from 15.2% of GDP in 1962 to a projected 11.3% of GDP in 2017. (That’s from Table 3.1 here.) However, the national defense piece of that has declined from 9.2% to 2.9%, while the nondefense piece has increased from 6.0% to 8.4%. There are some arguments to be had about whether the defense piece of the budget is calculated correctly (it doesn’t include veterans benefits, for example), and it’s worth noting that healthcare costs are part of the nondefense picture too (mostly due to rising Medicaid expenditures). Still, the basic shape of the river doesn’t change much. Most of the downward slope in spending is due to lower defense spending. Domestic nondefense spending hasn’t gone up a lot, but it has gone up.”

Actually, the shape of the river changes pretty significantly if you take Medicaid, veterans benefits, and other security spending (i.e., homeland security, international affairs, and nuclear weapons security, which oddly enough is embedded in the Department of Energy) out of the domestic spending category. Throw Medicaid in with Medicare and Social Security (all part of the “health care costs and demographics” thesis) and include veterans benefits and other security spending in with the defense budget, and you get a very different picture. Yes, defense/security fell from nearly 11 percent of GDP in 1962 to 5.7 percent in 1979, but guess where it’s at now? About 6 percent of GDP. Domestic spending climbed from a little more than 4 percent in 1962 to about 7.7 percent in the late ’70s, but over the last few decades it’s actually fallen: Before the recession, domestic spending had actually declined to under 5 percent. It’s risen a bit because of the recession (e.g., more people qualifying for food stamps and unemployment insurance) and the Recovery Act, but by 2017 it is projected to fall to a near 40-year low.

In other words, there was a story to tell of defense/security spending falling and domestic spending rising, but all that happened before 1980.  Since then, defense/security went up a bit during President Reagan’s Cold War build-up, down in the aftermath of the Soviet Union’s dissolution, and up again post-9/11 (wars aren’t cheap).  As for domestic spending?  It’s been pretty flat.

Update (2/29 10:18 a.m.): Watch video of Eisenbrey’s appearance on Colbert below.

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Original post: Tonight’s episode of Comedy Central’s Emmy and Peabody Award-winning The Colbert Report will feature EPI Vice President Ross Eisenbrey. In what is sure to be a memorable and entertaining exchange, host Stephen Colbert and Eisenbrey, a labor and employment law expert, will talk about the troubling proliferation of unpaid internships in the workforce. Tune in at 11:30 p.m./10:30 p.m. CDT (check local listings) to watch Eisenbrey discuss the negative impacts of this growing labor practice.

Over the past decade, the illegal use of unpaid interns has exploded with little protest. Unpaid internships don’t fairly reward hard work, block economic mobility and leave young workers in danger of exploitation.

EPI has highlighted the inadequate regulation of student internships and detailed why it is wrong, particularly with respect to for-profit employers not paying interns for their work. Serving as a crucial voice, our research and advocacy has garnered attention from government enforcement agencies, universities, and multiple major media outlets.

MORE: EPI’s work on unpaid internships

As a follow-up to my earlier post on the revenue implications of the Obama administration’s corporate tax reform framework, there is a major escape valve for turning at-best revenue-neutral tax reform into appropriately revenue-positive reform. In its framework, the administration singled out the deductibility of interest payments as one of the key imbalances in the tax code, along with distortions across industries’ effective tax rates, distortions among businesses’ organization (i.e., pass-through entities versus C-corporations), and distortions favoring offshoring. (The Center on Budget and Policy Priorities’ Chuck Marr has a good overview of this part of the framework.) These are all key areas for improvement in the tax code, but the deductibility of interest payments also has serious potential for raising revenue and curbing systemic financial risk.

This feature of the tax code distorts corporate financing decisions by pushing the effective tax rate on debt-financed investment well below the effective tax rate on equity-financed investment. The Treasury Department estimates that the effective marginal tax rate on debt-financed corporate business investment is -4.4 percent (a subsidy), versus a 36.8 percent for equity-financed investment – quite the tax wedge. Profits from equity-financed investment will be taxed at the effective corporate rate (26 percent on average), and after-tax profits will be taxed when disbursed to shareholders as dividends or realized as capital gains, both at the 15 percent rate. Conversely, Treasury notes that “profits from the same investment funded by debt will only be taxed to the extent they exceed the associated interest payments” and the interaction with the accelerated depreciation deduction results in a big tax subsidy. This is a huge boon to industries reliant on debt, notably the highly leveraged financial sector, although the value of the so-called “debt tax shield” weighs against the costs of financial distress associated with indebtedness.

We previously proposed limiting the deductibility of interest payments in our budget blueprint Investing in America’s Economy, with emphasis on reining in financial sector leverage. (This progressive budget report was a collaboration of Demos, EPI, and The Century Foundation.) The tax code should not subsidize systemic financial risk in the form of high leverage ratios (in balance-sheet terms, the ratio of assets to net worth). Emerging from the worst financial crisis since the Great Depression, curbing the debt tax shield should be a no-brainer: Lehman Brothers was leveraged 30-to-1 when it collapsed in Sept. 2008. This concern should have been addressed after hedge fund Long-Term Capital Management went bust in Sept. 1998 with a balance-sheet leverage ratio over 50-to-1. (LTCM was deemed systemically important, and the New York Fed organized a bailout by private investors.)

The administration proposed “reducing the bias toward debt financing,” which, while lacking specificity, could be a major revenue source. The deductibility of interest payments is not considered a “tax expenditure” (it’s not a deviation from the tax code, it is the tax code) so this isn’t included in the Joint Committee on Taxation’s estimate that revenue-neutral tax reform could only lower the corporate rate to 28 percent rate. (As I noted, the administration wants this 28 percent rate and permanent tax breaks for manufacturing, drawing into question whether these tax changes will result in reform or a tax cut.) Broadening the tax base into interest payments could help lower the corporate rate to the targeted 28 percent, fund the proposed continuation of the research and experimentation credit, level the playing field across financing decisions, and contribute to deficit reduction. There is a huge sum of money at stake here.

The Federal Reserve’s Flow of Funds data show $11.5 trillion in outstanding non-financial business debt and $13.7 trillion in outstanding domestic financial-sector debt as of the third quarter of 2011. It doesn’t take a leap of the imagination to conclude that there is real revenue potential in curbing the tax code’s debt-financing preference. Doing so could ensure that tax reform helps restore revenue adequacy while mitigating the subsidization of systemic financial risk.

In a recent speech, U.S. Secretary of Education Arne Duncan rejected “either-or” approaches, saying support was essential for both in-school reforms, and for improvements in the social and economic conditions that bring so many disadvantaged children to school unprepared to learn. For example, Duncan said he is a “huge fan” of programs like school-based health centers.

Yet his rhetoric has not been supported by his policy. To qualify for Race to the Top funds, and for waivers from No Child Left Behind requirements, states have been required by the Obama administration to change laws and policies so that teachers could be evaluated by their students’ test scores, and so that more charter schools would be authorized. States faced no similar requirements to change laws and policies to remove impediments for school-based health centers.

This can be fixed. Duncan can rescue his reputation as a “both-and” leader by using his powers to leverage an increase in children served by school-based health centers. For example, states could remove requirements for children to get pre-authorization from managed care organizations for routine and preventive visits to their school clinics. States could permit school-based health centers to bill Medicaid directly for services. Some states already have such policies, so it not unreasonable to expect all states to have them.

For more, read my commentary from yesterday morning.

An editorial in the Washington Post today caught my attention. Entitled The buck stops nowhere and subtitled Gov. O’Malley’s teachers’ pension plan would hurt counties without curing fundamental problems, the editorial suggests teachers get paid too much, pension costs are too high, and government is irresponsible. No evidence is provided for the first two propositions, and the editorial attacks a reasonable attempt by Maryland Gov. Martin O’Malley to bring about greater accountability.

Instead of evidence that teacher pay and pensions are too rich, the Post slides from complaining about how sympathetic school board members are to teachers unions to a complaint that “those pensions have become a crushing burden, amounting to about $1 billion annually.” Well, teacher pensions don’t cost nearly that much; that’s the cost of all state employee pensions, including state police, highway department, the parks department, etc. Does the Post not know that or was the writer just trying to throw dust in our eyes?

The editorial makes things worse in the next sentence: “That’s more than Maryland spends on the state police, housing, economic development or many other government functions.” This makes no sense. State employee pensions are a fundamental part of the cost of all of those state functions. Employees get deferred compensation – a promise of retirement benefits in the future instead of higher pay now. The Post apparently wants its readers to think that teacher pensions are stealing money that could have funded more police or economic development staff, but they are precisely what that $1 billion annual pension contribution pays for.

Are Maryland’s teachers overcompensated? The Post insinuates that it must be so because the school boards have no reason to restrain teacher salaries, but the editorial doesn’t cite a shred of evidence, and EPI research shows otherwise. The Post has talked endlessly about the need for better public school teachers and claims to believe in the magic of the free market, but the thought that you get what you pay for doesn’t seem to have occurred to them.

The investments are paying off. Maryland students’ performance on the National Assessment of Educational Progress has steadily improved over the last decade. In 2000, 35 percent of 8th graders tested below basic in math; last year, it was only 26 percent. Only 28 percent were proficient or advanced in 2000, but 41 percent tested at these higher levels in 2011. As recently as 2005, 31 percent of 8th graders tested below basic in reading. Last year, that number fell to 20 percent, an achievement by teachers and administrators the Post should celebrate.

The O’Malley plan that the Post attacks would transfer some of the cost of teacher pensions to the counties where the compensation decisions get made, rather than passing it on automatically to the state. The local residents who want to increase teacher pay and benefits will have to assume direct responsibility for more of those costs. If the Post is narrowly concerned about cost and accountability, it should be applauding. But the Post isn’t satisfied because the county in which each school board resides will be responsible for the cost, but the school boards are separate political entities. So what? Both are elected bodies, and voters can balance their preference for lower taxes against a desire for good schools and vote accordingly.

The Post never says it clearly, but accountability isn’t really its concern. The paper won’t be satisfied until education spending is cut. Maryland, in the Post’s view, spends too much on its schools. What is their evidence? Other unnamed programs have been cut “by $456 million while increasing aid to schools by an almost identical amount.” Unless the Post provides evidence that these programs were more critical or less well funded than schools, this is a meaningless point.

If education is crucial to the nation’s future, we should all be grateful that the Post’s editors are only criticizing the government and not running it.

Last week, I wrote a blog post marking the third anniversary of the American Recovery and Reinvestment Act (ARRA) and highlighting ARRA’s pivotal role in turning the economy around. Numbers crunched for the Congressional Budget Office’s (CBO) latest report on the legislation emphasize the same takeaway. Since ARRA was enacted in Feb. 2009, CBO has published periodic reports on the macroeconomic impact of ARRA; their latest looks at employment and economic output from Oct. 2011 through Dec. 2011. CBO finds that in the fourth quarter of calendar year 2011, ARRA’s successes included:

• Raising real GDP by between 0.2 percent (low estimate) and 1.5 percent (high estimate);
• Lowering the unemployment rate by between 0.2 and 1.1 percentage points;
• Increasing the number of people employed by as low as 300,000 and as high as 2 million; and
• Increasing the number of full-time equivalent jobs (which assume a full-time schedule worked by employees) by between 400,000 and 2.6 million.

Furthermore, CBO projects that ARRA will raise real GDP by between 0.1 and 0.8 percent and will increase the number of people employed by between 200,000 and 1.1 million in 2012, compared to the counterfactual without passage.

The two charts below show ARRA’s quarterly impact (both low and high estimates, as well as midpoints) on real GDP growth and the unemployment rate. The data include projections through 2013. Note that the majority of the impact occurred between Q3 2009 and Q4 2011. The subsequent waning is due to the fact that around 90 percent of ARRA’s budgetary impact was realized by the end of December 2011.

Earlier this week, the Obama administration and Treasury Department unveiled a “framework” for corporate tax reform. Like the rest of the tax code, the corporate income tax has been riddled with ever-more loopholes since the Tax Reform Act of 1986—the last significant scrubbing of the tax code. Here’s my distilled version of their five-point framework:

1. Eliminate loopholes to broaden the tax’s base, coupled with a cut to the statutory corporate rate from 35 percent to 28 percent.
2. Reinstate tax expenditures for domestic manufacturers, lowering their effective tax rate from 28 percent to 25 percent.
3. Establish a new minimum tax on foreign earnings.
4. Ever-present nod to small businesses concerns.
5. “Restore fiscal responsibility and not add a dime to the deficit.”

To lower the tax rate to 28 percent and yet keep the corporate income tax changes revenue-neutral, the framework proposes eliminating a handful of specific business tax expenditures—oil and gas subsidies, carried interest, last in, first out inventory accounting, special depreciation rules—repeatedly proposed in budget requests (summary of most of these can be found here). But the Joint Committee on Taxation recently estimated that revenue-neutral corporate tax reform could only be consistent with a top statutory rate of 28 percent if all major tax expenditures were eliminated.

The administration framework falls shy of that mark, and instead proposes new manufacturing tax incentives and a permanent extension of the research and experimentation credit (which is renewed annually as part of the “business tax extenders”). In the president’s FY13 budget, these “incentives for manufacturing” totaled $121 billion in revenue loss over a decade. The administration claims their plan will raise $250 billion—beyond offsets for the rate reduction—to pay for the permanent extension of these tax credits. JCT’s math, however, implies this figure may come from a current policy baseline assuming some of the “business tax extenders” (tax breaks which are not part of the permanent tax code but which are allegedly temporary yet extended by Congress like clockwork every year) are continued. Full continuation would reduce revenue by a hefty $839 billion over a decade.

On one hand, using this baseline seems odd; scoring any “savings” relative to current policy appears to give businesses credit for 25-plus years of successful lobbying. The bill of tax extenders includes the alcohol fuel credit, special depreciation rules for favored industries (e.g., restaurants, ethanol, race horses), special expensing rules for favored industries (e.g., film and TV production), and special foreign income deferral for the financial sector (e.g., Subpart F exception for active financing).

On the other hand, ending annual budget gimmicks (the extenders) does constitute a step toward responsible budgeting, and the depressing politics of tax reform suggests that these extenders will only be vanquished in some sort of bargain like that proposed by the administration.

But relative to current law (which does not assume the annual extension of these targeted tax breaks), Citizens for Tax Justice Director Bob McIntyre estimated that the president has proposed $1.2 trillion in tax cuts and only $0.3 trillion in offsetting loophole closers, leaving a gap of $0.9 trillion. This is hard to square with the administration’s professed intent not to add a dime to the deficit. And since when does restoring fiscal responsibility mean not adding a dime to the deficit?

Broadening the tax base and eliminating egregious preferences that have been lobbied into the tax code is good policy. But there is no reason a priori that tax reform be revenue-neutral. Indeed, the clearest flaw in the current tax system is that it simply doesn’t raise enough revenue to pay for government’s commitments. As CTJ spells out, it would be much more appropriate for corporate tax reform to be revenue-positive, relative to the much more stringent current law baseline.

Purported concern about the budget deficit always seems to vanish when it comes to tax cuts and vested business interests. “Shared sacrifice” is all the rage when it comes to reducing Medicare, Medicaid, and Social Security benefits, or raising taxes on the individual income side; where is the “shared sacrifice” in this framework for corporate income tax overhaul?

In her blog post on the earnings differences among interracial couples, the New York Times‘ Catherine Rampell concludes:  “So basically, what these numbers are reflecting is that Asians earn more money, period, which is generally true across the population of Asian-Americans and has been the case for a while.” This is true when looking at household and family income, but there is a different and more complicated story underneath these numbers.

It is important to recognize that many more Asian Americans have college degrees than whites. This 2010 EPI report found that nearly 60 percent of Asian American workers have a bachelor’s or higher degree compared to about 40 percent of white workers. College-educated workers tend to earn more than less-educated workers and this pulls up the median Asian American earnings.

When one compares the annual personal income of Asian Americans and whites of the same gender and educational level, Asian Americans do not always come out on top. The figure below shows these comparisons for workers with a high school diploma and with a bachelor’s degree. In 2010, among workers with a high school diploma, white men earned about $11,000 more than white women and Asian American men and women.

Among workers with a bachelor’s degree, white men remain the highest earners, but their earnings advantage over Asian American men is only about $5,000. In this comparison, Asian American and white women earn significantly less than Asian American men. Asian American women earn about $11,000 less than Asian American men, and white women earn about $13,000 less than Asian American men. This puts Asian American and white women at about $16,000 and $18,000 behind white men, respectively.

Another issue to consider is that Asian Americans are more concentrated than whites in high-cost-of-living areas. Asian Americans are overrepresented in expensive metropolitan areas like Los Angeles, New York, San Francisco, and Honolulu. Given this fact, controlling for educational attainment, Asian Americans should earn more than whites, but as the figure illustrates, they often don’t.

Former British Prime Minister Gordon Brown has a terrific piece in today’s Washington Post on European policymakers’ “fundamental miscalculation: a wrong-headed conviction, widely held across Europe, that if austerity is failing, it is because there is not enough of it.”

The failure of the “expansionary austerity” hypothesis has been growing increasingly apparent for quite some time, most recently highlighted by the euro zone economy falling back into contraction in the fourth quarter of 2011. More and more countries—including Italy and Spain—are projected to slide back into full-blown recessions. Via Ezra Klein, it’s clear to see that industrial production indices in the U.S. and the euro zone were closely tracking one-another until starkly diverging in the summer of 2011: U.S. production has continued to rebound and European output has fallen markedly.

But beyond this fiasco, Brown’s policy prescription is worth highlighting. Along the lines of advanced economies’ central banks coordinating monetary loosening and liquidity infusions during the financial crisis, Brown proposes coordinated fiscal expansion: “Europe and America should expand investment in infrastructure.” Now that would actually begin to address the global aggregate demand slump. This isn’t just Brown taking cheap political shots at Prime Minister David Cameron; this is sound macroeconomics. A massive U.S. public infrastructure project ($1.2 trillion) is also favored by prescient economist Nouriel Roubini, who similarly pegged “a front-loaded fiscal austerity that will sink us in a severe recession,” as the worst economic policy idea currently being floated.

Congress should be learning from Europe’s experience before we stray too far down the austerity path, as federal fiscal policy is all too set to do (state and local governments have already been down this path for years).

Today marks the three-year anniversary of the American Recovery and Reinvestment Act (ARRA). Despite overwhelming evidence of ARRA’s pivotal role in turning the economy around and boosting employment (including reports from the Congressional Budget Office, economists Alan Blinder and Mark Zandi, and the Federal Reserve Bank of San Francisco, among others), a vocal—mostly politically motivated—minority continues to misinform the debate, trying to convince the public that the stimulus failed.

That couldn’t be further from the truth.

As this recent video from the Center for American Progress nicely depicts, ARRA kept our economy from swerving over the cliff’s edge. In the video, Michael Linden of CAP uses three measures to demonstrate that the stimulus stopped the economy’s bleeding: He looks at annualized GDP growth, the monthly change in non-farm payroll employment, and monthly private-sector layoffs. As the housing collapse and financial crisis spread to the rest of the economy, these three indicators all grew dramatically worse, culminating in a dire situation in the fourth quarter of 2008—when GDP was plunging at an 8.9 percent annual rate—and the early months of 2009. After ARRA was enacted in mid-February, things started to turn around. In fact, here is what happened:

• In the second quarter of 2009—the first full quarter after the stimulus was passed—GDP declined at a much slower pace (0.7 percent), and growth resumed in the third quarter;
• Job losses slowed dramatically throughout 2009 and the economy started adding jobs in early 2010; and
• Private sector layoffs, which had peaked in Feb. 2009, began a rapid decline and returned to pre-recession levels by early Feb. 2010.

Now don’t get me wrong, ARRA wasn’t a cure-all (nor was it designed to be). The $831 billion 10-year cost of ARRA was smaller than the 2009 output gap and nowhere near the $3.0 trillion cumulative output gap since the start of the recession (which would be even bigger without ARRA). Unemployment remains unacceptably high, long after the official end of the recession. The economy needs 11 million more jobs to return to its pre-recession unemployment rate and the job seekers ratio has been higher for the last three years than it was at any point during the downturn of the early 2000s. Still, the stimulus prevented the situation from arguably being much worse than it otherwise would have been. Critics of the stimulus fail to recognize just how big of a hole ARRA was up against. As my colleague Josh Bivens explains in Failure by Design:

“The unemployment rate without the Recovery Act would have reached nearly 12%, not the 9% foreseen by the Obama administration. A good metaphor for this controversy is the temperature in a log cabin on a cold winter’s night. Say that the weather forecast is for the temperature to reach 30 degrees Fahrenheit. To stay warm, you decide to burn three logs in the fireplace. You do the math (and chemistry) and calculate that burning these three logs will generate enough heat to bring the inside of the cabin to 50 degrees, or 20 degrees warmer than the ambient temperature.

But the forecast is wrong—and instead temperatures plummet to 10 degrees outside and burning the logs only results in a cabin temperature of 30 degrees. Has log burning failed as a strategy to generate heat? Of course not. Has your estimate of the effectiveness of log burning been wildly wrong? Nope—it was exactly right—it added 20 degrees to the ambient temperature. The only lesson from this one is a simple one: since the weather turned out worse than expected, you need more logs.”

Unemployment in January was 8.3 percent, which is widely, and correctly, assessed to be unacceptably high. I agree. It should be noted that the unemployment rate for blacks in 2007 was the very same 8.3 percent, which barely registered much attention at all. That was at a time when the national unemployment rate was 4.6 percent and white unemployment was 4.1 percent. Well, the 8.3 percent for blacks in 2007 was also an unacceptable outcome. That’s why my colleague Algernon Austin organized an event, held yesterday at EPI: “Hit hard by the recession, left behind in the recovery: Achieving full employment for black workers.” Austin also wrote a new paper highlighting the currently very high unemployment among blacks and Hispanics, No relief in 2012 from high unemployment for African Americans and Latinos.

I was skeptical when Apple chose the Fair Labor Association (FLA) to investigate conditions in its supplier factories. The FLA is paid by the companies whose factories it monitors, and it’s just hard to bite the hand that’s feeding you. A truly independent monitor, one with no financial dependence on Apple, would be the right choice if Apple really wanted the public to trust its motives and any eventual exoneration of its suppliers.

Well, we didn’t have to wait long. The head of the FLA has apparently exonerated first, with full investigation to follow. Steven Greenhouse reports in the New York Times that barely after the investigation has begun, FLA’s president, Auret van Heerden, has declared the factories of Apple’s biggest supplier, Foxconn, “first-class” and said, “Foxconn is really not a sweatshop.”

These precipitous assertions are beyond troubling; they suggest FLA is not proceeding in a fair, systematic and serious manner to uncover the reality of the work conditions.

It might be time for Apple’s board of directors to take a close look at an approach that may protect Apple’s brand, but will not protect Apple’s workers. Rather than stick with what may simply turn out to be a public relations whitewash, they might want to find someone who will do an independent unbiased investigation and tell them the truth about conditions in Apple’s factories.

A growing body of research is finding that new Environmental Protection Agency rules will not disrupt the economy and may in fact modestly boost employment. According to a new report by EPI and a January report by the Congressional Research Service, this is true for the air toxics rule, the most costly regulation finalized by EPA during the Obama administration. More generally, overlooked testimony by the director of the Congressional Budget Office from last November concludes that efforts to derail air quality regulations generally, if successful, would harm the economy.

On Dec. 16, 2011, EPA issued its final standards for mercury, arsenic, and other toxic air pollutants from power plants (the “toxics rule” or the “Utility MACT”). In January, CRS issued EPA’s Utility MACT:  Will the Lights Go Out? As the title suggests, the report’s main focus is on whether the rule would, as some claim, affect the reliability of the power supply. CRS found otherwise, noting that while some facilities would be retired, “almost all of the capacity reduction will occur in areas that have substantial reserve margins,” meaning that the reductions can be easily absorbed without affecting power supply. CRS also observed that the rule includes additional time for compliance if in fact reliability is threatened in specific areas. The report’s bottom line conclusion: “…It is unlikely that electric reliability will be harmed by the rule.”

Last week, my colleague Josh Bivens released a report on the employment effects of the toxics rule. His analysis, unique in its comprehensive examination of both the positive and negative ways in which a regulation can influence employment, concluded that: “The toxics rule will lead to modest job growth in the near term and have no measurable job impact in the longer term.” His preferred single estimate is that 117,000 net jobs would be created.

The main reason why jobs would be created on balance in the near term is that the jobs generated by complying with the regulation, through pollution abatement activities such as increased investment on and the installation of scrubbers, will substantially exceed any jobs lost because of the modest increase in the price of electricity that would be produced. As Josh explains in his report and elsewhere, this is especially true today because of the large amount of capital and labor that is sitting on the sidelines; regulatory changes that spur investments to bring power plants into compliance with the new rules will mobilize this unused capital without leading to any offsetting rise in interest rates.

The Congressional Budget Office uses similar economic logic in assessing air toxics and other air quality rules. In testimony before the Senate Budget Committee on Nov. 15, 2011, CBO director Douglas W. Elmendorf included a general assessment of how initiatives to block EPA air quality rules would affect employment or output. He concluded: “On balance, CBO expects that delaying or eliminating those [EPA air] regulations regarding emissions would reduce investment and output during the next few years,” [emphasis added]. Essentially, CBO argued that the jobs created through investments to comply with the rules would exceed the number of jobs created due to alternative investments in the absence of the rules, because little such alternative investing would likely occur. (In my view, this reflects the fact that capacity utilization in the utility sector is at the lowest level on record, suggesting no need for further investments.) CBO also pointed out that the price increases that may result from these rules will not occur for several years, mitigating any near-term impact.

CBO’s use of the argument that regulatory changes are especially likely to spur job gains when, as is the case today, the economy has substantial slack in labor and capital markets, confirms that this reasoning is firmly based in mainstream economic analysis. It is an important argument that deserves greater attention in the ongoing regulatory debate.

It’s good to hear that Congress has reached a deal to extend the payroll tax cut and long-term unemployment benefits.The tax relief to working families and the stimulus provided by unemployment payments is critical to protecting some of the recent improvements we’ve seen in the labor market.   

But the nature of the “compromise” that congressional negotiators reached with regard to the length of unemployment benefits seems shockingly arbitrary. According to The New York Times, congressional Republicans wanted to end unemployment benefits after 59 weeks, while congressional Democrats pressed for coverage up to 93 weeks. They ultimately settled on a maximum of 73 weeks.I suppose given the state of Congress, we should be happy they could compromise on anything; but is this “let’s just meet near the middle” approach really the best way to decide when to end important social protections?

The point of unemployment insurance is, of course, to provide some level of income to workers during periods of joblessness. On a macro level, it also helps to counter economic downturns by mitigating the drop in consumer spending that inevitably occurs during periods of high unemployment.Thus, as Peter Orzag recently argued, if policies like unemployment insurance and payroll tax cuts are designed both to protect individual workers and the larger economy during times of distress, why would we want to affix them to arbitrary endpoints rather than overall economic conditions?Wouldn’t it be better to let the unemployment rate or even the long-term unemployment rate dictate how long we provide this additional economic support?

Roughly 2.3 million Americans, or 17 percent of the unemployed, have been searching for a job for at least 73 weeks – not including those that have given up looking for work and have exited the labor force. I should note that this is not the number of people who will lose benefits under the new proposal.Because each state has different unemployment eligibility requirements, differing lengths of state-sponsored coverage, and because federal support is also linked to state unemployment rates, it’s difficult to quickly estimate just how many will lose their benefits under this new cutoff.There are about 400,000 people who have been unemployed between 73 and 99 weeks, the existing cutoff point for unemployment benefits, but not all of these people have been collecting benefits. 

Some will argue, of course, that cutting off unemployment benefits will spur some job seekers to redouble their efforts, as if it’s their lack of trying that is keeping them unemployed.I think the table below suggests otherwise.It shows the 20 states with the highest number of individuals unemployed for at least 73 weeks as a share of their states’ labor force.The cells highlighted in blue denote the top 10 values in each column. 

As one might expect, the states with the highest unemployment rates are also states with the highest proportions of these “73-weekers.” In other words, in places with the highest proportions of long-term unemployed, it’s really hard to find a job. As Heidi Shierholz explains in greater detail, the reason so many have struggled to find work for so long isn’t because they are lazy or that they don’t have the proper skills, but that there simply aren’t enough jobs.The most recent Job Openings and Labor Turnover Survey (JOLTS) indicated 3.9 job-seekers for every posted job opening nationwide in December. 

Unfortunately, JOLTS does not include state-level statistics, but I would comfortably wager that this ratio is even more extreme in places like Nevada and Florida.Congress should be focused on doing everything it can to stimulate job growth in these states, not negotiating some arbitrary line for when job seekers there will suddenly be without help. 

One of the best aspects of President Obama’s new budget plan is its near-term focus on job creation. This is a significant change from last year’s budget, where job creation was effectively ignored in favor of deficit reduction (likely in response to the GOP victory in the 2010 midterm elections, but that’s no excuse). This year, the president included $350 billion in job creation, $300 billion of which would hit the economy in the next year and a half.  Here’s what’s in it though fiscal year 2013:

• $95 billion in the payroll tax cuts (employee-side)
• $80 billion in other business tax cuts (including a $25 billion hiring credit)
• $45 billion in emergency unemployment benefit extension
• $25 billion in transportation infrastructure investments ($50 billion over ten years)
• $20 billion in school facility repair and modernization
• $30 billion in retaining or rehiring teachers and first responders
• $25 billion miscellaneous neighborhood stabilization, job training, energy efficiency, VA conservation jobs, infrastructure bank, and manufacturing incentives

Last fall, the president proposed the American Jobs Act (AJA), a collection of policies designed to jump-start the economy. There are a few differences between the AJA and this jobs package—some policies were already enacted, some were scaled down, and there are a few new proposals—but this is essentially an updated and revised AJA.

And like the AJA, this jobs package would have an immediate positive impact on the economy and jobs. About 85 percent ($300 billion) of the package would hit the economy in the next year and a half. Using standard macroeconomic multipliers for the various policy categories, we find that the president’s job creation proposals would create 1.5 million jobs in fiscal year 2012 and 1.3 million jobs in fiscal year 2013 (through Sept. 2013).

The following graph shows by how much this proposal would lower unemployment relative to the unemployment levels under the Congressional Budget Office’s economic projections, if the historical relationship between GDP growth and unemployment held over the next two years. Note that CBO assumes that in Jan. 2013 the entirety of the Bush tax cuts will expire and the sequestration trigger will be implemented in full. A more realistic policy assumption that at least partially extends the Bush tax cuts and replaces the trigger would lower their projected unemployment levels. However, because the unemployment path under the jobs package was constructed off of the CBO baseline, the gap between the two would remain the same.

Some might argue that the full value of the $300 billion in the next year and half should not be included as “new” fiscal support, since the payroll tax cut is very likely to be extended for the full year (and full-year extension is included in the baseline of most macroeconomic forecasters’ models). In addition, the unemployment insurance extensions are also likely (though not guaranteed) to also run through all of 2012 (and many forecasts have some portion of these included in their baseline as well). Still, given the intense political pressure to move to immediate fiscal tightening, we think even just preserving the fiscal support already included in many forecast baselines is an important step in the president’s budget and should be highlighted.

For more on our job creation methodology, see our memo from last fall.

Since an unexpected link from Noam Chomsky (whoa!) has brought it some attention, I may as well take the chance to introduce my book Failure by Design as a piece of evidence in the “morals versus money” debate going on.

David Brooks, channeling Charles Murray, argues that moral/social decay led to the poor economic performance in the bottom half of the income distribution in recent decades. Paul Krugman, Dean Baker, and Larry Mishel (I’m sure I’m missing others) demur – arguing that evidence for the poor economic performance is clear as day while evidence pointing to moral/social decay as an independent cause is awfully unpersuasive. (Wait! Don’t choose sides already based purely on teams – I have more evidence to offer!)

One thing that hasn’t been mentioned yet is that there’s plenty of reason to believe that things besides moral/social decay led to poor economic performance; policy changes alone just about guaranteed this poor performance. As Failure by Design notes, recent decades have seen: the inflation-adjusted value of the minimum wage fall for years (almost decades) at a stretch (leaving it still today below its late 1960s peak); an ongoing decline in the share of workers represented by a union (even while the share of workers desiring a union has not much moved); a much-larger share of the total U.S. economy accounted for by trade with much-poorer nations; and a Federal Reserve that has been less and less willing to push back hard against unemployment rates that rise above even their own conservative targets.

Nobody, absolutely nobody, disputes that these things should’ve been expected to do anything but inflict disproportionate harm on low- and moderate-wage workers. The conservative case for making these policy changes was that they would improve overall economic performance and if one was so inclined to make sure that low- and moderate-income workers were not harmed by these policy changes, one could have used the tax/transfer system to redistribute some of these overall gains their way.

I’d complain that not enough of these overall gains have found their way to the bottom half of the income distribution – but it’s awfully hard to believe these overall gains happened at all. Measures of aggregate economic performance are really no better (and are mostly worse) in recent decades even as incomes are shifted.

The New York Times‘ brilliant two-part investigation of the wretched treatment of Apple’s manufacturing workforce is the obvious cause of the announcement that Apple is submitting to outside monitoring of conditions in its suppliers’ factories. No one at Apple headquarters had a religious epiphany; they were disgraced in the pages of the world’s greatest newspaper, and the public was beginning to react. This is not to say that a public relations gambit can’t lead to real change. But Steven Greenhouse’s story in the Times yesterday raises fair questions about the depth of Apple’s new commitment to labor rights.

Apple had two obvious choices for outside monitor: the Fair Labor Association, a monitoring group funded by the corporations it monitors, or a truly independent organization like the Worker Rights Consortium, which does not accept contributions from any for-profit corporation, let alone the corporations it monitors. The fact that it chose the in-house alternative tells me that Apple is less than fully committed to its new cause.

It’s worth noting that Apple has gone down this route before, with lousy results. In 2007, after China Labor Watch and Chinese journalists reported serious abuses at Apple’s key supplier, Foxconn, Apple hired Verite to monitor Foxconn’s labor law compliance. Foxconn is the company where—three years after Verite was hired—workers began committing suicide to escape their servitude, inhumanly crowded conditions, and personal abuse.

There are other reasons to doubt that anything material will change. The Fair Labor Association’s Executive Director, Jorge Perez-Lopez, with whom I worked at the Department of Labor, is a very decent guy. But when he says Apple will have no influence on which factories will be inspected or when, it’s hard to believe, especially when Apple’s CEO made the announcement that the first inspections would be in Foxconn factories in Shenzen and Chengdu. Oops! What Mr. Perez-Lopez didn’t say is equally interesting: How will the findings be released? We have seen that public shame is a powerful motivator. Will Apple have any control over the timing or content of the monitor’s reports on conditions?

And most important, will the Fair Labor Association be allowed to investigate the causes of the poor conditions, which include the price Apple is willing to pay for its products? Apple, like Wal-Mart, is famous for squeezing its suppliers, leaving them less and less to pass down to the workers in wages. Scott Nova, Executive Director of the Worker Rights Consortium, estimates that Apple could triple the wages its suppliers pay and reduce its gigantic profits by only 7 percent. That might be the fastest and surest way to improve the lives of its 700,000 workers. But it wasn’t part of Monday’s announcement.

On Friday, Feb. 10, the Department of Labor (DOL) announced a new set of rules for the H-2B program, the country’s main temporary foreign labor program for less-skilled workers in non-agricultural positions. The new rules are set to become effective in late April, and as the New York Times reported on Saturday, “the changes were hailed by advocates for guest workers, who said they would make it more difficult for businesses to exploit vulnerable foreign migrants and hire them to undercut Americans.”

I join in the applause for the H-2B rule changes. For several years, the H-2B program has operated in ways that defy common sense. For example, in the District of Columbia, where more than 30,000 people were unemployed in 2010 and the unemployment rate hovered around 10 percent, common sense tells you that hotels should have an easy time finding local residents to take jobs as maids or cooks. And if they really couldn’t find anyone from D.C. to clean hotel rooms, surely they’d find qualified applicants in Northern Virginia or Maryland.

Yet lodging giant Marriott Hotels claimed they couldn’t find anyone here or elsewhere in the United States for 48 hotel maid and cook positions. They got government approval to bring 48 H-2B workers from abroad to do work that local people (with a high school education or less) could have been trained to do very quickly.

How did Marriott do it? How did they convince the DOL that no one in the D.C. area was interested in and qualified for these jobs? One possibility is that Marriott might have dishonestly claimed that they tried to recruit U.S. workers but failed. Under the old program rules, DOL didn’t have to check the accuracy of Marriott’s claims; DOL in all likelihood simply accepted Marriott’s “attestation,” i.e., simply took their word for it. Widespread fraud and abuse, documented by government and news reports and legal cases, are the main reason DOL has done away with the attestation procedure in its new rule.

More likely, Marriott fully complied with the minimal recruiting requirements mandated by the current rules, and few qualified local residents responded, because few ever heard there were positions open and because the wages offered were well below the prevailing wage in the D.C. area.

Marriott offered to pay the cooks $9.80 an hour. Here are the median, mean (or average), and annual wages paid to cooks in D.C. in 2010. Marriott’s wage offer was $3.80 an hour less than the average paid to the lowest paid of the hotel, cafeteria, or restaurant cook occupations in D.C.

Marriott offered to pay the maids $8.50 an hour, even though the median wage for maids in D.C. was $14.58 and the mean was $14.44. Marriott’s offered wage was only 59 percent of the prevailing wage for maids in D.C. That might have been enough all by itself to discourage anyone in D.C. from applying for the jobs. It’s likely, however, that potential hotel maids in D.C. either didn’t see Marriott’s ad if it ran only for the required minimum of three days in some local paper, or if they did see it, it could have been months before the position was available and therefore job seekers ignored it.

If Marriott had been looking to employ cooks and maids in the broader, D.C.-Virginia-Maryland-West Virginia area, the prevailing wage would have been somewhat lower but still far above what the company actually offered.

It’s easy to see why employers like Marriott love the current H-2B program. They can legally pay temporary foreign workers less than the local market rate for essential jobs. Fixing this aspect of the H-2B program was the impetus for an earlier rule proposed by DOL, but that common sense rule was blocked by Congress after a lobbying firestorm. Employers claimed they’d go out of business if they were forced to pay the local average wage to maids and cooks (and especially landscapers), even though the employers they compete with are doing just that. But the fact that employers don’t have to document and prove their efforts to recruit U.S. workers—even at the below-average wages permitted by the H-2B program—exacerbates the problem and allows employers to ignore the employment needs of the local workforce where they do business, at the expense of the local workers’ ability to earn a living wage.

The new H-2B rules will help local workers find jobs at the prevailing wage for the work that they do. They will help put more unemployed Americans back to work, and also prevent the undercutting of employers who pay a living wage. Unfortunately, H-2B employers are already up in arms about these common sense reforms. Congress should not allow the desire of H-2B employers to lower American wages trump the need of unemployed workers to earn a decent wage.

In his 2010 State of the Union address, President Obama pledged to double exports over the next five years, which would “support two million jobs.” How’s that working out? Not so well, despite claims to the contrary from the White House. In this year’s SOTU address, the president pointed to newly signed Free Trade Agreements (FTAs) with South Korea, Colombia and Panama as policies that will generate more exports, and they are, but the U.S trade deficit with those countries also increased last year. In short, it’s hard to argue that the Obama administration has taken any serious steps to make trade flows move from a minus to a plus in generating growth and employment in coming years.

Their rhetoric often suggests otherwise. Just last week, Deputy National Security Advisor for International Economic Affairs Michael Froman claimed that “last year our exports of goods alone to China exceeded $100 billion, and have been growing almost twice as fast as our exports to the rest of the world.” While this was a nice welcome for China’s Vice President Xi Jinping, who visits the White House today, it turns out that this nice round (and arbitrary number) was only reached if one is willing to overlook some key issues in trade data.

On the broader question of export growth, while exports to China and the world have been growing rapidly, the volume of U.S. imports increased much more rapidly – and this means that U.S. trade deficits with China and the world have increased rapidly over the past two years. This increasing trade deficit has  generated a net loss in trade-related jobs with both China and the world as a whole. Thus, while export growth may have supported some new U.S. jobs, the growth in imports has displaced a much larger number of jobs. Between 2008 and 2010, the growth of U.S. trade deficits with China alone resulted in the loss of 453,100 U.S. jobs. A thorough jobs analysis of U.S. trade in the 2009-2011 period has not yet been completed. However, the U.S. trade deficit in non-oil manufactured goods, the most labor intensive portion of U.S. goods trade, increased by $129.3 billion in this period, displacing hundreds of thousands of U.S. manufacturing jobs.

Exports to China increase at a relatively brisk pace of 22.3 percent on average over the past two years (since President Obama’s announced goal of doubling exports), as shown in the figure below. While this number sounds great in isolation, it was more than offset by the growth of imports from China, as shown in the figure; and U.S. trade deficits with China have soared.¹ So, even though exports to China are growing rapidly, the base (their initial level) is tiny compared with imports, which exceeded exports by more than 4-to-1 throughout this period. Therefore, in order to merely stabilize our trade deficit with China, exports would have to grow at least four times as fast as imports. In fact, imports from China grew nearly as fast as our exports to that country, and our bilateral deficit has increased 14.6 percent per year on average over the past two years. 

U.S. exports to the world have increased at a slightly slower rate of 18.4 percent per year over the past two years. Although this is slightly lower than the rate of growth of exports to China, at this rate, exports will double between 2009 and 2013, one year ahead of the goal set by President Obama. Time for a celebration and a tour of all those shiny new factories shipping exports to China, right? Not if we care about jobs. If imports  and exports continue to grow at present rates, the U.S. global trade deficit will more than double by 2013 to more than $1 trillion. Millions more jobs will be lost, most of them in manufacturing. Again, the story is simple: Trade flows have two sides, imports and exports. Counting only one side tells you nothing about how policy has aided or hindered U.S. competitiveness in the global economy.

Readers will note that exports to China have grown only slightly faster than exports to the world over the past two years.Read more

One of the most overlooked items of the federal budget is the non-security discretionary budget. Despite accounting for only about 15 percent of federal expenditure, it includes some pretty important government functions. Half of the non-security discretionary budget accounts for the entirety of the federal government’s role in economic development, consumer protection, public safety, environmental protection, as well as portions of the safety net. The other half is made up of vital public investments in infrastructure, education, and research and development, which are necessary to keep the economy strong and globally competitive for decades to come. In fact, the non-security discretionary budget is practically the sole provider of these investments, with few existing elsewhere in the budget.

We’ve given good marks to President Obama’s 2013 budget for its upfront job creation proposals, efforts to promote tax fairness, and for realistically stabilizing the debt-to-GDP ratio over the second half of the decade (as the output gap shrinks). But unfortunately, his budget proposal achieves much of its savings by maintaining the non-security discretionary cuts in the first phase of the Budget Control Act, the debt ceiling deal that established 10-year caps on discretionary spending. As a result, his budget forces non-security discretionary outlays down to their lowest level as a share of GDP ever recorded (the data begins at 1962). That’s even lower than the Bowles-Simpson proposal!

The president has admirably made public investments a high priority, promoting increases in transportation, school facility repair and modernization, job training, R&D, and college access. But this vision is hard to reconcile with a rapidly shrinking non-security discretionary budget, as it will lead to even steeper reductions to everything else, with disastrous consequences.

A major new zombie lie is being launched: The claim that high inequality is due to more working spouses in high-income households and well-off people increasingly marrying other well-off people. This was part of James Q. Wilson’s recent op-ed in the Washington Post, which I addressed in an earlier blog post (though not on this point). My zombie lie detector went wild, however, after reading a very good New York Times article detailing new research showing “the [education] achievement gap between rich and poor children is widening, a development that threatens to dilute education’s leveling effects.” At the end of the article are two statements by conservative public intellectuals, one from Douglas Besharov and one from Charles Murray, attributing income inequality to working spouses.

To recall, here’s what Wilson wrote: “Affluent people, compared with poor ones, tend to have greater education and spouses who work full time.” Wilson then suggests that if these are the drivers of inequality, then it is best not to do anything about the problem, since, in his words, “We could reduce income inequality by trying to curtail the financial returns of education and the number of women in the workforce—but who would want to do that?”

Here’s what the Times‘ Sabrina Tavernise attributed to Murray in her piece:

The growing gap between the better educated and the less educated, he [Murray] argued, has formed a kind of cultural divide that has its roots in natural social forces, like the tendency of educated people to marry other educated people, as well as in the social policies of the 1960s, like welfare and other government programs, which he [Murray] contended provided incentives for staying single.”

And here’s what Besharov told Tavernise:

There are no easy answers, in part because the problem is so complex… . Blaming the problem on the richest of the rich ignores an equally important driver, he [Besharov] said: two-earner household wealth, which has lifted the upper middle class ever further from less educated Americans, who tend to be single parents. The problem is a puzzle, he [Besharov] said. “No one has the slightest idea what will work. The cupboard is bare.”

The basic claim, it seems, is that well-off families are more likely to have working spouses and that the spouses in well-off families are both more likely to have high earnings. Presumably this phenomenon has been growing, or else it cannot explain growing inequality. I address the issue of the role of the growth of two-earner households and inequality in this post but do not address the issue of assortative mating (rich marrying rich). Also, my focus is whether the “working spouses factor” contributes at all to our understanding of the key dynamic of income inequality, the growing income gap between the top 1 percent and the middle class.

To these folks demographic, rather than economic, trends are generating income inequality. Consequently, economic policy has had no role in causing inequality and can not ameliorate inequality either. Of course, this is only the latest effort to reduce inequality to a demographic phenomenon: The State of Working America has addressed other such claims going back to the first edition in 1988.

To explain inequality is to explain first and foremost the tremendous growth of income, wages and wealth that have accrued to the top 1 percent and the top 0.1 percent since 1979. How does the “working spouse” explanation hold up?

The first thing to note is that the presence of a working spouse, even a highly paid one, can potentially impact household income inequality but says nothing about the tremendous divergence of individual wages over the last few decades. Household incomes aggregate the labor income of all household members (which depends on how many members work, how much they work and how much they are paid), non-labor income (capital gains and so on) and any pensions, government transfers and other income. As we know,  the top 1 percent of households managed to more than double its share of national income between 1979 and 2007. Josh Bivens and I have argued that the dynamics underlying growing household income inequality are rising wage inequality, rising inequality in receipt of capital income (capital gains, dividends and so on) and the shift toward more capital income and less wage income. The demographic factor of working spouses is about how people combine into households and does not address and certainly cannot explain the huge increase in the wage growth of the top 1 percent of wage earners versus every other group. Here is the chart on wage growth showing the top 1 percent  gaining 131 percent  between 1979 and 2010 while those in the bottom 90 percent saw their annual wages rise by 15 percent (mostly in the late 1990s).

Second, we can look directly at the two–earner phenomenon among the upper 1 percent and the top 0.1 percent from the work of Jon Bakija, Adam Cole and Bradley T. Heim who analyzed tax returns from 1979 to 2005.Read more

Update (4:10 p.m. ET): Here’s some data (from EPI analysis of the Current Population Survey) on the share of those employed lacking a high school diploma or a GED certificate, labeled “less than high school,” by race/ethnicity and immigration status:

Note that just 4.1 percent of the native born white workforce is in this category. Only 5.1 percent of employment of all native-born Americans lacks a high school degree or a GED, with a slightly higher share among employed native-born blacks (6.7 percent).

Original post: I was struck by David Brooks’ example of bad behavior in his New York Times column today, writing, “I don’t care how many factory jobs have been lost, it still doesn’t make sense to drop out of high school.” Paul Krugman was struck by that same sentence. Brooks’ assumption, I guess, is that many workers have low wages because they never completed high school. He’s not alone in thinking that there are a lot of high school dropouts, but this is definitely not true. As the graph shows, the share of the workforce (ages 18-64) who have neither a high school or further degree (including a GED) has dropped tremendously in the last four decades, from 28.5 percent in 1973 to just 8.4 percent in 2011, a trend true among men as well as women. Oh, by the way, half of the “high school dropouts” in the workforce are immigrants, many of whom did not go to school in the United States and came here in their teens or later. You definitely can’t blame the erosion of workers’ wages on their failure to graduate from high school, since the vast majority did.

In fact, the education levels of our workforce have grown tremendously. As another example, the share of the workforce with a college degree or further education has doubled since 1973, growing from 14.6 percent in 1973 to one-third in 2011. And, by the way, the wages of those with a college degree (but no further education) have not increased in inflation-adjusted terms in 10 years, neither in the last recovery between 2002 and 2007 nor since. I wonder what bad behavior on their part caused this to happen.

President Obama’s FY2013 budget request, released today, is bound to get ample criticism from the right (and center-right) for not going far enough on near-term deficit reduction. As a few different articles have already highlighted today (for instance here and here), the president’s budget request does not honor a pledge he made to halve the deficit by the end of his first term. In reality, we’d all be in pretty big trouble if this budget chose to focus on promises as opposed to economic realities. Instead, the budget put forth by the administration today is a remarkably serious one – particularly given that Obama is running for reelection this year. The administration could have relied on gimmicks and austerity measures to focus solely on deficit reduction; instead we got a document that both emphasizes job creation and manages to hit fairly reasonable fiscal targets in the medium term.

The budget includes about $350 billion in temporary tax relief and investments to create jobs and jump-start growth. These investments are heavily front-loaded between FY2012-FY2014 – in fact, 96 percent of the proposed spending on these measures takes place in those years. Much of this investment in job creation is familiar, including policies such as:

• $94 billion for an extension of the payroll tax holiday for two years
• $44 billion for reforming and extending unemployment insurance for two years
• $30 billion to modernize schools over four years
• $30 billion for teacher stabilization and supporting first responders
• $50 billion to fund surface transportation priorities through 2022, with the investment front-loaded in the first three years

As we’ve stated before, this job creation package should be evaluated based on its scale, the difference it will make in the coming few years, its effectiveness and efficiency, and the way in which it is funded. The $350 billion figure is a decent amount to be spending on job creation, an amount that would raise employment levels significantly in 2012 and 2013. That is more than we can expect to see Rep. Paul Ryan (R-Wisc.) propose in this year’s House Budget resolution. But with an 11 million jobs deficit, it still falls short of what’s needed.

Though not perfect, the investments highlighted in the budget are fairly well-targeted. Macroeconomic multipliers show that across-the-board, spending on public investments, income-support payments, state-and-local fiscal support, food stamps, infrastructure projects, unemployment insurance, and targeted refundable tax credits garner a much larger bang-per-buck than spending on various tax cuts and credits. And since our economic problems generally still stem from a lack of demand, it makes sense that boosting the ability of consumers to spend should be a top priority for the administration.

The president’s budget “funds” this investment by proposing a greater level of taxation on those who can most afford to pay – rhetoric we have been hearing from Obama for a while now. This includes around $1.5 trillion over 10 years from upper-income tax provisions, which include, among other things, letting the George W. Bush-era tax cuts expire and taxing qualified dividends as ordinary income for those making above $250,000 per year ($200,000 single filers).

Along with addressing the jobs crisis, this budget also puts the federal government on a sustainable fiscal path. The president’s budget achieves primary balance in 2018, meaning that, excluding interest payments, spending does not exceed revenues. Primary balance is a good measure for two reasons. First, interest payments are essentially payments on past—rather than current—policy decisions, so primary balance allows us to use a measure that doesn’t punish current presidents for debt that may have been incurred by past presidents. Second, primary balance also results in a stabilized debt as a share of GDP, and this budget stabilizes debt at 76.5 percent in 2022 after peaking at 78.4 percent of GDP in 2014 and gradually coming down. And while the budget does propose around $4 trillion in deficit reduction over 10 years, around $850 billion of these savings comes from capping Overseas Contingency Operations, and a good deal more comes from pursuing high-income tax cuts and other revenue proposals. Additionally, the president proposes achieving around $600 billion of that deficit reduction through health and other mandatory initiatives, almost half of which would come from Medicare providers.

As we said in a statement earlier today, this budget is not perfect and particularly disappoints when it comes to non-defense discretionary spending levels. Despite this reality, this budget does a pretty good job of investing in job growth while at the same time promoting greater fairness and responsibility.