Nonresidential investment has been growing rapidly for quite some time – seven straight quarters averaging 10.5 percent growth. We have noted before that this provides powerful evidence that business fear of future regulatory uncertainty seems to be an odd explanation of sluggish economic growth – businesses are, in fact, actually spending pretty quickly during the recovery.

Is it a puzzle that nonresidential investment is coming on two years of rapid growth, yet employment growth remains sluggish? After all, if businesses seem fine in taking on new machines, why aren’t they fine in taking on new staff?

I’d argue the answer to these questions are ‘not really’ and ‘read on.’

First, it’s worth remembering that nonresidential investment just isn’t that big a part of the overall economy – it has averaged 11.1 percent of GDP since 1995 and sits at 10.3 percent today. While it’s nice that it’s performing well, it just doesn’t have enough heft by itself to drive overall trends in either output or employment growth. Contrast this with consumer spending sitting at about 70 percent or more of total GDP.

Second, nonresidential investment is hugely cyclical – from the last quarter of 2007 to its trough in the second quarter of 2009, it fell by 22.4 percent – or about 2.5 times farther than the drop in employment. Today, despite its good growth for nearly two years, it remains well below trend. In fact, Thursday’s report on third quarter GDP shows that the simple level of nonresidential investment remains nearly 8 percent below its pre-recession peak. So, it’s been growing very well for a while now, but it fell extraordinarily far during the recession.

Third, it’s important to remember that, like job-growth, investment has to grow just to keep overall economic slack stable. So, we need roughly 100,000 jobs each month just to keep the unemployment rate stable while absorbing new labor market entrants. And, we need 8 percent of GDP to be invested each year just to keep the overall capital stock from shrinking through depreciation that occurs in the private business sector.

Lastly, it’s worth asking whether investment is now so high after seven straight quarters of growth that it is threatening to change the economy’s capital/labor ratio in an appreciable way. That is, firms invest so that each worker has a useful bundle of capital to work with – one that hopefully grows over time and makes each worker more productive. If investment per worker begins rising well above trend, this could mean that output is just becoming more capital-intensive for some unspecified reason or that firms will have to start soon hiring to stabilize this ratio.

Neither seems particularly likely – investment per worker remains below its 2007 level even as employment shrank over that period. And this means that it remains well below what a simple extrapolation of the pre-recession trend would argue.

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In short, the trend in nonresidential investment is nice, but it won’t by itself bring about a robust recovery. More importantly, it mostly represents simply an ongoing climb out of a steep, recession-induced hole (which should sound familiar) combined with an attempt to run ahead of simple depreciation. And this trend certainly presents no puzzle in that it’s not being accompanied by more rapid hiring.

In Dec. 2008, the U.S. auto industry stood on the brink of collapse. The Obama administration negotiated a restructuring plan for the industry that took General Motors and Chrysler through quick bankruptcies, helped get them back on their feet again, and provided bridge financing for auto parts makers and auto finance companies. This plan was widely criticized at the time but restructuring has paid big dividends for the nation, autoworkers and the domestic auto industry.

If the auto industry had been allowed to collapse, between 1.1 and 3.3 million jobs would have been lost between 2009 and 2011. After restructuring, more than 78,000 jobs have been added in U.S. motor vehicle production. All three U.S. auto companies returned to profitability in 2011 and they earned combined profits of nearly $6 billion in the first quarter of this year. Total sales and market share of the Big Three are all up sharply since 2009.

GM, Ford and Chrysler have bargained new labor agreements with the UAW, recently approved by workers at each company, which will ensure increased employment and investments in the United States by all three firms. The completion of these agreements and the strong improvement in the performance of U.S. automakers shows that the Obama administration made a wise decision to invest in the auto industry restructuring package. If the industry had been allowed to fail, costs to federal, state and local governments in the form of reduced tax payments and increased unemployment compensation would have totaled between $83 billion and $249 billion in 2009 alone.

The auto industry restructuring plan has yielded a huge return on taxpayer investment and put the industry and its workers on a solid path to recovery. I estimate the federal, state and local governments saved between $10 and $78 for every net dollar invested in auto industry restructuring—a very savvy investment at a time when failure to intervene would have been catastrophic for the domestic economy.

The Congressional Budget Office released a report yesterday that provides more detail into their hugely valuable reporting on household income growth at different points in the income distribution. There’s plenty to dig into here, but, we’ll start with just noting that the report confirms what we posted today: that the primary complaint of the Occupy Wall Street movement – that economic inequality is rising, and economic policy, driven by the interests of the already well-off, is driving that rise – is spot-on.

The CBO report focuses on 1979-2007 – the last year before the Great Recession. While inequality actually tends to fall in the immediate aftermath of recessions (as incomes derived from the stock market fall more quickly than others, and these incomes are disproportionately claimed by the richest households), we know that over this period that inequality has always risen very sharply after the immediate recession-years.

One immediate comparison that comes to mind when examining data on inequality is a simple comparison of the growth of mean versus median income between 1979 and 2007. Mean income is just the simple average – it’s essentially how much the economy was able to generate on a per household basis. Median income growth is a measure of how a household smack in the middle of the distribution – poorer than half of households but richer than half – has done over the same period. If income growth is much faster for already-rich households (and it definitely was over this period) then mean income growth is going to outpace median growth. And, we can ask how much households at the median could be earning today if their income growth matched the overall average. This doesn’t seem too much to ask in terms of economic outcomes – the richest 1 percent in 1979 made considerably more than the typical household – so even if all incomes had simply grown at the overall average rate, there would be a considerable income gap today. Instead, of course, median growth fell far below average growth. If it hadn’t, the CBO data indicates that the median household would have had $75,160 in after-tax income in 2007, rather than the $61,800 it actually had.

In short, the inequality driven by households at the top claiming so much of the overall growth acted as a $13,360 tax on the median household. I should note that those used to citing Census Bureau numbers on median incomes will find these income numbers to be high. That’s because these are a measure of “comprehensive income” that includes many things – like in-kind transfers and imputed taxes besides the money incomes reported by Census.

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Speaking of taxes and transfers, we can also look at how policy most visibly affects income trends – looking at how taxes and transfers affect the evolution of inequality. Because the federal income tax is progressive and because transfers (Social Security, unemployment insurance, Medicare, Medicaid) make up a larger share of low- and moderate-income households’ incomes, the effect of taxes and transfers overall is to, at any given point in time, reduce the inequality that results from market-based incomes (though, to be clear, policy has fingerprints all over market-based incomes as well).

But, the CBO notes that “shifts in the distribution of government transfer payments and federal taxes also contributed to the increase in after-tax income inequality.” See the chart below from the CBO report and focus on the top-line. This top line shows the contribution that taxes and transfers make to reducing inequality – and it shows this contribution has fallen significantly between 1979 and 2007. That is, this most visible hand of policy – the effect of taxes and transfers – has actually changed in the direction of increasing inequality (or reducing it less) relative to its 1979 levels. In short, tax and transfer policy is leaning with the wind of rising inequality rather than against it.

The CBO report is just one more valuable piece of evidence adding to the overwhelming case that economic policy needs to be reoriented to insure that our economy starts generating fairer outcomes.

EPI has strung together a series of posts and papers on why regulatory changes enacted and proposed in the past couple of years are clearly not a contributor to the economy’s sluggish recovery from the Great Recession. We’ve been especially critical of the vague claims that “uncertainty” over regulatory change has dampened job-growth. Basically, we’ve done the analysis that anti-regulatory forces have not done – specified just what the evidence would look like if regulatory change or uncertainty was dampening growth and then examining the actual facts-on-the-ground to see if it was consistent with the story. Punchline: it wasn’t.

But we’re just EPI and the debate has seemed a bit lonely; until now.

The Treasury Department, in an important blog post, has reviewed the evidence that we cited and more to assess the case for regulatory changes or uncertainty stifling growth – and they find it as content-free as we did.

Treasury cites low hours per employee (yet to regain their pre-recession peak), low rates of capacity utilization, low bond-rates (even for industries facing regulatory changes), and low rates of financial volatility – along with high profit margins and high rates of investment in equipment and software – as all bolstering the case against regulatory uncertainty as a prime suspect for dampening economic recovery.

As we explained previously, low rates of capacity utilization and average hours per employee argue against regulatory uncertainty as a driver of sluggish growth because even if firms were reluctant, because of uncertainty, to make new permanent commitments to staff or investments, there’s no reason why future uncertainty would cause them to under-utilize their incumbent labor force and capacity. Slack demand, of course, would cause them to under-utilize these. Low bond rates and financial volatility argues that financial markets sure don’t see future uncertainty that needs to be priced into interest rates charged to American business. High rates of profit argue that nothing – not regulatory burden or anything else – has hampered business profitability – and high rates of investment in computers and software argues that businesses lack of spending is not the prime cause for sluggish growth in general. It’s amazing that just three years removed from the absolute meltdown of the most conspicuous experiment in market self-regulation over the past decades, the GOP Congress wants to argue that it’s excessive regulation that is stifling the economy, without providing an iota of evidence.

The Treasury’s post is very encouraging in that it signals an administration that has decisively rejected this view and seems determined to follow the evidence in continuing to push for smart, well-studied regulatory changes without worrying that they’re somehow strangling the recovery. In recent weeks, President Obama himself has undertaken some increasingly powerful pushback on that portion of the GOP jobs-agenda that consists simply of “deregulate.”   These developments, along with the administration’s proposal and advocacy for the American Jobs Act show a genuinely fact-based commitment to doing what would really work (and ignoring what wouldn’t) to reduce unemployment.

This is the first entry in a series of commentaries on the economic philosophies of the major candidates for the 2012 presidential election. Only candidates who have consistently polled at or near 10 percent are included, which at the start of this project includes Republicans Rep. Michele Bachmann (Minn.),  Rep. Ron Paul (Texas), Newt Gingrich, Gov. Rick Perry (Texas), Herman Cain, and  Mitt Romney. The series will conclude with President Barack Obama.

A Look at Michele Bachmann’s economic worldview

“In my perfect world, we’d take the 35 percent corporate tax rate down to nine so that we’re the most competitive in the industrialized world. Zero out capital gains. Zero out the alternative minimum tax. Zero out the death tax.” — Bachmann as quoted in the Wall Street Journal

The Minnesota representative’s economic program is vague on specifics but generally conforms to what other Republican candidates have advocated. Bachmann has been most forceful in her desire to repeal Obamacare the Patient Protection and Affordable Care Act (PPACA). Another key plank in her platform is cutting government spending to get deficits under control. Yet, repealing PPACA would actually add to deficit according to the Congressional Budget Office. Conveniently, Mrs. Bachmann dismisses the CBO report and has dismissed other non-partisan reports when careful research counters her assertions. That’s her right, I suppose. It would be nice, though, if she would substantiate her rhetoric. Just saying.

Reagan reference

“For my tax plan, I take a page out of one of my great economists that I admire, Ronald Reagan. And under my tax plan I want to adopt the Reagan tax plan. It brought the economic miracle of the 1980s. Why not go with what works? You can’t argue with success. I want to reinstitute the Reagan tax model from the 1980s.” — Bachmann on Fox News

From Flickr Creative Commons by Gage Skidmore

I will assume Bachmann was attempting humor by calling Reagan an economist. It is funny, though, that she doesn’t view the economic performance of the Clinton years as worthy of replicating, despite the fact those years brought higher growth and balanced budgets.

Take a canard, any canard

A recent Bachmann fave is to talk about excessive regulation driving up employer costs and limiting jobs. This notion is, in fact largely wrong and dismisses the benefits of regulation (see this EPI report). Several weeks ago, Bachmann railed against regulation at an Iowa meat packing plant and said the food industry is over-regulated. Interestingly, a well-regarded study that surveyed food industry managers found that only a small minority thought the industry was too regulated, about the same number thought it wasn’t regulated enough, and the vast majority felt the industry was regulated just right.

Declaration of independence

Bachmann and Ron Paul, though signatories to a pledge to condition a debt ceiling increase on so-called “Cut, Cap and Balance” legislation, opposed their party’s efforts to do so. Alas, her ultimate disagreement wasn’t that the cut, cap and balance approach would wreak economic devastation (see this EPI Commentary), but that it wasn’t extreme enough because it did not repeal and defund the PPACA.

Guiding principles

“I will demand a return to our Founders’ vision of smaller, smarter government within the enumerated powers laid out in the Constitution.” — Bachmann campaign website

That statement is part of Bachmann’s platform on budgets and deficits and seems to be the guiding principle for her presidential platform. This assessment of the Founding Fathers has long been part of the Republican catechism, yet it is simply not true.

First, the Founders were not a monolithic bloc. Even someone not well versed in the specifics of American history understands the general arc of why the republic was formed:  Our constitution, which she asserts is her guiding document, resulted from the failure of the Articles of Confederation, our first governing structure, to deliver necessary results. The Articles made the federal government subordinate to state governments, a circumstance Founder Alexander Hamilton described as “inconsistent with every idea of vigor and consistency.” Hamilton and other founding figures like James Madison, George Washington and Benjamin Franklin were proponents of a federal government empowered to do what was necessary to advance the United States so long as the people consented.

A principal reason, remember, for abandoning the Articles was government’s inability to pay its debts. I say with great confidence that the Federalist founders would have strongly disagreed with Bachmann’s position during the debt ceiling debate.

Don’t get me wrong—the federalists were not always right, nor did they unanimously agree. That’s actually the point. Asserting that there was a singular founding vision for this country demonstrates, at best, poor understanding of our history.

Next in the series: Ron Paul.

Every month, the Bureau of Labor Statistics releases updated data on the employment and unemployment situation facing each state. We, in turn, provide a quick analysis of these new data, a process which has for the most part consisted of finding new ways to highlight how truly dismal this recovery has been for virtually every state. And while the data on employment and unemployment trends present a mixed bag of late — with far too many states making negative progress towards economic recovery, one measure that gets far too little media attention is the state level “jobs deficit” — the number of jobs needed to get back to pre-recession unemployment rates (including the jobs required to return to pre-recession level AND the jobs needed to keep up with population growth since the beginning of the recession).

For states with the greatest population growth, employing a growing population and workforce during a recession can be challenging. The data show that of the 10 states with the greatest population growth since Dec. 2009 (the beginning of the recession), six of those states — Colorado, Arizona, North Carolina, Georgia, South Carolina, and Idaho — fall in the top 10 in terms of the current jobs deficit as a percent of Dec. 2009 employment. As seen in Figure 1, there are distinct regional patterns, with states in the West and Southeast facing the largest jobs deficits as a percentage of pre-recession employment.

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Figure 1

Notably, these states coincide very closely with the states experiencing the greatest economic distress as a result of housing foreclosures, further driving home the fact that each indicator of state economic and fiscal distress is intertwined with others (see, for example, our previous post highlighting a recent IRLE study showing that state budget distress is highly correlated with distress in the housing market, and is not caused by public sector unions).

State governors have been quick to pat themselves on the back when they have positive employment growth to report. Indeed, the governor of Texas has made his track record on job creation a centerpiece of his campaign for the Republican presidential nomination. Yet these jobs deficit numbers highlight the fact that even Texas has a long way to go to erase its jobs deficit. If one looks at the number of jobs required to erase state jobs deficits, Texas has the third largest jobs deficit to address — 654,700 jobs — behind California (1,781,100 jobs deficit) and Florida (973,300 jobs deficit). Figure 2 shows the number of jobs each state must create in order to erase the jobs deficit that continues to impede economic recovery throughout the nation. Only North Dakota has successfully erased its jobs deficit, showing growth of 19,500 jobs beyond the employment level needed to get back to pre-recession unemployment rates.

America works best when Americans work. Since it will take some time to make inroads on the 11.6 million national jobs deficit, state and national leaders should continue extended unemployment insurance benefits, and boost wages for those who are working by increasing the minimum wage. Until every state has successfully returned to pre-recession levels, state and national leaders need to focus like a laser on creating quality jobs that contribute to shared prosperity and a moral economy.

Figure 2

House Majority Leader Eric Cantor (R-Va.) just declined to give a much anticipated speech on inequality at Wharton (apparently giving a speech to the public was a deal breaker). The transcript, however, can be found here.

His opposition to the American Jobs Act was premised in an objection to progressive taxation (masquerading as concern for soup kitchens and the poor). Blocking funds to keep teachers in classrooms—exacerbating the widening teacher gap—will, of course, impede upward mobility. Now, he manages to turn concern about inequality into an argument against progressive taxation:

“Instead of talking about a fair share or spending time trying to push those at the top down, elected leaders in Washington should be trying to ensure that everyone has a fair shot and the opportunity to earn success up the ladder. The goal shouldn’t be for everyone to meet in the middle of the ladder. We should want all people to be moving up and no one to be pulled down. How do we do that? It cannot simply be about wealth redistribution. You don’t just take from the guy at the top to give to the guy at the bottom and expect our problems to be solved.

Instead, we must ensure fairness at every level. We must ensure that those who abuse the rules are punished. We must ensure that the solution to wealth disparity is wealth mobility. We must give everyone the chance to move up. Stability plus mobility equals agility. In an agile economy and an agile society, people are climbing and succeeding.”

So how does the House Republican 2012 budget Cantor pushed through the lower chamber go about giving everyone the chance to move up?

• Slashing Pell Grants
• Slashing food stamps (the old block-grant-and-defund trick)
• Slashing health care for children (Wisconsin Rep. Paul Ryan’s budget would halve federal spending on Medicaid over the next 20 years)
• Repealing the health care expansion to 34 million non-elderly adults
• Immediately cutting discretionary spending, which would cause 900,00 job losses in the first year alone
• Slashing the top corporate tax rates on individuals and businesses to 25 percent, then “broadening the base” to recoup this $2.5 trillion revenue loss through unspecified reforms. Who picks up the tab? Probably low and middle-income households

Two-thirds of the spending cuts in the Ryan budget would come from programs for lower-income families, according to Bob Greenstein. Nothing in the Ryan budget or their revealingly titled “House Republican Plan for America’s Job Creators” demonstrates sincere concern for inequality, poverty, upward mobility, or unemployment.

The Economic Opportunity Institute, a partner of EPI’s Economic Analysis and Research Network (EARN), and Social Security Works-Washington have a catchy new slogan on the future of Social Security: “Just scrap the cap.”

Hoping to spread their message, EOI and SSWW produced a hilarious but poignant music video featuring seniors rapping about moving in with their son because their Social Security benefits were cut. Both of the lead actors are union activists and somehow maintain a straight face throughout the video.

“Just scrap the cap” refers to the groups’ preferred policy of subjecting all workers’ earnings to Social Security taxes. Currently, the “earnings cap” is  $106,800 , meaning that workers who earn more than this face a tax rate of zero on each dollar over the cap. And this cap rises only at the rate of average wage growth in the economy; given that earnings at the top of the distribution have risen much faster than this overall average for decades, this means that a rising share of economy-wide earnings spills over the cap, reducing the tax-base for Social Security.

The Goldman-Sachs macroeconomics team is calling for the Federal Reserve to get really aggressive to help the economy. Paul Krugman, “out of a combination of a sense that support is building for a Fed regime shift and sheer desperation,” gets on board as well. Meanwhile, the Center for Economic and Policy Research’s Dean Baker has been there for a while.

And now the big guns – me and my 400 words in U.S. News and World Report. Really, the pressure has become irresistible now, no?

Macroeconomic Advisers has a new analysis of the Republican alternative to the American Jobs Act.

Bottom line job impact through 2013:

• Obama’s American Jobs Act: +1.3 million
• Republican’s Jobs through Growth Act: zero (or worse).

Read below via Macroadvisers: Man Up: AJ(obs)A vs. J(obs)TGA (emphasis added):

Last week the Republican leadership unveiled the Jobs through Growth Act (JTGA) as a counterpoint to the President’s proposed American Jobs Act (AJA).[1] JTGA includes a Balanced Budget Amendment (BBA), reform of the income tax code, repeal of “Obamacare,” Dodd-Frank, and other regulations, fast-track authority for the president to negotiate new trade agreements, and the easing of restrictions on the exploration for new domestic sources of energy.

Without more detail on the Republican plan, we cannot offer a firm estimate of its economic impact in either the short or long run. However, if what we do know of JTGA were enacted now, we would not materially change our forecasts for either economic growth or employment through 2013.

If actually enforced in fiscal year (FY) 2012, a BBA would quickly destroy millions of jobs while creating enormous economic and social upheaval.Read more

As I wrote in an earlier blog post, the American Jobs Act contains about $35 billion of extremely needed state and local budget relief. It also appears that this will be the first piece of the AJA to reach the Senate.

This is one of the most important pieces of the entire jobs package, and probably the most misunderstood.

First, it’s important to understand that this is not a “bailout,” as Sen. Mitch McConnell (R-Ky.) would have you believe. State budget shortfalls have not been caused by fiscal mismanagement, but rather by the weakness of the national economy, over which any individual state has little power. But because they must balance their budgets, their budget cuts do collectively drag on economy-wide growth. In other words, the justification for state and local budget relief has little to do with helping governments themselves and everything to do with protecting the economy from harm.

Second, state and local budget relief is often criticized as only helpful to government workers. Again, wrong. It’s true that providing budget relief would lead to fewer layoffs of firefighters, police, and teachers. And that’s a great thing—it’s not like the recession has magically caused our streets to get safer, houses more fireproof, and students more self-taught. We still need these public services as much as ever before, and by skimping on them now in the name of budget austerity would just inflict needless pain.

But, according to research I conducted a few years back (research that’s unfortunately still extremely relevant), over 60 percent of the job impact of state and local budget relief would fall in the private sector. There are four primary ways in which state and local budgets in particular support private-sector jobs:

1) Transfer payments: A significant portion of state budgets goes toward transfer payments, such as Medicaid or unemployment benefits. These programs have some overhead costs, but the vast majority of these funds go straight into consumers’ pockets, who then spend the money in the private sector.

2) Private contracting: More and more work is being done on the local level not by government workers, but by private workers on public contracts. See those construction workers repairing that bridge on your way to work? They’re likely employed by a private contractor, but if the government cuts highway spending, poof! Their job is gone.

3) Equipment suppliers: While many services are subsidized or contracted out by the public sector—and thus actually provided by the private sector—others are provided in-house. Public safety and education come to mind. But the funds aren’t all spent on public employee salary and benefits—much of it is spent on equipment and materials as well. Firefighters need hoses and trucks, and teachers need books, computers, and chalk. Everyone needs office supplies. And all those goods are produced by private-sector workers.

4) Re-spending: The first three items in this list show how budget cuts can cause private-sector job loss. True, there will be public-sector job loss as well. But as all these workers lose their jobs—both private and public—they cut back on their spending on food, clothing, durables, and other consumer goods. And who provides consumer goods? Private-sector workers.

Viewing state and local budget relief as only affecting the public sector underestimates just how intertwined the public and private sectors really are. State and local governments are creating a substantial drag on economic growth because they’re being forced to cut back, and that economic slowdown is hurting everyone. Budget relief is thus a highly targeted and effective way to maintain public services and reduce joblessness, both public and private, throughout the economy.

The ongoing Occupy Wall Street movement launched on Sept. 17 and its “We are the 99 percent” campaign highlights that the top 1 percent has fared very well while the 99 percent have not fared so well over the last few decades. (The conservative rebuttal, “We are the 53 percent,” referring to households with positive federal income tax liability, is insultingly flawed and misleading.) OWS’ mantra is easily supported by data, as EPI President Lawrence Mishel highlighted in this week’s economic snapshot.

From 1979 to 2007, the inflation-adjusted pre-tax incomes of the highest-income 1 percent of families (in 2011, the 1 percent are those with incomes exceeding $441,000) increased 224 percent. Think that’s impressive? The incomes of the top 0.1 percent rose 390 percent. So where does that leave the rest of us?

For the bottom 90 percent of Americans, incomes grew just 5 percent over the same 28-year period. Whether it’s the bottom 90 percent or the OWS folks’ 99 percent, this much is clear: We have a winner-take-all economy and the substantial rise in economic inequality has prevented the vast majority from improving their living standards in line with what was possible. The nation’s not broke, even if the bottom 99 percent are.

It’s popular to criticize Keynesian economics by alleging that the Recovery Act was an experiment in fiscal expansion, and because two-and-a-half years later the economy still hasn’t roared back to life, it must have failed.

What this criticism forgets is that the federal government isn’t the only government setting fiscal policy. While the federal government did conduct Keynesian expansionary fiscal policy over the last few years, the states have been doing the reverse, acting, as Paul Krugman put it, like “50 Herbert Hoovers” as they cut budgets and raise taxes. They’re forced to do this because the cratering of private-sector spending which threw the economy into recession blew huge holes in their budgets (in particular with a huge fall in income, sales, and property taxes, and increases in demands on safety-net programs), and just about all of them are required to balance their budgets each year. Overall, states have had to close over $400 billion in shortfalls over the last few years – this is spending power siphoned off from the economy and acts as a significant “anti-stimulus.”

This means that just looking at the amount of federal stimulus that’s been enacted significantly overestimates how much fiscal support has actually been pumped into the economy. In fact, as the Goldman Sachs graph below shows, the net fiscal expansion across all levels of government only lasted through the third quarter of 2009. For the last two years, state and local cuts have been overwhelming the federal fiscal expansion, making overall fiscal policy across all levels of government actually contractionary and creating a net drag on economic growth.

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What’s needed to reverse this drag of public-sector austerity on growth? The $35 billion for state and local aid that’s part of the American Jobs Act is a good start, as it would help keep states and local governments from being forced to cut further. As the last two years of austerity have shown, this would only serve to further weaken the economy. And if we’re going to get out of this economic hole, we first need to stop digging down further.

Last week, Congress considered two important pieces of legislation that will affect imports and exports; one would provide a substantial boost to the U.S. economy in the near term while the other will be irrelevant at best. The first was S 1619, The Currency Exchange Rate Oversight and Reform Act of 2011. I have estimated that ending currency manipulation with China and other Asian countries could create up to 2.25 million jobs over the next 18 to 24 months, boosting GDP by up to $285.7 billion and reducing the federal budget deficit by up to $857 billion over the next 10 years.

This bill passed the Senate with a strong, bipartisan majority of 63 votes. A similar measure passed the House last year by an overwhelming, bipartisan majority of 349-79.  This year, the companion bill to the Senate measure, HR 639 has attracted 225 co-sponsors, also a bipartisan majority. However, the bill faces opposition in the House this year from Republican leadership, who may not allow it to come up for a vote, while the White House has also expressed concerns about the legislation.

Contrast the fate of currency legislation with the package of free trade agreements negotiated by the Bush administration with South Korea, Colombia and Panama. These deals were rushed through both chambers of Congress last week just in time for the visit of South Korea’s president Lee Myung-bak. The Korea and Colombia FTAs were opposed by more than two-thirds of House Democrats, and 64 percent opposed the Panama FTA. Yet, both were approved by the House and Senate and will be signed into law by President Obama later this week.

At best, the administration claims that these deals will support a few tens or hundreds of thousands of jobs that could be created over the next decade (I have estimated that when the effects of growing imports are included, we are likely to lose over 200,000 jobs over the next seven years due to the Korea and Colombia FTAs alone). But the United States has a jobs crisis now. A decade from now, if employment finally recovers, these deals could simply end up moving jobs from one industry to another. FTAs are no answer to the jobs crisis, even in the best case.

Given the jobs crisis, why can’t we pass currency legislation that enjoys broad, bipartisan support? Why are controversial trade deals that will have, at best, a minimal impact on unemployment being rushed through Congress with a full-court press from the White House? The answer is simple. Big business opposes restrictions on China trade because they earn enormous profits on cheap and subsidized imports from China, and because low real wages in China keep a lid on wages of their U.S. workers. And big business favors FTAs, because they make outsourcing easier. So it turns out that the Occupy Wall Street group has it right. When it comes to trade, it’s not about ideology, or politics, it’s about the money.

The Tax Policy Center’s verdict on Herman Cain’s ‘999’ plan is in, and it’s not pretty for the vast majority. Last Sunday, Cain claimed on Meet the Press that his plan would lower taxes on most Americans. Analysis of the plan proves otherwise. The average household would see an $836 tax increase, with 84 percent of households paying more, relative to current tax policies. In this case, that’s what ‘broadening the base’ entails: more households paying much more in taxes.

Mr. Cain said the elderly wouldn’t be made worse off, because the elimination of capital gains taxes would offset the new taxes levied on their consumption, again a wildly unfounded claim. It turns out that 86 percent of elderly households would see a tax hike, which is unsurprising because fewer than 10 percent of households will even pay capital gains taxes this year, again according to TPC. If the vast majority is getting hosed, who’s reaping the benefit?

I recently characterized the ‘999’ plan as the inverse of the so-called ‘Buffett Rule’ that millionaires and billionaires shouldn’t be paying a lower effective tax rate than middle-class households. TPC’s distributional analysis demonstrates just this. The chart below depicts effective tax rates under current policy (blue) and the ‘999’ plan (red) across various cash income ranges.

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Under a progressive tax code, effective tax rates should rise with income. TPC treats the ‘999’ plan effectively as a 23.6 percent flat sales tax, which is in fact the final phase of Mr. Cain’s tax plan (TPC’s wonky explanation here and Howard Gleckman offers a more accessible explanation here). Upper-income households consume less of their income than middle-class families, hence lower effective tax rates and a regressive tax code. (Note: the tax code is less progressive than the blue bars suggest because the federal tax code is layered on top of regressive state and local taxes, as Citizens for Tax Justice notes in this report.)

Under ‘999,’ average tax rates would begin to fall for households with income exceeding $200,000. Households with income exceeding $1 million would see their effective tax rate roughly halved from 32.9 percent to 17.9 percent, for an average tax break of $455,000, relative to current tax policies. The top 0.1 percent of filers—those with incomes of roughly $2.7 million and above—would get an average tax cut of $1.4 million, as Jared Bernstein depicts nicely. This is where the benefit of eliminating wealth taxes (i.e., capital gains, dividends, and estate taxes) really kicks in; the highest-income 0.1 percent will pay 49 percent of all capital gains taxes this year.

The American consumer is in no position to lead the economy to recovery. Lower-income and middle-class Americans are burdened by mortgage debt and lost housing equity, underemployment, and a decade of falling real median income. In this context, I fail to see how jacking up taxes and slashing disposable income for 84 percent of the population constitutes responsible tax reform, much less a jobs plan. It’s more along the lines of kick ‘em when they’re down.

Mr. Cain’s ‘999’ plan amounts to highway robbery, not a jobs plan. It’s simple, all right, simply a massive redistribution of after-tax income up the earnings distribution.

RedState.org blogger Erik Erickson has launched a counterattack to the Occupy Wall Street’s “we are the 99 percent” campaign. Erickson’s retort: “Suck it up you whiners. I am the 53 percent subsidizing you so you can hang out on Wall Street and complain.”

What’s he talking about? This 53 percent figure refers to the share of all households who pay federal income taxes. Far too many people, hearing this statistic, miss the crucially important adjectives “federal” and “income” and take it to mean that nearly half of American households pay no taxes at all. This is clearly wrong. Essentially every adult in the country pays taxes. They pay federal excise taxes when they buy gasoline, they pay state sales taxes when they buy clothes and electronics, they pay local property taxes if they own a house, and they pay federal payroll taxes on every dollar of income they earn – unless they’re lucky enough to earn over $107,000, when Social Security taxes revert to zero.

Federal income taxes, in fact, accounted for only 37 percent of federal taxes and just 20 percent of total federal, state, and local taxes paid in 2010. So why have conservative activists like Erickson tried to privilege the income tax over others? Well, mostly because they’re hoping people think this refers to all taxes. But conservatives particularly dislike the federal income tax because it’s pretty much the only significant part of our tax code that remains progressive – though less so after a decade of Republican-backed tax cuts. (The most progressive federal tax, the tax on large estates and gifts, has been eviscerated over the last decade.)

Most taxes besides federal income taxes are flat or regressive, meaning that lower-income households pay a higher share of their income in these taxes than the rich. Citizens for Tax Justice has a great report that points out that the tax system as a whole is nearly flat – meaning that households across the income distribution are paying about an equal share of their income in taxes.

The 47 percent that pay no federal income tax that Erickson thinks he’s subsidizing are a mix of current taxpayers that just happen to have not made enough income in the current year to have income tax liability, and former income taxpayers (retired households), as explained in this post. Unlike other taxes, the federal income tax intentionally exempts subsistence levels of income from taxation, largely through the standard deduction and personal exemption. The tax code also provides an extra standard deduction for retirees, who face high costs of living, and exempts some Social Security income from taxation. Because of this, and because the effect of the earned income tax credit (EITC – first introduced in the Nixon administration and expanded under both the Clinton and George W. Bush administrations) is to offset payroll tax liability for low-earners, it is true that 18 percent of households (mostly retirees and very low-earning families with children) will face no net federal taxes on income this year. Is it really so offensive that retirees and families with very low incomes are not paying this particular tax?

One wonders where this hilarious attempt to cherry-pick tax stats to divide the world into the virtuous and undeserving will end. According the Tax Policy Center, 90 percent of tax units will pay no capital gains or dividends taxes this year – does this make the rest of us freeloaders? But wait, eliminating all taxes on capital gains and dividends is a prime goal of conservative policymakers – are they trying to replace the undeserving freeloaders with virtuous freeloaders?

Or, are they just trying to mislead people who are angry (with good reason) about the outcomes the economy is producing and threatening to pin some outrage where it actually belongs?

Eons ago, in blogtime, Ezra Klein wrote an excellent piece on policymaking in the face of the Great Recession and its aftermath. It’s a long piece with plenty to recommend, but I’ll just spend some time lingering over his reliance on the now-famous finding of Carmen Reinhart and Ken Rogoff (and the IMF) that recessions accompanied by financial crises tend to be followed by much slower and less robust recoveries.

This finding is true and useful but far too often misinterpreted. There is nothing inherent in the economics of financial crises that makes slow recovery inevitable – they just require that policymakers figure out how to engineer more spending in their wake, same as in response to all other recessions.

Rather, the real problem they pose to policymakers is that engineering such spending increases in the wake of financial crises often requires policy responses that seem unorthodox or radical relative to the very narrow range of macroeconomic stabilization tools that enjoy support across the ideological spectrum. To put this more simply – they require policymakers do more than watch the Federal Reserve pull down short-term interest rates. For decades, all recession-fighting was outsourced to the Fed’s control of short-term “policy” interest rates – this despite the fact that in the U.S. this recession-fighting tool hasn’t actually been all that successful since the 1980s (see Table 2 in this paper).

The best response to a recession that is either so deep or so infected by debt-overhangs that conventional monetary policy is not sufficient, is simply to engage in lots of fiscal support – think the American Recovery and Reinvestment Act (ARRA) – but (as Ezra notes) much, much bigger in the case of the Great Recession.

But, this kind of discretionary fiscal policy response to recession-fighting (and jobless-recovery fighting) had fallen deeply out of favor in the same decades that saw increasing reliance on conventional monetary policy[1]. In fact, advocating fiscal policy that was up to the task of providing a full recovery in the wake of crises that defanged conventional monetary policy somewhere along the way got labeled radical, rather than simply nuts-and-bolts economics.

Further, this rejection of discretionary fiscal policy was done on very thin analytical reeds – essentially the fear was that it took too long to debate, pass, and see an effect from fiscal policy – and that if the recession was “missed” in real-time by policymakers, we would end up providing lots of fiscal support to an already-recovered economy – and might even cause economic overheating that would lead to runaway inflation and interest rate spikes.

This fear led to the strange mantra in the debate over fiscal stimulus in 2008 that policy had to be targeted, temporary and timely – which basically ruled out most things but tax cuts. But, given that the last three recessions have seen extraordinarily sluggish return to job-creation in their wake, this timely obsession was clearly misplaced (and, plenty argued so in real-time).

So we’ve come to what is, I think, a big gap in Ezra’s piece – the repeated (and correct) insistence that the political system just couldn’t accommodate what nuts-and-bolts economics indicated was needed (i.e., large-scale fiscal support) for a full recovery without examining just how we found ourselves with a political system that has become deeply stupid about fighting recessions and jobless recoveries. Read more

There are now two competing proposals to fix America’s aging public school buildings and, coincidentally, give jobs to thousands of construction and maintenance workers. One will work; the other won’t.

The first, the one that would be effective, was proposed by President Obama and introduced by Connecticut Rep. Rosa DeLauro (H.B. 2948) and Ohio Sen. Sherrod Brown (S. 1597). Fix America’s Schools Today! (FAST) is a straightforward federal grant program that would send $25 billion directly to state education agencies and local school districts by formula, accounting for need, and permitting them to hire contractors to make repairs, do deferred maintenance, and make improvements in public K-12 school buildings and facilities. We estimate it could put 250,000 people back to work.

On Oct. 12, Virginia Senators Jim Webb and Mark Warner introduced the second, more complicated yet very limited bill to rehabilitate only the nation’s ‘historic’ schools, The Rehabilitation of Historic Schools Act of 2011. According to their press release, Virginia Gov. Bob McDonnell and U.S. House Majority Leader Eric Cantor also support their proposal.

As my colleague, Jared Bernstein, wrote in his blog last week, it’s good to see bipartisan support for fixing up our public school buildings. And it’s true that, as Jared pointed out, “the first step towards fixing a problem is recognizing the problem and taking responsibility for it.”

Unfortunately, the Webb-Warner Historic Schools Rehabilitation Tax Credit plan is so limited in scope that it would accomplish little in terms of either job creation or school modernization.

Their plan offers developers a federal tax credit to enter into public/private partnerships with states and school districts to help pay for modernization of schools that are on the National Register of Historic Places.

Private partners would have to purchase the historic public school building and then lease it back to the school district. As part of the sale-lease-back agreement they would modernize the historic schools using the incentive of the federal tax credit to reduce the overall cost.

However, unlike FAST, the tax credit program is small, convoluted, and slow. The President proposed rehabbing 35,000 school buildings, but there are fewer than 1,000 public schools on the National Register of Historic places. The policies, approvals, and agreements needed for school districts to enter into developer partnerships (the kind of bureaucratic and legal red tape politicians normally deplore) add a level of complexity that will take time and limit the impact on both school repairs and jobs. And poorer school districts – the ones that need help the most — just won’t be able to make use of a tax credit—they need a grant to make these repairs.

School repair and modernization shouldn’t depend on the desire of developers to secure tax credits. We ought to be simplifying the tax code, not adding to its loopholes. Having recognized both the need to improve our educational infrastructure and a federal role, Webb, Warner and Cantor should join with the president in supporting FAST.

At the very least, even if they’re wedded to using the tax code to fund school modernization, they should expand their vision beyond a few hundred historic buildings.  The problems of unemployment and substandard school infrastructure are far too big for such a narrow solution.

All politicians say they want to protect the middle class, but who belongs to the middle class? The Census Bureau puts the median household income at a shade under $50,000, and a broad definition (leaving out the bottom and top twenty percent) gets you a range of about $20,000 to $100,000, ignoring differences in household size and regional cost of living.

But the definition of “middle class” seems to expand or contract depending on the context. When it comes to shielding taxpayers from tax increases, the “middle class” tends to extend well above the $100,000 threshold. For example, the Alternative Minimum Tax is “patched” by Congress each year in the name of protecting the middle class, even though roughly three-fourths of the forgone revenue comes from households making more than $100,000. Similarly, while campaigning for president, Barack Obama famously pledged not to raise taxes on married couples with incomes under $250,000 or single taxpayers with incomes under $200,000.

But when it comes to Social Security cuts, the middle class seems to shrink. The co-chairs of the president’s Fiscal Commission, for example, proposed cuts for the “most fortunate” that reduced benefits for Social Security’s prototypical medium earner (a worker earning around $43,000 in 2010) by 19 percent. Though some of this would come from across-the-board cuts like a lower cost-of-living adjustment, even targeted (“progressive”) cuts would fall on those earning as little as $38,000.

Why go after middle class retirees? One reason is that there are few wealthy retirees and they don’t receive much in Social Security benefits. Only 7 percent of Social Security beneficiary “units” 62 and older had incomes above $100,000 in 2008 (this includes single retirees and married couples). Even if these upper-income retirees all received close to the maximum benefit of around $35,000, it’s hard to achieve substantial savings without going lower down the income scale or eviscerating benefits for higher-income retirees, who earned them through years of contributions and already rebate some through the income tax system.

While trimming benefits for high-income retirees doesn’t get you very far, a modest payroll tax increase on high-income workers does. Currently, earnings above $106,800 are exempt from Social Security taxes. Taxing all earnings equally would all but eliminate Social Security’s long-run shortfall. Alternatively, removing the cap on the employer side and indexing it to cover 90 percent of earnings on the employee side (as it did in the early 1980s when Social Security was in long-term balance) would close around 70 percent of the shortfall if benefits are based on the employee contribution. This has the advantage of neither raising employee taxes nor creating outsize benefits.

Despite strong public support for lifting or eliminating the payroll tax cap, politicians like Texas Governor Rick Perry insist on keeping alive the idea that the projected Social Security shortfall can and should be closed by “means testing” benefits for high-income retirees. Going after AARP-card-carrying Lexus drivers living in gated communities (as Fiscal Commission co-chair Alan Simpson characterized opponents of benefit cuts) may sound like a good idea until you realize how elastic class categories are. In fact, even those of us who drive old Chevy Prizms and live in rental apartments had better watch out.

In an eloquent veto message of a school accountability reform bill last weekend, California Governor Jerry Brown articulated an alternative to the narrow standardization of schooling and the promotion of misleading quantitative test score measures that have characterized American education in the last generation.

Most observers recognize that as government increasingly held schools and teachers accountable primarily for the math and reading test scores of their students, schools inevitably narrowed their curricula to minimize attention to other important educational outcomes, substituted test preparation and test taking skills for real learning, and even engaged in cheating to meet politically determined targets.

Some policymakers have recently attempted to address these problems by advocating accountability for “multiple measures.” Their reasoning has been that the corruption of education that results from a near-exclusive focus on basic skills in math and reading can be ameliorated if other indices can be added to accountability systems to supplement the math and reading test scores. This was the goal of the California bill, sponsored by liberal Democrats, and sent to Brown for signature.

But because other important outcomes of education – like character, inquisitiveness, citizenship, civic awareness, historical reasoning, scientific curiosity, good health habits – cannot be standardized like math and reading scores, proponents of “multiple measures,” like the California senators who crafted the bill, are left with adding indices like attendance rates, parent satisfaction, graduation rates, the number of students taking advanced placement courses, and the like. But this does little to divert schools’ obsession with math and reading test scores, since they remain the only academic outcomes that count.

As Brown observed, “adding more speedometers to a broken car won’t turn it into a high-performance machine.”

In his veto message, Brown recalled an aphorism of Albert Einstein: “Not everything that counts can be counted, and not everything that can be counted, counts.” The bill, Brown said, “nowhere mentions good character or love of learning. It does allude to student excitement and creativity, but does not take these qualities seriously because they can’t be placed in a data stream.”

Brown invited the legislature to work with him to devise a truly workable accountability system for education, one that relies on qualitative evaluations by “panels [that] visit schools, observe teachers, interview students, and examine student work.”

The Broader, Bolder Approach to Education campaign has advocated such a system, and described it in more detail in a statement issued by nationally prominent educators and policy experts. The system is also described in Grading Education: Getting Accountability Right. If the panels that Brown advocates are constituted with appropriate experts in curriculum and instruction, and include members of the public as observers, they have the potential to finally provide citizens with the ability to distinguish effective from ineffective schools in their state and communities.

It is encouraging that California State Senator Darrell Steinberg responded to Brown’s veto message with a willingness to work with him to design such an accountability system. Should they succeed, it could signal that some in the nation may finally be ready to turn away from a well-intentioned but destructive reduction of schooling to the standardized tests that can, at best, measure only a small aspect of education.

High-profile education “reformers” in Washington, D.C., New York, and Chicago have asserted over the past decade that test-based accountability, whether for teachers (D.C. and N.Y.) or schools (Chicago) is key to student improvement. They have accused those who note the well-documented impact of poverty on academic achievement of “making excuses.”

Ten years in, what do they have to show for these resource-consuming “no excuses” initiatives? The answer seems to be very little, and maybe less than that. Recent reports on Chicago and Washington schools find little improvement in student achievement overall, with the white-black and rich-poor achievement gaps reformers promised to close actually widening in some cases. In New York, rewards for high-performing teachers proved so ineffective in raising test scores that the city abandoned them.

Michelle Rhee’s tenure as D.C. Public Schools Chancellor provides a stark example. Rhee invested $4 million in her new teacher evaluation system in 2009 and fired 1,000 educators in her 3 ½ years based heavily on test scores biased in favor of wealthier students. Current status? A stubborn achievement gap and apparently rampant cheating. In schools serving lower-income students especially, high stakes have also likely led to the substitution of real learning for test prep, to those students’ detriment. 

Two D.C. schools illustrate the strong correlation between test score disparities and the concentration of low-income students. In a January Washington Post article, Bill Turque notes that at Horace Mann Elementary School, with a 73 percent white student body and only 4 percent of students qualifying for free or reduced-price lunch, around 90 percent of students meet or exceed district achievement standards. Across town at Stanton Elementary School, where 85 percent of students qualify for free or reduced priced lunch, only 9 percent of students met or exceeded 2011 math and reading standards.

Rhee’s regime of test prep for students and tough accountability for teachers did little to narrow these gaps because it ignored the more complex and challenging issue of poverty. Ineffective teachers and principals clearly impede learning. But the variation in teacher quality is overwhelmed by the variation in social and economic conditions that promote (or limit) children’s readiness to learn. The failure of a small-carrot large-stick approach to attaining teacher “excellence” should give serious pause to the certainty of “reformers” like Michelle Rhee. It also challenges their assertions that acknowledging the effects of lack of early childhood education, excess mobility, family stress, and poor health on student outcomes amounts to “excusing” teachers. Rather, the “no excuses” crowd must stop excusing itself.

Fiscal year 2012 kicked off on Oct. 1 to an economy roughly $1 trillion (-6.2 percent) below potential economic output—the level of economic activity that would be associated with full employment and industrial capacity utilization. This economic slack has significant consequences for the budget deficit because revenues are lower and more Americans rely on the social safety net.

Recently, the Congressional Budget Office estimated that this portion of the budget deficit attributable to economic weakness is $340 billion this fiscal year (FY2012). In other words, if the unemployment rate were closer to 5 percent, the budget deficit would be around a third lower than its projected level ($973 billion, or 6.2 percent of GDP). CBO’s methodology and older estimates can be found here.

While sizable, these estimates understate the impact of the recession on the budget by only focusing on economic variables and ignoring deliberate legislative efforts to prop up the economy. Objectively stimulative provisions in last December’s tax and insurance compromise added $124 billion to this year’s deficit (in addition to the $299 billion added to the deficit by extending current tax policies), the Recovery Act added $49 billion, and supplemental stimulus extensions (UI, helping states with their Medicaid bills, and a teachers’ jobs fund) added $1 billion. Similarly, tax deal stimulus added $157 billion to last year’s deficit, the Recovery Act added $163 billion (net of the alternative minimum tax patch, which wasn’t stimulus), and supplemental stimulus extensions added roughly $47 billion to last year’s deficit.

Adjusting the budget deficit (less cyclical contributions) for these legislative decisions, the effective impact of the recession is closer to $699 billion last year and $514 billion this year, or about 54 percent of last year’s actual budget deficit and 53 percent of this year’s deficit.

Even adjusting for legislated economic support underestimates the impact of the recession, because many economically sensitive projections, such as decreased revenue from capital gains realizations, show up in CBO’s ‘technical revisions’ rather than the cyclical economic revisions. Technical revisions are residual non-legislative, non-economic changes in projected receipts and mandatory outlays, influenced by factors such as the distribution of tax filers through income brackets or effective tax rates. Kitchen (2003) finds that economic and technical revisions demonstrate a statistically significant and close relationship, particularly with personal income receipts. Since the start of the recession, technical revisions to CBO’s budget outlook have cumulatively added $139 billion to the FY2011 budget deficit and $246 billion to the FY2012 deficit.

Stripping out the combined impact of cyclical economic factors, stimulus legislation, and technical revisions, this year’s structural deficit would be $223 billion, or 1.4 percent of GDP. Last year’s structural deficit would have been $446 billion, or 3.0 percent of GDP. Put differently, a host of recession-related factors account for at minimum half and upwards of 65 percent of last year’s deficit and 77 percent of this year’s deficit.

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This analysis shows just how sensitive the budget is to economic activity and employment. Unfortunately, the economy faces a big drop off in deliberate fiscal support between last year and this year. Goldman Sachs recently estimated that under current law, U.S. fiscal policy will shave 1.8 percentage points from GDP growth in calendar year 2012 (or one percentage point even if the payroll tax cut is extended). We estimate that the debt ceiling deal’s initial spending cuts, coupled with failure to extend the payroll tax cut and UI, would shave 1.5 percent off growth and lower employment by 1.8 million jobs in 2012.

Congress needs to change course and enact more economically supportive policy to put millions of Americans back to work and improve the fiscal outlook.

Researchers from the UC Berkeley Institute for Research on Labor and Employment released a paper today that shows clearly and persuasively that the state budget crisis that continues to cripple most states has been caused by the bursting of the housing bubble and the persistent recession (and very weak recovery), not as many contend, by the presence of public sector unions.

The authors, labor economist Sylvia Allegretto, Ken Jacobs, and Laurel Lucia, connect the dots: the economy fell off a cliff and unemployment hit double digits, simultaneously increasing demands for state services and decimating state tax systems reliant on income and consumption, and then political opportunists lined up to identify scapegoats for widespread state revenue crises. Allegretto et al.’s paper separates the research data wheat from the political rhetoric chaff.

Step one shows that state and local government employment has remained remarkably consistent over the past 30-plus years, hovering between 14 percent and 15 percent as a share of total non-farm employment. During the recession, it bumped slightly above 15 percent primarily because the denominator, total employment, shrunk dramatically. Can the current acute fiscal distress be blamed on steady public sector employment? Hardly.

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As seen in the map, there is considerable variation between states in the share of total employment comprised of state and local government employees. The states with the largest share of state and local government employees may surprise some – it’s generally not states that are normally associated with “big government.” Moreover, in step two, the authors demonstrate that there is no statistical correlation between higher public union density and share of public sector employment.

Steps three and four show that public sector compensation as a share of state budgets has actually declined over the past two decades, and summarizes new research (including IRLE research, The Truth About Public Employees in California: They are Neither Overpaid Nor Overcompensated) showing that public sector employees are not overcompensated.

Having demonstrated that public sector workers are not to blame for state fiscal woes, the authors drill down to the real cause of state fiscal distress – the bursting of the housing bubble. They find that regardless of public sector union strength, “house price declines [resulting from the bursting of the housing bubble] were, to a large extent, a central reason why state budgets are in such dire straits.”

The real take-away of this paper – “It’s the economy, stupid!” – highlights the path needed to further revive state fiscal conditions. Putting American workers back to work will breathe new life into both income tax revenues and state sales taxes. It’s time to focus on the real crisis facing America, rather than being distracted by so many paper tigers.

Last night, Congress passed a free trade agreement for the first time since 2007. In fact, it passed three.

Behind vast Republican support, the House and Senate approved trade deals with Colombia, Panama and South Korea. This came, of course, one day after Senate Republicans killed President Obama’s jobs bill. These trade agreements should be a boon for jobs, right?

Not so fast. Robert Scott, EPI’s Director of Trade and Policy Manufacturing Research, estimates that 214,000 net U.S. jobs will be lost or displaced in the first seven years under the FTAs with Colombia and South Korea.

“With 14 million unemployed, these deals will only further burden our domestic economy, which is already teetering on the brink of another recession,” wrote Scott in a statement today.

Supporters of the FTAs, however, claim the deals will create tens or hundreds of thousands of U.S. export jobs. That would sound great if it wasn’t so naive.

As Scott points out in this week’s snapshot, trade both adds to and subtracts from the demand for workers. While the growth of exports supports domestic employment, the increase of imports displaces American jobs. Scott says counting export jobs while ignoring imports is like “trying to run a business while ignoring expenses.”

In 1993, the Clinton administration also had high hopes for job creation when the U.S. and Mexico signed the North American Free Trade Agreement. They claimed NAFTA would “create an additional 200,000 high-wage jobs related to exports to Mexico by 1995.”

Before NAFTA, the U.S. had a trade surplus with Mexico. By 2010, the U.S. had a trade deficit with Mexico and had lost or displaced 682,900 jobs. Free trade, anyone?

Clive Crook blogs on my paper, Regulatory uncertainty: A phony explanation for our jobs problem, and finds it “clever and interesting but not all that persuasive.” He reports that the paper finds “Trends in investment (this recovery, weak as it may be, has been “investment-led” by historical standards), in hiring, and in hours worked all suggested that lack of overall demand is the problem,” and does not dispute any of the conclusions. Crook just thinks I should have written a different paper:

“First, the focus on regulatory uncertainty seemed too narrow. What about other kinds of policy-induced uncertainty? Second, its target–the idea that regulatory uncertainty as opposed to weak demand is the cause of slow growth–is a straw man. Who is denying that weak demand is a factor, or even the larger factor of the two?”

Well, I do think there are a ton of important people denying that there is any demand problem whatsoever, or at least one that can be addressed by policy. How else can there be an essentially uniform view among the Republicans that the initial stimulus had zero effect? How else to explain that the program of each candidate for the Republican presidential nomination has an exclusively ‘supply-side’ approach which basically boils down to fiddling with the structure of taxation? How else to explain the recent contention by the top four Republican leaders in Congress that the Federal Reserve should take no further policy actions to expand demand? It is hard not to notice that conservatives and Republicans are seeking immediate reductions in federal spending, which can only exacerbate any demand-side problem. Perhaps Crook should supply some examples of leading conservative economists and Republican leaders saying there is a demand problem, that it is a ‘larger factor’ than uncertainty, and of the proposals they are advancing to address the demand shortfall.

That my analysis focused on regulatory and tax uncertainty was not arbitrary, of course; this is what conservative economists, business trade associations and Republican politicians are saying is the sole reason for high unemployment, and I offered several (of numerous possible) examples. They do not talk about other types of uncertainty when trying to explain persistent high unemployment and slow job growth. They focus on regulations and taxation because they are claiming that Obama administration policies and proposals are inhibiting job growth. In fact, just last week, House Republicans “dared President Obama and other Democrats to support two bills that would delay two pending Environmental Protection Agency (EPA) rules, a move they said would have a more immediate effect on jobs than anything Obama has proposed.” I am confused why Crook does not understand that examining the employment and investment impact of tax and regulatory uncertainty is a key question in current policy debates.

Crook suggests a broader uncertainty lens, which to me is changing the topic. He points to a recent paper by Scott Baker, Nicholas Bloom and Steven Davis which attempts to measure uncertainty and finds:

“Index values are high in recent years and show clear jumps associated with the Lehman bankruptcy, the 2010 midterm elections, the Euro crisis and the U.S. debt-ceiling dispute. … Greater policy uncertainty in 2011, relative to 2006 levels, lowers GDP by about 1.4 percent and employment by about 2.5 million…”

I am not persuaded that the measurement of uncertainty in this paper is worthwhile since their metric relies heavily on news citations; consequently, when the conservative echo chamber screams about a topic their index captures these claims as real economic concerns. Nevertheless, it is interesting that the paper’s results in no way support the conservative/Republican/business association claim that Obama’s policies have inhibited job growth. Note that the paper’s conclusion estimates the impact of uncertainty from 2006 to the first half of 2011, so it covers much ground before Obama was even elected. If you look at the paper you will see that the main spikes in policy uncertainty (see their Figure 1 below) are due to the Lehman implosion, the TARP legislative debate and the banking crash, all of which pre-date Obama, and that by far the largest spike in uncertainty under Obama was the ‘debt ceiling dispute.’

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Now, in my view and I think in most objective observers’ views, the debt ceiling fiasco was a crisis totally manufactured by Republican politicians. So, if uncertainty hurt job growth, then one should point at those responsible for the financial crisis and the debt ceiling debacle. Crook has clarified one thing for me. Anyone claiming uncertainty is holding back the economy needs to identify the particular types of uncertainty and who’s responsible for those uncertainties—Obama, Republican policymakers, both or neither. The case that Obama’s policies are generating job-killing uncertainty has not been substantiated and the intense emphasis by conservative/Republican/ business association leaders on tax and regulatory uncertainty is a counterproductive distraction from advancing the demand-side policy changes necessary to move the economy forward.

In an interview with the Wall Street Journal, GOP presidential candidate Herman Cain responded to a question about the Occupy Wall Street protests by saying, “Don’t blame the big banks. If you don’t have a job and you’re not rich, blame yourself.”

Here are the facts: This morning, the Bureau of Labor Statistics (BLS) released new data from the Job Openings and Labor Turnover Survey showing that there were nearly 3.1 million job openings in August. However, we know from other BLS data that there were 14 million unemployed workers in August. In other words, there were nearly 11 million more job seekers than job openings.

The ratio of unemployed workers to job openings is now 4.6-to-1. A job seeker’s ratio of more than 4-to-1 means there are literally no jobs available for more than three out of four unemployed workers. In a given month in today’s labor market, the vast majority of the unemployed are not going to find a job no matter what they do. It is wrong, not to mention cruel, to call this their fault.

Mr. Cain went on to explain that he doesn’t “understand these demonstrations and what is it that they’re looking for.” For many, the answer is simple: jobs. National politics wrongly vilifying the unemployed while ignoring the economic fundamentals of a severe aggregate demand slump, however, are blocking an appropriate fiscal response that could put millions of Americans back to work.

In education policy, Congress and President Obama’s administration continue to seek an unrealizable national whip that will somehow transform American schools for the better. These efforts ignore both evidence and common sense.

The latest example is a proposal developed by Senate Democrats to re-authorize the Elementary and Secondary Education Act (known recently as “No Child Left Behind,” or NCLB). Democratic Senator Tom Harkin of Iowa, chairman of the Senate education committee, has drafted a bill that will relieve states of having to meet federally specified achievement goals in math and reading. Instead of requiring all students to be “proficient” in these basic skills by 2014 (as NCLB demands), or to be “college ready” by 2020 (as the Obama administration proposes), the Harkin bill will require only that schools show “continuous improvement” for all students, and for students from low-income families, those who don’t speak English, minority students, and students with disabilities (see page 52 of the draft bill).

According to a report in Education Week, “state and local officials likely will be exchanging high-fives, since that would give them much of the flexibility they’re looking for.”

They are in for a shock. “Continuous improvement” is no more reasonable or achievable than “proficiency for all,” or universal college readiness.

Of course, citizens should expect every public school to strive for its peak level of performance, but some schools have much farther to go to reach this level than others. Unlike present policy, a well-designed accountability system could judge how far each school can and should go, and whether it is on the right track to get there for the several populations it may serve. In each case, this is a difficult judgment to make, and a slogan is no substitute. In this regard, a single one-size-fits-all metric such as “continuous improvement” is no better than “proficiency for all.” The Broader, Bolder, Approach to Education campaign has described the outlines of a more reasonable accountability system, and a book, Grading Education, goes into more detail.

NCLB’s attempt to require all students to be proficient at a challenging level led to the absurd result that nearly every school in the nation was on a path to be deemed failing by the 2014 deadline. The demand ignored an obvious reality of human nature – there is a distribution of ability among children regardless of background, and no single standard can be challenging for children at all points in that distribution.

Expecting all children to be college-ready suffers from the same problem, and more. In a nation where 32 percent of all young adults now earn bachelor’s degrees, and where the Bureau of Labor Statistics projects that only 30 percent of job openings by 2018, even in a healthy economy, would require a bachelor’s degree or more, the notion that 100 percent of students would be able to succeed in an academic college by 2020 is even more fanciful.

So why not “continuous improvement” instead? It’s a nice slogan, borrowed from a management fad promoted by W. Edwards Deming and others who thought this was the key to Japanese auto manufacturing success. But while consistent attention to small improvements makes sense as a management tool, no company has ever continuously improved, overall, indefinitely. There are spurts of improvement, and plateaus, and then the most successful companies fade, to be overtaken by others. No management expert would recommend that firms be dismantled if they are consistently profitable, but just not more profitable year after year after year.

But continuous improvement will now, if Senate Democrats have their way, be the trajectory for every school in the country, by law. Read the rest of my commentary here for more on why the expectations of Congress have no basis in reality.

Back when the “Gang of Six” was the fiscal flavor of the week and Sen. Tom Coburn (R-Okla.) was sparring with Grover Norquist over ethanol subsidies, I wrote that Norquist’s Taxpayer Protection Pledge is the height of fiscal irresponsibility. The pledge unconditionally rejects any net reduction in tax credits, deductions, or increase in rates unless matched dollar-for-dollar by some other tax reduction. (The pledge should have lost some of its gravitas when conservatives decided it didn’t apply to the payroll tax cut enacted last December.)

Since then, a rigid refusal to restore any revenues from levels diminished by current tax polices led Republican leadership to repeatedly walk out of debt ceiling negotiations, first with Vice President Biden and then again with President Obama. Instead of a grand bargain containing more desperately needed support for the faltering economy, our political system delivered an eleventh hour debt ceiling deal that prompted a credit rating downgrade from Standard & Poor’s, albeit on specious grounds (they made a $2 trillion baseline error but continued with the downgrade based strictly on political judgments). A stage of Republican presidential candidates unanimously declared that they would oppose a budget deal with 10 dollars in spending cuts for every dollar in new revenue.

Now, an impasse over revenue suggests that the super committee (tasked with negotiating the second phase of the debt ceiling deal) will go down in flames. This would trigger further discretionary spending cuts—the $111 billon cut slated for FY2013 would wallop GDP growth a year from now—and all but rule out more near-term fiscal support (due to limited borrowing headroom). The pledge is also hindering initiatives to put millions of Americans back to work; House Majority Leader Eric Cantor (R-Va.) recently proclaimed the American Jobs Act dead, having objected to its revenue offsets. Advantage Norquist?

Not so fast. Last Tuesday, Rep. Frank Wolf (R-Va.) excoriated Norqusit for guarding spending through the tax code, obstructing tax reform, and thwarting deficit reduction deals. “Have we really reached a point where one person’s demand for ideological purity is paralyzing Congress to the point that even a discussion of tax reform is viewed as breaking a no-tax pledge?” Wolf, who is one of only six House Republicans who have not signed Norquist’s pledge, came to Coburn’s defense a little too late, but this is nonetheless encouraging. Shortly thereafter, Taxpayer Protection Pledge signee Sen. John Thune (R-SD) said that Congress can’t be “bound by” pledges if it wants to enact comprehensive tax reform. Michael Gerson understands that pledge ideology rules out political agreement on long-term deficit reduction, and his attempt to fault the president’s emphasis on tax “fairness” as being equally unproductive is preposterous (he must have repressed all memories of the debt ceiling negotiations, and for good reason).

One by one, conservatives may be coming to the realization that the pledge is incompatible with fiscal responsibility of any form. Perhaps it helped that President Obama threatened to veto any budget deal that cuts Medicare without raising more revenue from upper-income households and businesses. Hopefully a critical mass of conservatives will stray from the herd of deficit peacocks and prioritize reducing the long-term budget deficit rather than blindly obsessing over the level of government spending.

My research has shown that the growth of the U.S.-China Trade deficit since 2001 has displaced or eliminated 2.8 million American jobs, and that eliminating currency manipulation by five countries in Asia (including China) could create up to 2.25 million U.S. jobs in the next 18-to-24 months. Dan Ikenson of the Cato Institute has responded with a graph which appears to show “a positive relationship” between “the bilateral trade deficit and jobs… when the deficit increases, U.S. employment rises; when the deficit shrinks, U.S. employment declines.” If Ikenson is right, there’s a simple policy solution: just eliminate exports!

Increasing exports reduces the trade deficit. In Ikenson’s world, this shrinks employment.  In Ikenson’s model, eliminating exports increases the trade deficit and creates jobs. If he’s right, we should eliminate all exports, which totaled about $1.8 trillion last year. That will provide a HUGE boost to employment and the economy.

President Obama and all the business executives on his export council, such as Boeing Chair W. James McNerney, must be wrong if Ikenson is right. Exports are really the problem, and the president’s campaign to double exports will only make our terrible unemployment problems worse.

Last Wednesday, Senator Orrin Hatch used a graph very similar to the one developed by Mr. Ikenson to criticize my estimate that China trade has displaced 2.8 million jobs. The senator’s chart compares only U.S. imports and employment—he was careful to avoid bringing exports into the discussion. But his chart otherwise echo’s Ikenson’s work.

The basic problem with both charts it that they ignore basic economics and simple rules of national income accounting. In the national income accounts, exports contribute to Gross Domestic Product (and employment); imports reduce GDP and employment. Every quarter, the Bureau of Economic Analysis in the U.S. Department of Commerce publishes GDP statistics based on these national income accounts, and they have been a foundation of macroeconomics for generations. Economists from EPI and many other leading institutions, including the Federal Reserve bank of New York, have estimated the job impacts of trade in recent years by netting the job opportunities lost to imports against those gained through exports. But in the world of Senator Hatch and Mr. Ikenson, increasing imports are good for employment and exports are bad: what’s down is up and up is down. It’s economics Through the Looking Glass:

Alice laughed. “There’s no use trying,” she said: “one can’t believe impossible things.”

“I daresay you haven’t had much practice,” said the Queen. “When I was your age, I always did it for half-an-hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast.”

(Lewis Carroll, Through the Looking Glass, Chapter 5).

Last week on NPR, Robert Reich did a nice segment connecting the (not exactly cryptic) dots between high rates of unemployment, extraordinarily low interest rates, and the clear benefits of improving the nation’s infrastructure. However, he noted that the extraordinarily low interest rates meant that we could borrow cheaply (to fund infrastructure projects that would re-employ people – in case that part wasn’t obvious) “from the rest of the world.”

Actually, the low interest rates also mean that we (or the federal government) can borrow much more cheaply from ourselves (i.e., American households and businesses) too. And since the beginning of the Great Recession, we’ve been doing that more and more. While Federal borrowing has risen sharply (both a symptom of and sensible response to the recession), private savings – both household and business – have sharply increased. In fact, the upward swing in household and business savings is larger than the upward swing in federal government borrowing. This means that we are borrowing much less from the rest of the world than we were even before the Great Recession hit (in fact, it’s currently less than half as much as we were borrowing at the height of the housing bubble in 2005).

This is, of course, both bad and good news. The bad news is that the huge upward swing in private savings means that private spending is way, way down – and that’s why the economy remains so sluggish. The good news is that domestically financed increases in federal budget deficits means that, despite all the overheated rhetoric decrying them, there is no direct generational implication of them – we’re borrowing from ourselves and we’ll just pay it back to ourselves at a later date (for the long version of this argument, see here). More good news is that today’s low interest rates are no fluke or quirk that will quickly reverse – they are the inevitable consequence of this huge upward surge in private savings, and they will remain with us as long as the economy keeps operating so far below potential. Low interest rates, however, have not proven a panacea for growth, hence the need for bigger budget deficits to get us back to full employment.

Unfortunately, the past few quarters have seen U.S. borrowing from the rest of the world increase again – the mirror image of the increase in the trade deficit that has dragged on growth in that time. This trade deficit, in turn, highlights yet again the need to do something to allow the dollar to reach a level that keeps pre-Great Recession levels of trade deficits to return. If we do this, then we can borrow from ourselves to both fund economic recovery and a better infrastructure.

Click figure to enlarge