As Paul van de Water recently pointed out, some of the plans floated by supercommittee members cut non-defense discretionary spending by about the same amount as the sequestration trigger would. This is because the proposals to cut discretionary spending do not include a firewall between defense and non-defense, so it is likely that a large cut to the entire discretionary budget—such as the Democratic offer to cut $400 billion—would all end up falling on the non-defense side. Remember, the trigger was supposed to be so bad and disastrous that it would scare Congress into striking a deal. But apparently it’s just scaring Congress into making pretty much the same cuts to non-defense discretionary and just sparing defense.

Why should we care about non-defense discretionary? There are a lot of reasons to care about this portion of the budget, which includes just about every federal government function outside of Social Security, Medicare/Medicaid, defense, and net interest, despite only representing less than 20 percent of the budget. But one of my main concerns is public investments such as infrastructure, education, and research and development. Economists across the board—even presidential candidate Mitt Romney’s economic advisor!—recognize that these investments must be sustained and even expanded to ensure long-run economic growth and global competitiveness. But according to Office of Management and Budget account-level data, these investments make up 1.7 percent of GDP, or about 40 percent of non-defense discretionary. This means that it would be extremely difficult to hit the budget targets proposed without taking a decent-sized hunk of flesh from these accounts.

Second, non-defense discretionary has been on a downward path as a share of the economy since the late 1970s (about the time that income inequality really started taking off, hmmm…). The discretionary caps enacted into law as part of the debt ceiling deal would force non-defense discretionary to record lows: to just 2.7 percent of GDP, far lower than the levels of the 1990s and 2000s, and a 29 percent reduction relative to the funding in the 2000s. And both the sequestration trigger and the $400 billion cut—were it all to fall on domestic discretionary—would cut these services even further.

Mayor Michael Bloomberg of New York is in the news today for shutting down the Occupy Wall Street protests in Zuccotti Park. This reminds me that he spoke last week at a forum co-hosted by the Center for American Progress and the American Action Forum. Besides a couple of truly novel twists (comparing Social Security to OPEC?!) it’s actually useful bringing up his speech because it perfectly crystallized the dominant economic narrative that far too many policy-making (and media) elites tell themselves these days. The punchline of that narrative, presented with no evidence at all,  is simply that we need to urgently move to cut the budget deficit.

Bloomberg is sure that providing more fiscal support (i.e., using larger near-term deficits to finance spending and investments) to the economy won’t work to reduce unemployment. How is he sure? Because we gave some already and unemployment remains high. This is like a fire chief claiming that pouring water on a fire won’t quench it because once there was a really big fire and his crew poured more water on it than they’ve ever poured before … but it kept burning. So, apparently we’re going to move to pouring gasoline on it. Really, it says so right in the press release – “the best stimulus is fiscal responsibility (where “fiscal responsibility” is nearly always Beltway speak for quick reduction of budget deficits through large spending cuts leavened with some tax increases).”

I know that my harping on this may be getting old, but people haven’t stopped doing it yet, so here we go again: the failure of fiscal support would leave clear footprints in economic data. The textbook case for why debt-financed fiscal support does not lead to net new jobs and economic activity in some cases is that the first-round effect of spending and tax cuts are counter-balanced by rising interest rates that “crowd-out” private investment. There has been no rise in interest rates, hence there is no crowding-out.

Bloomberg is also sure that businesses aren’t spending enough – and that their failure to spend is because of vague uncertainty:

“But as important, and the subject for today, is the broader uncertainty that exists about the country’s long-term fiscal stability… . Nearly every CEO I talk with says the same thing: If the Federal government passed a real deficit reduction plan – and we’ll talk about what ‘real’ means in a minute – business leaders would respond just as they did in the 1990s, when President Clinton and Congress adopted a long-term deficit reduction plan that gave businesses more certainty about the market.”

But businesses are spending. Actually much, much more than they did during the first two-and-a-half years of the early 1990s expansion.

Click to enlarge

And there is no actual evidence that uncertainty is constraining them. And if businesses are uncertain about the future, aren’t they at least happy enough with today’s record-high profit margins?

I guess this is the quality of fiscal policy analysis I should expect from somebody who seems to think that Congress forced banks to finance the housing bubble.

Enough for now – suffice to say that this speech could’ve been generated by a Ye Olde Beltway Centrist Cred-Producing software package from the mid-1990s. With this mindless invocation of “smaller deficits will fix everything,” is it really so hard to figure out why countries respond so poorly to financial crises?

As the deadline looms for the supercommittee to report back to Congress, some have raised the specter that “failure” would lead to a collapse in financial markets. For example, Massachusetts Sen. John Kerry has expressed concerns that a failure to reach an agreement would send a dangerous signal to markets, and the Committee for a Responsible Federal Budget has said that a “go big” agreement is needed to “reassure markets about our ability to repay our creditors.”

These concerns are misplaced.

First, even if the supercommittee fails to find an agreement, there would still be a $1.2 trillion 10-year spending reduction put onto the books via a process called sequestration that would limit annual appropriations by Congress. From a pure deficit-reduction perspective, a $1.2 trillion agreement would be no different than a so-called failure. Congress can of course revisit those cuts, but they could also revisit any other kind of spending agreement too.

Second, remember that financial markets are forward looking and respond primarily to unexpected news. Does the market believe that Democrats and Republicans will come together in a Kumbaya moment to pass $3 trillion in tax increases and/or cuts to spending? I wouldn’t bet on it. Goldman Sachs noted in a recent Q&A on the supercommittee that, “a ‘grand bargain’ to resolve this imbalance appears to be a low probability this year. Instead, the politically realistic outcomes range from no agreement to a deal reaching $1.2 trillion in deficit reduction over 10 years.” They also note that just “32% of economists polled in the November Blue Chip financial survey expected a super committee agreement to become law.” Thus a failure would merely confirm market expectations, and there should be little reaction in the markets.

Third, as I noted in an earlier post, real interest rates on federal debt are negative for some maturities, and very low for longer term bonds. There is no indication that markets are worried about U.S. debt and need to be reassured. For example, Moody’s rating agency recently stated that, “failure by the committee to reach agreement would not by itself lead to a rating change.”

Finally, the main worry for businesses is the lack of demand for their goods and services and the main worry for individuals is the lack of jobs. The markets would react if Congress fails to continue a payroll tax holiday or fails to continue unemployment insurance payments. The real, immediate crisis is jobs and economic growth – Congress needs to focus on getting people back to work. A jobs-first focus would, more than anything else, reassure markets that the U.S. economy is poised for growth, and not slipping into premature, job-killing austerity.

The Social Security benefit cut the supercommittee is most likely to make is a reduced COLA, the inflation adjustment that protects the purchasing power of recipients’ benefit checks from rising prices. Alice Rivlin, Alan Simpson, Erskine Bowles, and most pundits argue that the COLA overstates price growth facing the elderly and hence provides them a mounting windfall over time , fattening the retirement checks of the elderly at the expense of everyone who’s still working. They are wrong.

In fact, as economists have pointed out, it is likelier that the current Social Security COLA is insufficient to fully protect Social Security beneficiaries from the effects of inflation, because it doesn’t take into account the large amounts of money the elderly pay out-of-pocket for health care. It’s probably true that the chained CPI-U better accounts for price changes affecting the general population, but it simply measures the wrong market basket for the elderly. The chained CPI-U not only understates the effect of health care cost inflation on the elderly, but it may also overstate their ability to change their buying habits in response to price increases since a greater share of their incomes is spent on necessities.

New evidence that the elderly have very different consumption patterns than the general population comes from the federal Interagency Technical Working Group that just reported on a new Supplemental Poverty Measure (SPM), a new methodology for determining the extent of poverty in the United States. The study group confirmed that medical out-of-pocket expenses for the elderly are a disproportionate part of their consumption. When the study group measured poverty based on the actual spending of Americans over the age of 65, they discovered that the poverty rate jumped from 9 percent to 15.9 percent. More than 6 million Americans aged 65 or over are living in poverty, according to the SPM. The view that the elderly are doing better than everyone else and living well at the expense of the working population is contradicted by this new evidence.

No supercommittee member should be allowed to pretend that using the chained CPI to determine Social Security COLAs is a “technical” change to increase their accuracy. It is a benefit cut, pure and simple, and it will do the greatest harm to the oldest of the elderly. Under the proposed COLA, an average-wage worker retiring this year would, in 2031, receive $1,754 less in annual benefits.

Question: What’s wrong with this story?

“In 1940, when Social Security first paid monthly retirement benefits and the number of private pension plans was just beginning to grow, individuals reaching age 65 lived, on average, for another 13 years. Furthermore, many workers entered the labor force at age 18, immediately after graduating from high school. These individuals could expect to work for 47 years before attaining “normal” retirement age…

Fast forward to 2006: the demographics of pension planning have changed significantly. Approximately two-thirds of eligible non-disabled workers claim Social Security retirement benefits at age 62 rather than 65, and they enter the labor force at a later age, often at age 21 or even older, rather than age 18. This leaves about 40 years of work before an expected retirement at age 62, at which point remaining life expectancy is approximately 20 years.”

Answer: It ignores women, except when including them makes the situation seem worse.

The hypothetical “individuals” in the first paragraph appear to be men, since few women born in 1875 spent 47 years in the paid workforce before retiring at 65 (it’s also doubtful whether their male counterparts worked that many years, but that’s another story). Likewise, the life expectancy of a 65-year-old man in 1940 was thirteen years. In the second paragraph, however, the life expectancy cited is for both sexes, which has the effect of exaggerating the increase in life expectancy in retirement since older women live roughly two years longer than men.

The quote is from an American Academy of Actuaries brief published in 2006. It’s still relevant, however, because the thrust of the argument—that we need to raise Social Security’s full retirement age because people are living longer but retiring at younger ages—has become the conventional wisdom in Washington.

You could argue that the statistics cited are appropriate since the workforce in 1940 was largely male, whereas in 2006 it was more evenly split between men and women. But it’s no accident that the influx of women into the paid workforce goes unmentioned, since acknowledging it would require the authors to paint a more complicated, and rosier, picture.

The rise of two-earner couples has been a boon for Social Security because it increased the number of workers contributing to the system while decreasing spousal benefits, which aren’t paid for by higher taxes on married workers. Meanwhile, it lowered the average age of retirement, since women have historically retired at younger ages than men (often at the same time as older husbands).

The resulting decline in the average retirement age was especially pronounced in the 1970s and 1980s, when the trend was toward earlier retirement for both sexes. But the last two decades have seen a reversal of this trend, and the labor force participation rate of older workers is now as high as it was half a century ago. In any case, whether people choose to retire early is irrelevant to discussions of Social Security’s finances because monthly benefits are reduced for early retirement in order to equalize the value of lifetime benefits.

A focus on the average retirement age misses the bigger story of how much more Americans are working and contributing to Social Security over the course of their lifetimes, thanks to women. It also ignores the fact that Social Security’s full retirement age is already increasing, so the ratio of working years to covered retirement years is roughly the same as it was in the early 1980s when the system was in balance. Last but not least, it ignores the fact that people are encouraged to continue working after claiming benefits. If you exclude people still working for pay as well as those who weren’t in the workforce to being with, such as full-time caregivers, the average retirement age is 65.5, not 62 as is often claimed.

Today’s interesting story on the front page of The Washington Post presents a nuanced view of the reaction of companies  to new environmental regulations, quoting, for instance, several utility industry representatives on the ways jobs are created during the compliance process. The main channel of job creation occurs through the construction and installation of pollution-abatement equipment, or less-polluting facilities.

The piece is a good overview of the impact of regulatory change on employment in general, but there is an important angle that it did not touch on: the positive job-impacts of regulatory changes are likely to be much more potent in today’s economic context of high unemployment and low rate of capacity utilization. In particular, the construction industry, where many jobs would be created, is in particularly dire shape, with its overall level still nearly a half million short of its level at the start of the recession.

As Josh has blogged previously, when there are large amounts of unused capital and unemployed workers, as there are today, government regulations can effectively move this capital into action in the form of investments to comply with important environmental rules. Partially because of this, Josh’s analysis of the air toxics rule found that it would be a net job producer; in essence, in 2014 the jobs generated by investments in less-polluting technologies would outweigh any jobs lost due to higher prices or plant closings by about 90,000 workers.

Plenty has been written on this by smarter people than me – but since the troubles of Greece (and now increasingly Italy) are routinely invoked by those arguing that the U.S. needs to move to rapid deficit-reduction, it can’t hurt to emphasize the salient points again.

The cautionary tale one should take from the Eurozone crisis is not the dangers of large deficits. Yes, Greece and Italy do have large public debts – but nowhere near as large as Japan. Yet nobody is talking about a yen crisis. And Spain – often fingered as a likely candidate for a run by the bond-market vigilantes – has a public debt about half as large as that of the UK. And nobody is talking about a pound crisis.

Instead, the cautionary tale one should take from the Eurozone is that the tools of macroeconomic stabilization – fiscal, monetary, and exchange rate policies – need to be taken much more seriously than they have been for decades. Since 1980 a consensus (obviously wrong in retrospect – and not adhered to in real-time by plenty of admirable skeptics) developed among macroeconomic policymakers that fiscal policy should simply aim for balanced budgets (or even surpluses) and should not be used discretionarily to fight recessions; that monetary policy should simply target very low rates of inflation; and that capital markets (including international capital markets) should be left to govern themselves and capital should flow freely across international borders. The underpinning of this consensus was the belief that capitalist economies could and would generally heal themselves quite quickly following recessions, so macroeconomic stabilization policy (the tools used to fight recessions) were mostly unnecessary and would often just impede, not aid, speedy recoveries.

This flawed consensus informed the adoption of the Euro – countries surrendered independent monetary and exchange rate policies because they were sure they weren’t really all that important.

By adopting the Euro and entering a monetary union, member countries lost the ability to print their own currency and to regulate capital flows. So, when borrowing on international markets, they were now borrowing in a currency that they no longer had the capacity to print themselves. This inability to run the printing presses to pay off debt means that they can be forced into default if financial markets players ever decide to stop lending them money on reasonable terms.

Further, the common currency means that important stabilizing forces that kick in when financial markets stop demanding a country’s assets – increased exports and reduced debt obligations driven by the now-weaker national currency – are not operating for individual members of the Euro zone. This exchange rate channel is hugely important for countries trying to recover from financial crises – as the experience of Argentina and Iceland have shown. Further, this abandonment of monetary and exchange-rate policies was not accompanied by a beefing-up of a continent-wide fiscal policy that could be used to buffer downturns.  Michigan or Nevada, for example, do not have their own monetary or exchange-rate policies, but they do get lots of federal transfers (like unemployment insurance) when their economies do more poorly than the national average.

To put this simply – the Eurozone was essentially a ship constructed for the fairest weather possible – a world without recessions. Now that the weather has turned foul, the consequences of not taking macroeconomics seriously is coming clear.

Worse, the too-limited scope that Eurozone countries have for macroeconomic policy stabilization resides solely in the actions of the European Central Bank (ECB) – which is barely even trying to mute the broader economic crisis. As John Quiggin notes, the ECB has actually raised rates within the past year – raising interest rates in the midst of the worst economic downturn in a generation! Recently, the new ECB head has cut these rates – but they remain a full percentage point higher than those in the United States or Japan.

So, what do we really have to learn from the Euro crisis? That the tools of macroeconomic management matter a lot – and they should not be given up casually. Failing to heed this lesson is already hurting the U.S. economy.

The Emergency Unemployment Compensation (EUC) program, part of the American Recovery and Reinvestment Act, is a federally-funded program that provides unemployment insurance (UI) benefits to the millions of Americans who lost their jobs in the Great Recession and who have exhausted or no longer qualify for unemployment benefits through existing state programs. With the anemic pace of job growth since the recession’s end, millions of unemployed Americans are still relying on these benefits to support themselves and their families. As the country is painfully aware, the job market is not recovering quickly enough to put these people back into jobs, and the EUC program is set to expire at the end of this year.

According to the Congressional Budget Office, extending UI benefits through 2012 would cost about $45 billion. But as EPI’s Larry Mishel and Heidi Shierholz explain, this $45 billion in federal spending would translate into an additional $72 billion in U.S. economic activity, or a 0.5 percent increase in GDP, due to standard economic “multiplier” effects and the fact that the long-term unemployed—often the most desperate for resources to meet their basic needs—are apt to immediately spend any benefits received.

From a jobs standpoint, this additional $72 billion in economic activity will save or create about 560,000 jobs across the country. How would your state be affected?  The table below estimates the share of these 560,000 jobs saved or created in each state based upon the size of the state’s economy and its share of previous federal EUC spending.  Not surprisingly, California has the most at stake – about 80,000 jobs.  New York, Texas, Florida, and Pennsylvania will each save over 27,000 jobs.

One other way to look at these jobs numbers is as a share of each state’s payroll employment to control for the differences in the size of each state’s workforce. As the highlighted cells show, New Jersey, Connecticut, Nevada, Colorado, and Massachusetts will see the largest job loss as a proportion of state payroll employment if the EUC program is not extended.

The deadline for the supercommittee is approaching, and so we welcome budget ideas from our friend and former board member, Andy Stern. But he and Reagan OMB Director David Stockman are advising the supercommittee to “go big” on deficit reduction, based on the false premise that “our debt crisis is so severe, so obvious,” in this CNN opinion piece. In Washington parlance, that means $4 trillion plus in deficit reduction, heavily weighted toward spending cuts.  The economic crisis we face today is not a debt crisis at all. We have a jobs crisis, and that is why we currently have large fiscal deficits. In today’s economic context, the most compelling case for long-term deficit reduction is to finance greater efforts to create jobs in the short term. Invoking a debt crisis that is not happening, however, can only lead to a rush for changes that need not be addressed in the short, nontransparent process of the supercommittee and are likely to do needless damage to our retirement and health programs, if not the economic recovery altogether.

To clarify:

Our “debt crisis”: 2.05% 10-year sovereign bond yields, independent central bank

Italy’s emerging debt crisis: 7.26% 10-year sovereign bond yields, no independent central bank

Greece’s very real debt crisis: 27.33% 10-year sovereign bond yields, no access to capital markets

We didn’t have a debt problem until conservatives in Congress concocted a debt ceiling crisis this summer, “ceiling” being the operative word. We’re struggling through a huge economic shock, and bigger budget deficits have ensued as a result. And it’s still the economy that Congress should be paying attention to: well over half of this year’s budget deficit can be chalked up to the weak economy and policies to boost employment.

Our economic crisis is so severe, so obvious, that it is visible in just about every U.S. data release. Unemployment has been stuck at or above 8.8% for over two and a half years. The economy and employment are growing too slowly to lower the unemployment rate. Poverty is rising, and real median incomes are falling. The economy is running $895 billion (-5.6%) below potential, which singlehandedly accounts for roughly a third of the budget deficit.

Yet Congress ignores these data in favor of the imaginary. There is no talk of a jobs program coming out of the supercommittee, even though fiscal policy is poised to shave one to two percentage points off of real GDP growth next year. The filibuster is repeatedly used to obstruct meaningful jobs legislation in the Senate.

We do face real long-term fiscal challenges that must be addressed. Along with Demos and The Century Foundation, EPI drafted a long-term budget for economic recovery and fiscal responsibility. We should address the health cost escalation but having just witnessed a yearlong process to achieve health care reform (at the time, the biggest piece of deficit-reduction legislation in over a decade), one wonders why this supercommittee should revise our health care system again—likely undermining reform—even before we see the results of reform. Social Security is not in any crisis and there is no need for its long-term fiscal challenge to be addressed in this process, either. We must restore revenue adequacy, but the prospects of the supercommittee doing so are zilch. Stern’s piece with Stockman does contribute to that effort by getting a prominent Republican on the record for substantial revenue increases (which is presumably what the point was, at least for Stern). But if long-term fiscal challenges misguidedly produce premature withdrawal of fiscal support and near-term spending cuts, as looks all too likely, both economic recovery and fiscal sustainability will remain elusive. Those genuinely concerned with long-term fiscal sustainability should pay attention to the economic crisis at hand, the jobs crisis, since we will never have a sustainable fiscal situation with the persistent high unemployment we are facing.

As Republicans in Congress intensify their attacks on EPA rules, largely on the grounds they disrupt the economy, it is important to keep in mind that in terms of the overall economy, these rules are essentially inconsequential.  Previously I’ve blogged on how the total compliance costs of all the major rules proposed or finalized by EPA so far during the Obama administration amount to only about one-tenth of one percent of the U.S. economy.  What I failed to quantify is how the 0.1 percent figure itself, as small as it is, significantly overstates the potential economic effect of the rules.

This can be demonstrated by looking at the economic benefits of just two of the rules finalized so far by EPA.  These are joint rules with the Department of Transportation that regulate greenhouse gas emissions from, and establish fuel standards for, various-size vehicles for model years 2012-2016.  The economic benefits from these two rules are particularly sizable, as they produce large savings to drivers in the form of reduced expenditures on gasoline.

In 2010 dollars, a conservative estimate (see explanation below) of the economic benefits from these two rules amounts to $6 billion to $20.6 billion a year.  This range is above the range of estimated compliance costs for all 11 major rules finalized so far by the Obama EPA; that range is $5.9 billion to $12 billion a year.  Even if the four major proposed rules are also taken into account, the economic benefits from the fuel standard rules alone offset much of the combined costs of the final and proposed rules ($19.7 billion to $27 billion a year).

Stated simply, the economic benefits of just two of the major Obama EPA rules offset much of the economic compliance costs of all the rules.  It also bears noting that companies have several years or more to comply with the rules, diminishing immediate costs and facilitating transitions.  Further, an array of economic benefits is not considered here, including the economic benefits from the other nine final rules and the four proposed rules; these economic benefits range from workers spending more time at their jobs because they or their children are healthier to reduced expenditures on health care.  The modest employment gains from the largest rule, the air toxics rule, are also not considered; these gains reflect the fact that compliance expenditures generate jobs when the economy has substantial unused capacity.

So especially once offsetting economic benefits are considered, it is hard to conceive how the EPA rules advanced so far during the Obama administration could drag down the overall economy.

What is conceivable, and indisputable, is that the health benefits from these rules are large.  Every year, the cleaner air and other environmental benefits from the rules will save tens of thousands of lives, prevent tens of thousands of heart attacks, and mean hundreds of thousands fewer people will contract respiratory illnesses, thereby diminishing hospital stays.  When all benefits, including health benefits, are considered, the benefits from the rules dwarf any compliance costs.

Note:  Explanation of calculation.  For the two rules that raise fuel standards for, and reduce greenhouse gas emissions from, various-sized vehicles, this blog considers the following benefits as economic:  reductions in fuel expenditures, the value of time savings from needing to refuel less often, and the value of the decreased chance of economic disruption due to reduced dependence on foreign oil.  The costs of time lost due to increased congestion (due to more driving since fuel costs less) and the costs of increased crashes (also reflecting more driving) are considered economic losses.  The additional value drivers attach to driving more are not considered economic, nor are the costs assigned to increased traffic noise (reflecting more driving).  The method is conservative because due to technical obstacles, no economic benefits are attached to reducing carbon dioxide or other emissions.  Additionally, the health benefits from these rules, which EPA calculated for 2030 and did not annualize, are not included in the calculation.

From this week’s economic snapshot:

One of the arguments marshaled by the Occupy Wall Street movement is that corporate executives have seen pay increases far in excess of those enjoyed by typical workers.  To be clear, CEOs have always earned much higher salaries than the workers they manage, but the gap between CEO and worker pay has soared in recent decades.

The figure below shows the ratio of average CEO compensation to compensation of the average worker from 1965–2010. In 1978, compensation of CEOs was 35 times greater than compensation of average workers. Since then, this ratio has skyrocketed, peaking at 299-to-1 in 2000. During the Great Recession, CEO pay fell relative to pay of typical workers because much of CEO compensation is directly linked to the stock market, which fell sharply in 2008 and 2009. However, the ratio bounced back during the recovery and stood at 243-to-1 in 2010. At this rate, it likely will not take long for the gap to reach its prior peak.

Click to enlarge

—With research assistance from Hilary Wething and Natalie Sabadish

There was a lot of good news last night and some great headlines this morning. But here’s one of my favorites, via Fox News Latino, and not just because it references one of (immigrant former governor) Arnold Schwarzenegger’s best films:

Conservative voters in Arizona may have had enough of their immigrant-bashing elected officials, it seems. Arizonans confirmed that Arizona Senate President Russell Pearce had gone too far by sponsoring and pushing hard for the passage and implementation of SB 1070, an insanely draconian (and likely unconstitutional) anti-immigrant, anti-Latino law that facilitates racial profiling.

Arizona is also home to controversial, attention-loving Sheriff Joe Arpaio (pictured above on the right), an ardent supporter of Russell Pearce and vocal proponent of SB 1070. Arpaio has personified the extremist elements in the state that support SB 1070, and his questionable enforcement tactics have earned him criticism from Amnesty International for the harsh treatment of prisoners. His actions, which recently included forcing an immigrant detainee to give birth while handcuffed and shackled, are the subject of two federal investigations, one by the Department of Justice over civil rights violations and another by a federal grand jury for abuse of power.

The recall vote, the first ever recall of an Arizona state legislator, is being heralded as a rejection of the policies and tactics embodied in SB 1070.

Pearce lost the election last night in his conservative suburban Phoenix district to a political newcomer, fellow Republican Jerry Lewis. Pearce lost by a substantial margin of seven percent, despite having outspent Lewis by a 3-to-1 ratio, thanks to a flood of campaign funds donated by corporate lobbyists, 90 percent of which came from outside the district.

Legislators in other states – most notably Alabama, Georgia, South Carolina, and Indiana – who have targeted immigrant workers and their families for political gain or because of intense lobbying from corporate interests, including and especially from the private prison industry – are now officially on notice. If you strive to terrorize law-abiding immigrants and Latinos who simply wish to work to provide food and shelter for their families, responsible voters will not allow you to remain in power, no matter how much money you get from the special interests you champion.

This is the second part of a two-part blog prompted by an alarmist Washington Post article on Social Security, as well as the Post ombudsman’s muddleheaded response. Last Wednesday, we looked at links between the Social Security surplus (and future deficit) and the overall federal deficit and debt. Today, we’ll look at the impact of the Great Recession on Social Security and whether the fact that Social Security is now running a primary deficit will add to the nation’s budget problems, as Post reporter Lori Montgomery claims.

How have the Great Recession and weak recovery affected Social Security to date?

Compared to intermediate projections in the last prerecession (2007) trustees report, the number of workers covered by Social Security last year was down seven percent and the number of beneficiaries was up one percent in 2010, according to the latest report. The cumulative impact was that the Social Security trust fund held $2.6 trillion at the end of 2010 rather than the $2.9 trillion projected in the 2007 report.

How will the recession and weak recovery affect the future of the trust fund?

The Social Security actuaries project slower economic growth over the next decade, though long-run assumptions remain unchanged. As a result of lower projected employment growth, wage growth and other factors, the trust fund is expected to peak at around $3.7 trillion rather than the $6.0 trillion projected in 2007 and to be exhausted five years sooner—in 2036 rather than 2041.

How will the recession affect Social Security’s long-run outlook?

Because benefits are mostly paid out of current tax revenues as opposed to savings, Social Security’s long-run outlook isn’t as affected as one might think if focusing only on the trust fund.  The 2011 report projected a 75-year shortfall equal to 2.22 percent of taxable payroll, an increase from 1.95 percent in the 2007 report (some of this is due to the changing 75-year projection period and other factors besides the weak economy). This means that a relatively modest increase in the Social Security tax on employers and employees from 6.2 percent to around 7.3 percent of earnings would put the program in long-term balance, though more progressive revenue options, like lifting the cap on taxable earnings, would be preferable.

Why do some people say Social Security is already running a deficit?

Social Security had $781 billion in revenues in 2010. Of this, $637 billion was revenue from payroll taxes and $118 billion was interest on trust fund assets. Meanwhile, Social Security had $713 billion in expenditures, the bulk of which ($702 billion) was paid out in Social Security benefits. Since current tax revenues no longer cover current expenditures, Social Security is running what’s known as a primary deficit (sometimes referred to as a “cash-flow” deficit) even though it is still building up savings in the trust fund.

What’s the significance of this cash-flow deficit, if any?

By definition, Social Security will run a deficit when it taps into its savings to help pay for the Baby Boomer retirement. Running a primary deficit is a normal stage in the process of moving from saving to dissaving. The fact that this is happening sooner than expected is actually beneficial in the short run—since Social Security serves as an automatic stabilizer for the economy. Older workers tapping retirement benefits when they lose their jobs helps them and the sputtering economy—and does so at no cost to Social Security since benefits are adjusted for early retirement. Lower-than-anticipated payroll tax revenues do, however, add modestly to the system’s long-run challenges.

Does this “add to the nation’s budget problems?”

As explained last week, Social Security cannot contribute to the federal debt over time because it is prohibited from borrowing. This is analogous to a family with indebted parents and a thrifty child who is saving money from a newspaper route. When the child dips into her piggy bank to buy a bike, she’s contributing to her family’s “deficit” simply by tapping into her savings. She’s also adding to her family’s net indebtedness because there are now fewer savings in her piggy bank to offset her parents’ credit card debt. However, it would be absurd to hold the child responsible for her parents’ mounting debt.

On Monday, the Census Bureau released a report on the new Research Supplemental Poverty Measure (SPM), a metric designed to address longstanding criticisms of the official federal poverty threshold. The official “poverty line” is a set pre-tax income level, established in 1969 at essentially three times what was considered necessary to afford a “minimal, but adequate” amount of food. The measure has been adjusted for family size and inflation, but has otherwise remained unchanged for more than 50 years.

What’s different about the SPM?

The SPM attempts a more holistic appraisal of family expenses. It takes the average between the 30^th and 36^th percentiles of spending by a family of three on food, clothing, shelter, and utilities, and adjusts this amount to reflect other necessary expenses, such as child care, federal income taxes, FICA payroll taxes, out-of-pocket medical expenses, and work-related expenses such as commuting costs, uniforms, and tools. At the same time, the SPM also accounts for resources available to low-income families through government programs, like the EITC, SNAP (food stamps), housing subsidies, school lunch programs, heating assistance, and WIC (food assistance for women, infants, and children). Finally, unlike the existing official poverty rate, the SPM does adjust for regional differences in prices and costs.

How do poverty levels under the SPM compare to those under the official poverty threshold?

According to the SPM, more than 49 million Americans—or 16 percent of the population—are living in poverty as of 2010, compared to 46.6 million—or 15.2 percent—under the official poverty line.

Moreover, the figure below highlights changes in the distribution of people by the ratio of their income to the poverty line.  Note the enormous growth in the number of people with incomes 1.0 to 1.99 times the poverty threshold. This means that the number of Americans with incomes at or below 200 percent of the poverty line—a level often thought of as an adequate, but modest standard of living – rises from 34 percent under the official measure to 47.5 percent under the SPM. That’s nearly half of all Americans.

Why are so many more people closer to poverty under this new measure? 

One clear reason is that the official poverty line’s method of pegging the poverty threshold to three times a minimum food bundle assumes that the growth in all expenses other than food will remain proportionate to the growth in food costs. But we know this is not true: case in point, healthcare. In fact, the SPM report shows that when you factor in individuals’ out-of-pocket medical expenses, it increases the poverty rate by 3.3 percentage points – in other words, the poverty rate would be 12.7 percent instead of 16 percent if individuals faced no medical costs. This contrast is even starker for seniors. Without accounting for out-of-pocket medical expenses, the poverty rate for seniors would be 8.6 percent; once you factor in medical costs, the poverty rate among seniors jumps to 15.9 percent! (Let this be a big warning to policymakers advocating benefit cuts to seniors, under the illusion that the current indexing of benefits has been too generous.)

There’s another interesting point to be made when you look at the effect that the additional necessary expenses (childcare, payroll taxes, etc.) and government-provided resources (EITC, SNAP, etc.) has upon the estimated poverty rate. The sum of the effects of the additional government-provided resources is to lower the SPM rate by 5.2 percentage points. However, the sum of the effects of all the additional expenses is to increase the SPM rate by 6.7 percentage points. So on net, the additional expenses that families face are overshadowing the benefits that government programs provide at a level sufficient to raise the poverty rate by 1.5 percentage points. At a time when so much of the political discourse is on reducing and eliminating federal programs, this finding at least suggests that the question should not be which programs to cut, but whether the programs we currently have to combat poverty are actually doing enough.

The Census Bureau acknowledges that the new measure is a “work in progress” and there are certainly some glaring concerns about the SPM that other researchers have dutifully pointed out. On a more fundamental level, there will always be questions around measures that define poverty in quasi-absolute terms. Simply because a family is spending on healthcare (childcare, food, shelter) at a level commensurate with the 33^rd percentile of spending does not mean that they are receiving adequate healthcare. For these reasons, the SPM may be one step towards better ways of identifying poverty, but it cannot and should not be the end of the conversation.

Ohio’s landslide rejection of SB 5, a law that attacked the right of employees to engage in collective bargaining, a core human right, shows that conservatives there and elsewhere have gone too far. Americans know that unions, which have been crushed by big business, conservative courts, and right-wing politicians, are not the cause of the nation’s economic woes. Rather, unions are a hope for the 99 percent to hang on to what they have and preserve the middle class that they helped build.

House Republicans, who are attacking collective bargaining and the NLRB, the agency that protects the right to join unions and bargain collectively, should take heed. They are going down the same dead-end road as Gov. John Kasich in Ohio, and Americans won’t follow them.

I’ve generally been a fan of Planet Money – and still refer people to ‘another frightening show about the economy’ for a good summary of what led people to get so panicky in Sept. 2008. So, I’m afraid I find Adam Davidson’s first New York Times Magazine column – titled “It’s the economy” and labeled an exercise in “[trying] to demystify complicated economic issues…” –  to be pretty disappointing.

He covers a lot of ground, so my list of disagreements is going to be scattershot, but here’s a quick taxonomy. First, I don’t buy his characterizations about what is generally agreed upon and what is seriously contested among economists. Second, he really undersells how well studied the concept of providing Keynesian-style fiscal support to ailing economies is. Finally, he doesn’t help readers in their attempt to make an evidence-based decision on what is easily the most important economics question today: Should Congress and the Administration be spending more to help lower today’s 9 percent unemployment rate?

Let’s start with the general – Davidson portrays economists as hopelessly divided and unsure about whether or not debt-financed spending and tax cuts (i.e., something like another Recovery Act, which I’ll just call “fiscal support” from now on) could lower today’s unemployment rate, but relatively united when it comes to how to reform taxes and education and health care systems.

This is the reverse of the truth – there is wide agreement that debt-financed fiscal support in a depressed economy will lower unemployment. Now, it’s true that there are holdouts from this position. And others who think the benefits of lower unemployment are swamped by the downsides of higher public debt (they’re wrong, by the way). But, the agreement* is much more widespread – ask literally any economic forecaster, in the public or private sector, that a casual reader of the Financial Times has heard of if, say, the Recovery Act boosted economic growth. They will all tell you “yes.”

You won’t find anywhere near such a consensus on long-run tax or education or health care policy. In fact, public finance economists can’t get unanimous agreement on if, in the long run, income accruing to holders of wealth should be taxed at all (it should, by the way). In short, anybody waiting for the current unpleasantness to pass and for economists to unite in harmony in future policy debates shouldn’t hold their breath.

Davidson also claims that there is wide agreement that “many Americans don’t know how to do anything that the world is willing to pay them a living wage for.” I’m not quite sure what this means. I guess it’s true in the strictly tautological sense that there are a lot of involuntarily unemployed workers out there, but if it is meant to be an indictment of American workers’ skills (and it’s hard for me not to read it that way) – then there’s no serious basis for this indictment.

Most distressingly, Davidson doesn’t rise above the “opinions on the shape of the world differ” review of the argument about the virtues of debt-financed fiscal support as the answer to today’s unemployment crisis. He writes as if this argument has lain completely unstudied since the Great Depression and that advocates for fiscal support in the last three years have taken a huge leap of faith in pushing it as the answer to today’s troubles. This is, again, so at odds with what has actually gone on in the profession that it’s hard to figure out his basis for claiming it. If nothing else, the experience of Japan’s Lost Decade alone has inspired thousands of pages on recessions (and jobless recoveries) driven by deficient demand. And no, a Google or Lexis search on “job creation” won’t actually capture all academic work relevant to this.

He also writes that the point of large-scale fiscal support was to “goad consumers into spending again.” Not really. A good chunk of the Recovery Act was indeed aimed at households, but it didn’t rely on some esoteric trick to bamboozle people into spending – instead it gave them money (or its near equivalent). And much of the most-effective parts of the Recovery Act actually recognized that consumers were unlikely to begin spending again and had the government spend the money directly. The recession was largely caused by consumer retrenchment, but this doesn’t mean that recovery has to come through consumer spending – instead we can provide the spending power through other sectors.

Lastly, Davidson notes that there is a rump of economists (he calls them, reasonably enough, the Chicago School) that argue that debt-financed fiscal support cannot help economies recover from recessions. But, it’s important to note that there is pretty simple evidence that can be brought to bear on this Keynesian versus Chicago debate. Nobody denies, for example, that the government could borrow money and just hire lots of people – hence creating jobs. What the Chicago school argues is that this borrowing will raise interest rates (new demand for loans will increase their “price,” or interest rates) and this increase in interest rates will dampen private-sector demand. But interest rates have not risen at all since the Recovery Act was passed and private investment has risen, a lot.

Those in the demystifying business really should point lots of this stuff out.

*Note: The Kaufmann survey describes the results wrong – any multiplier greater than zero means that debt-financed fiscal support has boosted the economy.

The Senate appears poised to pass two components of President Obama’s American Jobs Act, having found the first area of bipartisan agreement. These two components, however, fall woefully short of what is needed to address the jobs crisis.

The first provision would provide tax credits for hiring veterans, with bigger credits for hiring veterans who have been out of work for more than six months and those with service-related disabilities. It would also expand education and training opportunities for up to 100,000 older veterans. Helping veterans find employment or vocational training is a laudable goal. The problem is that this hiring credit is a rounding error in terms of national economic activity and will not visibly budge the dial on the national unemployment rate.

As Larry Mishel recently pointed out, scale is critical to evaluating any jobs plan. The president proposed a $447 billion jobs bill that would boost employment by 1.9 million jobs and reduce the unemployment rate a percentage point, according to Mark Zandi. The $1.6 billion cost of the Senate’s bill for veterans, on the other hand, represents only one-hundredth of one percent of GDP.

Worse, a second provision would repeal a requirement that, starting in 2013, will withhold 3 percent of payments to government contractors, in the form of a credit against contractors’ tax liability they already owe. Essentially, the cost of helping veterans is simultaneously helping government contractors avoid taxes. Of course, the increased tax avoidance would cost money – but the Senate provided a “pay-for” in the form of decreasing eligibility for Medicaid and subsidies for those seeking to buy health insurance under the Affordable Care Act (i.e., the health reform bill passed at the beginning of 2010).

So, to recap, the big “jobs-plan” coming out of the Senate today would help veterans (good), but would not move the dial on overall joblessness (bad), would facilitate tax avoidance by government contractors (bad), and would pay for this loss in tax revenue by eroding some of the benefits of health reform (bad). Will this pass? Probably—so much for the alleged benefits of bipartisanship. The likely success of this legislation owes first and foremost to the fact that it would not be paid for with a millionaires’ surtax. Over the last month, Senate Republicans have filibustered all of the following measures, which would have been paid for with varying surtaxes on incomes of more than $1 million:

1. $447 billion for the entire American Jobs Act (10/11/2011)
2. $35 billion to put teachers and first responders back to work (10/20/2011)
3. $56 billion to build roads, repair bridges, and create an infrastructure bank (11/3/2011)

Helping some of the 240,000 unemployed veterans of the wars in Iraq and Afghanistan is merited, but so is helping the broader pool of 25 million un- and underemployed Americans. As we have pointed out over and over again, boosting GDP growth in a $15.2 trillion economy and seriously tackling persistent underemployment requires hundreds of billions of dollars in additional fiscal support. Republicans in the 112^th Congress, however, have filibustered (or blocked through other procedural means) all job creation proposals that would provide any meaningful help ameliorating the jobs crisis.

The Washington Post‘s Ezra Klein with a useful observation…

Just a reminder: The market will literally pay us to borrow money from them for 5, 7 or 10 years. Pretty good deal for a country that has, say, trillions of dollars in infrastructure repairs it needs to make, or millions of workers who are unnecessarily unemployed. More here.

Here are the real interest rates on Treasury’s TIPS (click to enlarge):

On Friday, the Bureau of Labor Statistics released its monthly report with the most recent data on jobs and employment in the United States, a bleak reminder that things aren’t getting much better for the unemployed in this country. Sadly, as the International Labor Organization’s annual World of Work report reveals, the world economy is no better, and the risk of social unrest has increased dramatically in rich countries as a result (see figure below). The ILO’s calculations are based on “levels of discontent over the lack of jobs and anger over perceptions that the burden of the crisis is not being shared fairly.”

Click to enlarge

Just in the past year, we’ve seen violent clashes erupt between protestors and police in London, New York, Rome, and Oakland as a direct result of citizens protesting budget austerity, joblessness and a sputtering economic recovery. And in encampments literally all over the world people are peacefully protesting income inequality and widespread joblessness as part of the Occupy Wall Street movement. Thanks to a 17 percent youth unemployment rate in the U.S., young people in New York, Tulsa, Sacramento, Philadelphia, Minneapolis and elsewhere have plenty of time on their hands to protest and make their voices heard. Even recent college graduates have an unemployment rate that’s almost double what it was before the recession.

But just because they’re peaceful does not mean the OWS protestors are not seething with anger about the way that high level executives in the financial services industry – who are some of the wealthiest people in the world (better known as “part of the 1 percent”), have escaped prosecution or serving any jail time after bringing our economy to the brink of collapse, while the industry as a whole somehow managed to escape serious reform by Congress.

One of the other principal gripes of the peaceful OWS protestors is that Congress has failed to do almost anything to invest in the economy or create jobs since the stimulus package was passed in 2009, despite persistent joblessness and underemployment. Foreign governments in other developed countries have failed at this as well – and the discontent is palpable. Just look at the scale of protests in Spain, spurred in part by the country’s eye-popping 46 percent youth unemployment rate.

From most reports, it appears that the OWS protestors are committed to remaining peaceful – for now. Let’s hope it stays that way, despite this new evidence that things may deteriorate if economic conditions fail to improve.

My colleagues at EPI recently outlined how the grievances of the Occupy Wall Streeters are fact-based and supported by ample evidence. The ILO’s 2011 World of Work report offers a new estimate that should motivate 99 percent of the global population to join together into one massive movement that challenges the financial and political elite to enact policies that will put people back to work around the world. The table below is the ILO’s estimate that by 2013, there will be a global shortage of 40 million jobs – that’s a lot of desperate, hungry people with way too much time on their hands.

In a blog post yesterday, Paul Krugman again noted that the growth in income inequality is not all about education.

He pointed to two different charts to illustrate: one showing the growth of the top 1 percent relative to other income groups and a second with wage growth by education levels. Since the two charts had different scales, it was hard to see just how out of whack the education-explains-inequality story really is.

Below is a chart that combines the two series in one chart, showing that the top 1 percent has outpaced, by a very wide margin, not just those with less formal education, but college grads as well. And this gap between the growth of the top 1 percent and the rest is much larger than the growth gap between education levels.

This is not to say that education is not important. The chart also shows that those with a college (or post-secondary) degree have outpaced others. But it’s also clear that this trend only explains a small part of the broader inequality story.

(Note: The top 1 percent line shows the growth in average after-tax incomes for this group, via the CBO, data from Figure 2. The education lines show the growth in wages for all workers, via EPI’s State of Working America data on wage and compensation trends by education. Both are inflation adjusted.)

As Americans wrap their heads around the meaning of the growing “Occupy” movements in cities throughout the nation, trying to determine whether or not the 99 percent vs 1 percent breakdown of Americans constitutes “class warfare,” there are a great many irrefutable facts that need to inform such discussions. Many have been clearly articulated recently, (including this great collection by my EPI colleagues). In this blog post, I begin a renewed examination of how the decline of manufacturing employment has contributed to the erosion of the American middle class, and in the process, left many state economies in shambles.

Employment in the manufacturing sector has long provided a foundation for the American middle class. In 1999, former EPI economists noted key features of manufacturing employment:

Manufacturing provides middle-class jobs and a channel of upward mobility for non-college-educated workers (especially men). Compensation is higher and fringe benefits (such as health insurance and pension coverage) are more common than in other industries that, like manufacturing, employ non-college graduates. Blue-collar workers in manufacturing are also more likely to be union members, and thus they have more bargaining power than do comparable workers in services.

In 1999, there were troubling signs that all was not well in the American manufacturing sector, with the “Asian crisis” identified as a growing threat; a threat which my colleague Rob Scott has repeatedly shown to have continued to erode American employment (see, for example, Growing U.S. trade deficit with China cost 2.8 million jobs between 2001 and 2010). The alarming decline of the American manufacturing sector has of course only gotten worse over the intervening decade, leaving in its wake many state economies that have yet to recover. Since Jan. 2000, the American manufacturing sector has lost 5.5 million jobs, nearly a third (32.1 percent) of the Jan. 2000 total. Six states – Michigan, North Carolina, Rhode Island, Mississippi, New Jersey, and New York – have lost over 40 percent of their manufacturing workforce, while another five states have lost more than 37 percent of their manufacturing employment (collectively, the dark red states in the figure below). Indeed, only Alaska has seen growth in its manufacturing sector since 2000, though numbering less than 2,000 workers.

Click to enlarge

In future posts, I’ll examine the impact the erosion of manufacturing employment has had on wage trends in those states that have been hardest hit by the decimation of manufacturing employment. Lest readers despair, here are some concrete suggestions for what can be done to breathe new life into American manufacturing:

• The Alliance for American Manufacturing has a comprehensive plan for job creation based on the following five strategies:  expanding American production, hiring, and capital expenditures; investing in America’s infrastructure; enhancing our workforce; making trade work for America; and rebuilding America’s innovation base.
• AAM’s Executive Director Scott Paul appeared Tuesday night on The Ed Show, noting how different the American economy would be if 5.5 million manufacturing jobs had not been lost over the past decade.

Washington Post reporter Lori Montgomery’s recent  article on Social Security’s finances has been the subject of blistering critiques by Dean Baker, Paul Krugman, and others who rightly point out that her opinions belong on the editorial page, not the front page. But Social Security’s finances have also tripped up more even-handed observers. To help the genuinely perplexed, here’s a primer on Social Security and the federal deficit (for a more in-depth discussion, go here).  A follow-up blog post will look at the impact of the recession and explain the meaning of Social Security’s primary (or “cash-flow”) deficit.

Does running a deficit mean you’re piling up debt?

Not necessarily. You can be rich as Croesus and still be running a deficit. All it means is that you’re spending more than you’re taking in over a specified period, whether by borrowing or drawing down savings.

Is Social Security running a deficit?

No. Social Security is running a surplus. Its combined revenue sources – payroll taxes, interest from the trust fund, and earmarked income taxes on some Social Security benefits – are still larger than benefit payments. The trust fund, which currently has $2.6 trillion dollars, is projected to grow to around $3.7 trillion in 2022. But once Social Security starts drawing down the principle in the trust fund to help pay for the Baby Boomer retirement, Social Security will be running a deficit. Also, as will be explained at greater length in our second blog post, Social Security is currently running a primary deficit, which means it would be running a deficit absent the interest on the trust fund.

Is drawing down the trust fund a bad thing?

No, that’s what it’s there for. Social Security is structured as a pay-as-you-go program, with current benefits mostly paid out of the revenue from current payroll taxes. With steady population growth, the trust fund would only need enough to handle normal cash flow, like a checking account.  However, for nearly a generation significant savings were built up in the trust fund and are now there to handle the demographic “bulge” of the Baby Boomers’ retirement. The fact that Social Security will tap the trust fund to help pay for the Boomers only comes as a surprise to people like Alan Simpson.

Can Social Security contribute to the federal deficit?

It can, if you’re looking at a unified federal budget. By law, Social Security isn’t considered part of the federal budget since it has dedicated funding. But it can be useful to consider the federal government as a whole, including off-budget programs like Social Security. If you do, Social Security’s surplus or deficit contributes to the unified federal budget surplus or deficit.

Can Social Security contribute to the federal debt?

No. Social Security is prevented by law from borrowing—it can only draw down savings in the trust fund. Since Social Security must operate in long-term balance, it can’t contribute to the federal debt over time. This is true whether you consider Social Security as part of a unified federal budget or as a stand-alone program.Read more

I apologize for continuing to harp on this Rick Perry study, but I just can’t help myself. As I mentioned in an earlier post, the first thing that really jumps out at you is the breathtaking intellectual dishonesty. But beyond its complete inconsistency with Perry’s ideology and professed objectives, the analysis simply doesn’t make sense. Here are a few examples:

1) GDP growth is impossibly high: Remember that Heritage Foundation analysis of the House Republican 2012 Budget, the one that predicted economic growth and unemployment at levels most economists considered impossible? Well, John Dunham and Associates’ (JDA) projections underpinning the analysis of Perry’s tax plan are even more impossibly higher! The Heritage analysis found that the average annual real growth rate from 2014-2020 would be about 3.1 percent. JDA is predicting that under Perry’s plan, it would be 5.3 percent. Reality’s overrated anyway, right?

2) Double counting: The analysis claims that “overall income is based on growth in nominal GDP and population (pg. 4).” See the problem here? Yeah, that’s right, nominal GDP already takes into account population growth. We checked their numbers, and it does appear they grew income by both GDP and population, so it doesn’t seem to be just a typo.

3) Other weird stuff: Check out the qualified dividends forecast from Table 2 of the analysis. From 2016-2019 dividends grow at an average 12.6 percent, including 13.2 percent in 2017, 14.0 percent in 2018, and 8.2 percent in 2019. And then 2020? Whoops. According to this forecast, qualified dividends in 2020 will be exactly the same as in 2019, to the dollar. Same thing with 2011 and 2012. The chance that that’s not a mistake is about zero.

4) Optional or mandatory?: It is unclear whether JDA modeled an optional flat tax or a mandatory flat tax as a replacement for the current income tax. The campaign maintains that JDA did model optionality. But their stated methodology does not mention how they modeled which taxpayers would choose which system, and their description of the proposal—”a 20 percent flat rate for both personal income taxes and corporate income taxes”—also makes no mention of having a choice between the current system and the new system.

We contacted the Perry campaign in regards to these numerous errors and omissions, but have yet to hear back. These aren’t minor problems – the entire analysis is suspect and the Perry campaign should retract these numbers.

At EPI’s 25^th anniversary celebration last night, we presented an award to Paul Krugman. (You know, because he’s short on credentials and really could use some professional validation.)  Harry Hanbury produced a very candid video about him for us, and it’s well worth seeing – it’s not just a hymn of praise, it actually has a great narrative arc.

MORE: Multimedia on EPI at 25

I think the only thing I’d add that the video didn’t emphasize (because it was made for people, not economists) is just how inspiring Krugman’s work is for economists who are actually trying to make sense of the real world. Nobody else so consistently reaches back for the tools that we’re all taught in grad schools (many of which he built, it bears saying) – tools like graphs and equations and models that often seem dry and abstract – and holds them up against developments in the real world to see what they actually can and can’t explain. He runs with the things that are useful and (often pretty brutally) discards the things that aren’t. For those of us who got into the economics business to understand the world around us, his work is an inspiration.

Krugman’s acceptance speech

[pro-player width=’540′ height=’304′ type=’video’ image=’http://www.epi.org/files/2011/Krugman_Award.png’]http://www.youtube.com/watch?v=-pKRBLdG1eA[/pro-player]

A clear trend is developing among the economic plans of the GOP presidential hopefuls: shift the burden of taxation from upper-income to lower-income households. Yesterday, the Tax Policy Center released an analysis concluding that Texas Gov. Rick Perry’s plan would cut taxes on high-income households, raise taxes on low- and middle-income households, and produce bigger deficits. The gist of Perry’s plan is to add an optional federal income tax to the current code: a flat 20 percent tax on (almost all) income less personal exemptions, charitable giving, home mortgage interest, state and local taxes, and all capital gains and dividends income (aptly dubbed an “Alternative Maximum Tax” by Howard Gleckman).

Those earning more than $1 million would see their average tax bill fall by more than half, a tax break of $496,000 in 2015 alone, relative to current policy. The highest income 0.1 percent of households (with income above $2.8 million) would see a tax break of over $1.5 million—even more egregious than the mammoth tax cut they would receive under Herman Cain’s “999” plan.

Meanwhile, Perry’s plan appears to let the Bush-era tax cuts expire in 2013, meaning that lower-income households would lose their expanded earned income tax credit, child tax credit, and the 10 percent bracket. (The John Dunham and Associates analysis for the Perry campaign uses a current law baseline and TPC also concluded that the Bush-era tax cuts would expire on schedule.) The Bush-era tax cuts were regressive and disproportionately benefited upper-income households, but a fraction of these tax cuts have gone to lower- and middle-class households; Perry would effectively do away with these tax cuts while giving higher-income households an even bigger tax cut. This would mean an average tax increase of over $400 for households earning between $20,000 and $40,000. Although this may appear at odds with Perry’s anti-tax ideology, higher taxes for the poor and middle class is in fact entirely consistent with his misleading rhetoric lambasting the “injustice” that nearly half of households don’t pay federal income taxes.

The chart below depicts TPC’s analysis of effective tax rates by cash income level under Perry’s plan versus current policy. On average, households with income under $50,000 see a tax hike. Above this level, tax cuts balloon as income rises. Millionaires would be left paying a lower effective tax rate than a middle class family earning between $50,000 and $75,000. This completely violates the idea of a progressive tax code and the Buffett Rule.

Click to enlarge

The natural result of modestly raising taxes on working families while slashing taxes for upper-income households is hemorrhaging revenue: this is not about “shared sacrifice” or the budget deficit. As my colleague Ethan Pollack points out, the Perry campaign relies on highly dishonest dynamic scoring to claim their tax code produces more revenue. Official budget scorekeepers incorporate behavioral responses but not dynamic growth effects into tax policy analysis, because research shows growth effects are generally small and can break either way depending on how tax cuts are financed (see this CBPP overview of dynamic scoring). TPC’s static model shows Perry’s plan losing $995 billion relative to current law, a decrease of 27 percent, in calendar year 2015 alone ($570 billion relative to the inadequate levels projected under current policy).

Working households would get hammered again when that additional revenue loss is financed with draconian spending cuts, as required by the balanced budget amendment and spending cap component of Perry’s economic plan. This is merely a plan to dismantle government and refund all the savings, plus some of working families’ disposable income, to upper-income households.

I’ve been reading through Rick Perry’s official analysis of his tax plan (scored by John Dunham and Associates), and hoo boy, it’s a doozy. Difficult to know where to begin.

The intellectual dishonesty is breath-taking. The basic conservative argument that tax cuts increase economic growth goes like this: tax cuts for the rich results in more capital formation, which fuels greater productivity and higher economic growth. In other words, supply-side growth with demand catching up. It’s a pretty ridiculous model in the face of huge demand shortages, but hey, at least it’s a model.

But as Matt Rognlie points out, the model that Rick Perry used is very different, and in fact has a lot more in common with traditional Keynesian demand-side economic models than conservative supply-side models. In fact, this economic model (called IMPLAN) is usually used to justify government public works projects, such as sports stadiums, because this model shows that the economy can be significantly improved through government spending.

Wait, what?  Rick Perry’s using an economic model that shows that government spending helps the economy? That’s right, partner. In fact, the IMPLAN model (which we’re decently familiar with at EPI) will actually show that spending cuts reduce demand more than tax cuts boost it (because a portion of the tax cuts are saved), so the net effect is likely negative. And to be clear, JDA did assume that the plan would cut spending by the same amount as the revenue loss (page 7, footnote 7).

So how did the analysis show a positive economic impact? Simple: they assumed the spending cuts, but didn’t model them, despite the fact that it’s logically inconsistent to claim that tax cuts have an effect on demand but spending cuts don’t. The only reason they got a positive economic impact was because they did not model the entire plan. Had they, it’s pretty clear that the analysis would have shown that Perry’s overall budget plan—tax cuts paired with offsetting spending cuts—would, on net, hurt jobs and economic growth.

Here’s something really scary for Halloween: the plan being pushed in the budget super committee by Alice Rivlin, Alan Simpson and Erskine Bowles to cut Social Security benefits by changing the way inflation is measured. Any member of Congress who goes along with this plan will deservedly be as popular as a vampire at a blood drive.

Retirees living on Social Security are mostly just scraping by. The average retirement benefit is only about $14,000 a year in 2009, and most retirees depend on Social Security for half or more of their incomes. Knowing how tight their budgets are (and their proclivity for voting), Democrats and Republicans alike have promised not to cut the benefits of people nearing retirement, not to mention the benefits of people who have already retired. Yet the only way the inflation measure can reduce the deficit over the next 10 years is by cutting Social Security cost-of-living adjustments for current and near retirees.

The members of Congress who want to make this benefit cut don’t want to admit they’re breaking their promises to retirees. So they disguise the cuts as a technical change—an improvement in the cost-of-living measure. That’s hogwash. The alternative index they propose for the Social Security COLA is not an improvement over the current measure; it’s almost certainly a worse indicator of the rising cost of living faced by seniors. And there’s nothing technical about its expected effect on retirees’ checks. The COLA reductions it will cause will cost the average retiree about $1,700 a year by 2031.

Social Security’s annual cost-of-living adjustment is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. Ironically, the CPI-W measures changes in the cost of living for workers, excluding retirees and other Social Security recipients who aren’t in the labor force. This measure doesn’t accurately reflect the cost of living for seniors. Seniors have experienced higher inflation because they spend a greater share of their incomes on out-of-pocket medical expenses, and health costs have risen faster than overall inflation in recent decades. An index that specifically tracks the cost of living of seniors has risen roughly 0.27 percentage points faster per year than the CPI-W.

The rationale for the change the super committee is contemplating is that the current price index overstates inflation because it doesn’t fully account for the ability of consumers to change their buying habits in response to price changes. In other words, if the price of oranges goes up, people will buy more apples and fewer oranges, and this change isn’t fully reflected in the CPI-W even though the consumption “basket” evolves over time to put more weight on apples and less on oranges.

The problem with this argument is that it doesn’t look at the growth in the costs actual retirees face over time. Not only are seniors harder hit by escalating medical costs than the working-age population, but since they have roughly half the household incomes, they spend a greater share on necessities like rent and utilities. It’s likely that the CPI change advocated in the super committee will understate inflation in the goods and services the elderly mostly purchase, and it may actually overstate their ability to change consumption habits in response to price changes. No one disputes that it will lead to benefit cuts that start small but compound over time.

Benefit cuts are justly unpopular across the political spectrum—especially cuts that affect retirees and near-retirees. But Republican members of Congress have a double problem. The CPI change would affect income taxes, too – not just Social Security and veterans’ benefits. How does anyone who took a no-tax-increase pledge defend voting for a “technical change” that will raise $72 billion in taxes by 2021 on tens of millions of Americans? They might be tempted, since there will be nearly $2 of Social Security cuts for every $1 of increased tax revenue. But at the end of the day a vote for the CPI change will feed the disgust of Tea Party types as much as progressives and liberals.

Former Secretary of Labor Ray Marshall released his new book, Value-Added Immigration: Lessons for the United States from Canada, Australia, and the United Kingdom, at a forum at EPI this morning. The book examines the employment-based immigration policies of the principal immigration-receiving countries and contrasts their data and evidence-based policy development with our own very partisan policy making, which has been governed by ideology and interest group advantage rather than a rational examination of the national interest.

Marshall made clear at this morning’s forum that a realistic hope for progress depends on putting one federal agency in charge, gathering data for informed decision-making, and committing ourselves to pursuit of a high value-added immigration policy, rather than simply a pursuit of cheap labor.  Unlike Australia and Canada, which track the experience of immigrants in longitudinal studies and adjust their policies to improve outcomes, the United States does not even know how many “temporary” non-immigrant workers are legally in the U.S., let alone how they are faring.

Marshall was joined on a panel by three distinguished researchers: Philip Martin of the University of California, Davis, one of the nation’s foremost experts on agricultural economics and labor migration; Michael S. Teitelbaum of the Alfred P. Sloan Foundation and Harvard Law School, a demographer and expert on STEM education and immigration; and Ron Hira, of the Rochester Institute of Technology, an expert on the offshoring of IT work and the relationship between our non-immigrant visa programs and the health of the domestic engineering and computer science workforces.

Martin and Teitelbaum, like Secretary Marshall, praised the flexibility of the Australian and Canadian systems and their use of rational, objective point systems to determine the admission of skilled immigrants. Each also praised the U.K.’s Migration Advisory Committee for its collection and use of very extensive labor shortage statistics, its use of “bottoms up” information from local businesses, unions and government sources, and its non-partisan method of researching, reporting, and analyzing whether importing workers is the sensible way to solve particular problems.  All three commenters agreed with Marshall that the current state of immigration and labor market data in the U.S. is far inferior to that in the countries studied and inadequate to the task of informing the policy debate.

Value Added Immigration: Lessons for the United States from Canada, Australia, and the United Kingdom, is available from EPI for $15.95.

GDP grew at 2.5 percent in the third quarter – and that seems to be about the growth rate to expect for the next year (which will be an improvement from the 1.6 percent growth that has characterized the most recent 12 months). This is, as we’ve noted, insufficient to drive down the 9.1 percent unemployment rate.

It is, however, worth remembering just why there are so many unemployed workers in the country: the depth and length of the Great Recession, caused by the bursting housing bubble (and perhaps amplified by the corresponding financial crisis). The unemployment rate is slightly down and employment growth since the recession ended in the middle of 2009 is actually roughly in-line with the recoveries we’ve seen in the past two decades (following the 1990 and 2001 recessions). Further, to the degree that the current recovery is slightly under-performing these previous two, it’s in the hemorrhaging of public sector jobs.

So why is unemployment so much higher today compared to nine quarters after these two other recessions ended? Because the output losses (and hence corresponding job-losses) suffered during the Great Recession were so much larger – meaning that we have a much larger overhang of economic slack (both unemployed workers and idle factories) to put back to work.

The figure below shows GDP declines during the Great Recession compared to these previous two recessions, as well as GDP gains nine quarters into recovery for the Great Recession and the previous recessions.

Click to enlarge

As we’ve also observed before, recoveries from recessions happened much more quickly in the years prior to 1990, reflecting in part that monetary policy was much more effective in driving recoveries pre-1990 (since it was generally monetary policy tightness that caused these recessions, monetary loosening could hence lead to rapid recovery).

So, focusing for a second on just those recessions that have happened in the two decades (give or take a year), we see something clear – this recovery lags the average by 1.1 percent of GDP, but the hole left by the recession was larger by an average of 4.5 percent of GDP, meaning roughly that it was the difference in the losses caused by the recession that explain 80 percent of why unemployment is so high relative to its pre-recession level.

So while it’s true that we slightly lag the pace of post-1990s’ recoveries, it is clear that what really explains why so many more workers and so much more capital remains idle today compared to recoveries past is just how ferocious the preceding recession was.

Does this leave today’s policymakers off the hook? No – they should do more. The past is the past and just because a problem is inherited doesn’t mean it shouldn’t or can’t be solved. Clearly in retrospect not enough was done to boost the economy following the 1990 and 2001 recessions (some speculative reasons why are here). And clearly there is more we can do now to boost the sluggish demand growth that is the main cause of today’s economy operating below potential.

But, it is worth remembering where the problem came from. As we get further and further from the Great Recession, the temptation is great to act as if citing it as the root cause of today’s problems is just unseemly dwelling on the past and dodging blame. But, really, it does matter how it all started.

Rick Perry’s out with his tax plan, and while he might be winning the “who can pander to their base the most” award—beating out strong efforts by Mitt Romney and Herman Cain—his proposal proves to be an utter disaster for the economy and the middle class.

On the tax side, the plan would do the following:

• Replace the graduated income tax with an optional 20 percent flat rate with a slightly broader base
• Slash the corporate tax by almost half
• Abolish the estate tax
• Enact a temporary repatriation holiday
• Eliminate taxes on capital gains and dividends
• Raise the personal exemption for households to $12,500 per person

Perry makes two basic claims about his plan. First, he says that the “net benefit will be more money in Americans’ pockets.” For corporations and high-income households, that’s certainly true, even though their tax rates are already at historic lows. But it does that by shifting the tax burden onto middle- and low-income households, whose incomes have actually fallen over the last decade.

Second, he claims that his plan will simplify the tax code, so simple that you can “file your taxes on a postcard.” Yet his tax code is optional, meaning that millions of households will have to do their taxes twice to see under which code they should file (and if they think they might be subject to the Alternative Minimum Tax, they’ll have to do their taxes three times!).  Layering another tax code over the current one makes filing taxes more complicated, not less.

From Flickr Creative Commons by Gage Skidmore

Now, it’s certainly the case that the tax code is too complex.  But it’s telling that his proposal doesn’t even attempt to tackle the issue of unfairness, which has sparked protests across the country. Most people hear that Warren Buffet pays a lower tax rate than his secretary and conclude that he should be taxed at a higher rate, one more comparable to middle-class workers. Rick Perry, however, thinks his taxes should be cut even further.

And how does he pay for these tax cuts? No surprise here: massive cuts to the social safety net and public investments. He’d raise the Social Security retirement age, potentially raise the Medicare eligibility age, eliminate all the expanded health insurance coverage in the Affordable Care Act, and take an axe to non-defense discretionary spending, which has already been slashed by the Budget Control Act.

It’s the basic conservative approach to budget and tax policy: (1) pretend that you care about deficits, (2) give huge tax cuts to corporations and the top 1 percent, and (3) slash the very programs that people depend on because now we “can’t afford them.” The rich get richer, and even more risk and cost is pushed onto the middle- and low-income households that can least bear the burden. Perry may call this tax plan “fair.” but I don’t think that word means what he thinks it means.

So this Halloween season, the middle class might want to skip Perry’s house, because for them he’s got no treats, only cruel, cruel tricks.