The Bureau of Labor Statistics' latest employment report shows that unemployment dropped to 9.4 percent, the largest percentage-point drop since April of 1998. However, much of the reason for the decline was a drop of 260,000 in the size of the labor force. While the reported gain of 290,000 jobs in BLS' household survey is healthy, it's inconsistent with so many people leaving the labor force and may just be an aberration. It is worth noting that average weekly unemployment claims are still averaging more than 400,000. The economy did not start generating jobs at all following the last recession until weekly claims fell below 400,000 in 2003.
On the whole, this report does not suggest a very positive picture of the labor market going into 2011. The decline in the unemployment rate is certainly positive, but with employment-to-population ratios (EPOPs) hovering near their low point for the downturn, the main story appears to be people giving up looking for work. Furthermore, there is no sector that appears to be experiencing robust job growth at the moment, nor any likely candidates for the near future.
Across the nation, federal employees are getting undeserved lumps of coal in their Christmas stockings this year. When President Obama signed the 2 1/2-month extension of government operations yesterday, it included a 2-year pay freeze for federal workers. While the White House argues that the freeze will save $5 billion by the end of 2012, CEPR's Dean Baker points out that this reduction in money that federal workers have to spend will lead to drops in private sector employment in 2011 and 2012 of 7,000 and 18,000 jobs, respectively.
(Actually, calling this a shortfall in Medicare is unfair, because three-quarters of funding for Parts B and D comes out of general revenue. So long as this is true, Parts B and D will always run deficits totaling 75 percent of spending… even if spending is cut 99 percent!)
From where did such a large deficit reduction come? According to the report “the decrease is primarily attributable to provisions of the ACA as amended by the Health Care and Educational Responsibility Act of 2010”—that is, the recent health-care reform. Total costs of running Medicare—Parts A, B, and C-- are projected to be 5.3 percent of GDP over 75 years compared to 7.4 percent last year. In other words, health-care reform is projected to save Medicare 28 percent.
It is important to realize just how large (2.1 percent of GDP) are the savings that the recent health care legislation has offered. By comparison, the shortfall in Social Security is $5.8 trillion, or 0.6 percent of GDP. In other words, the fall in Medicare deficits have fallen by enough to cover that of Social Security more than three times over.
Anyone who frets over the Social Security “crisis” should be overjoyed by the ACA and working to strengthen and extend heath care reform—not aiming to further lower the retirement prospects of current and future retirees.
Initiated in late 2007, the Term Auction Facility (TAF) was the first of the Federal Reserve’s many liquidity facilities intended to stem a financial collapse by providing financial institutions with emergency funding. The TAF was intended to alleviate some of the stigma on Wall Street against borrowing from the central bank’s discount window. The program was structured to provide low-interest, short-term loans (set to mature in either 28 or 84 days) to all eligible depository institutions, with investment-grade assets held as collateral. The terms and specific beneficiaries of the facility were kept secret until earlier this month, December 2010, when a Congressional mandate forced disclosure.
We now know that hundreds of banks, both American and foreign-based firms, accessed short-term funding through the Federal Reserve’s program. In cumulative terms, the Fed auctioned off over $3.8 trillion through the TAF, from late 2007 to early 2010. The top ten participating institutions at the TAF accounted for nearly $1.8 trillion – or nearly half – of cumulative borrowing from the Fed.
The following newsletter highlights CEPR's latest research, publications, events and much more.
CEPR on the Road CEPR Co-Director Dean Baker has been busy speaking about the tax deal and debating the deficit hawks. On December 1st, he was on a panel about the Fiscal Commission and alternative progressive blueprints for economic recovery with Nobel Laureate Joseph Stiglitz at the National Press Club. On December 16th he appeared on a panel on the effects of deficit reduction on the disadvantaged at the Brookings Institution. (You can watch a video of the panel here). And the very next day he was at the Aspen Institute, debating Grover Norquist and Andrew Stern on the “Contours of US Deficit Reduction”. You can hear what Dean had to say about “shared sacrifice” here.
CEPR Senior Economist Eileen Appelbaum was at the Department of Labor last week, meeting with top officials to share the results of a study she completed with CUNY’s Ruth Milkman on the effects of California’s Paid Family Leave law, six years after its implementation. Look for the formal release of the paper in mid-January, including events in both Sacramento, CA and Washington, DC.
CEPR Director of Domestic Policy Nicole Woo was a panelist at a conference held by the White House Initiative on Asian Americans and Pacific Islanders (AAPI) on December 10th. She presented CEPR's research on AAPI workers and recommended improvements to the data collected about AAPIs in the Census Bureau's main data sets.
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I’m getting to this late, but the New York Times’ David Leonhardt and Mother Jones’ Kevin Drum started a discussion earlier this week on whether a social safety net –especially the availability of health insurance– could actually promote entrepreneurship in the United States.
Guaranteeing people a decent retirement and decent health care does more than smooth out the rough edges of capitalism. Those guarantees give people the freedom to take risks. If you know that professional failure won’t leave you penniless and won’t prevent your child from receiving needed medical care, you can leave the comfort of a large corporation and take a chance on your own idea. You can take a shot at becoming the next great American entrepreneur.
Still, I remain curious about the Leonhardt argument, which is a common one in the liberal community. Is it true? Does knowing that you have a safety net make you more likely to get up on the trapeze and try something risky and new? The analogy is wonderful, but that doesn’t make it true. Surely, though, this is a testable hypothesis? Not a provable one, of course, but one where evidence can be amassed on different fronts based on measurements of social safety nets in different times and places vs. risk-taking behavior in different times and places. Has anyone ever done this? It seems like a pretty obvious thing to try to study.
The short answer is yes, economists have looked at this issue, and the evidence generally supports the view that a safety net supports self-employment and small businesses.
The New York based Fiscal Policy Insitute has a great new report (pdf) out on rising economic inequality in New York state and New York City. The FPI researchers have used state income tax data to do a state-level analysis of income concentration, modeled on the path-breaking research by Thomas Piketty and Emmanuel Saez, who used IRS data to look at national income inequality in the United States from 1913 to the present.
Here are just a few highlights. First, over the last 30 years, economic inequality increased more rapidly in New York state than it did in the economy as a whole, and more rapidly in New York City than it did in New York state.
Source: Fiscal Policy Institute.
Second, the middle and the bottom saw their share of total New York City income plummet since 1990.
Source: Fiscal Policy Institute.
Third, the increase in income inequality in the United States far outpaced what has happened in other rich economies.
Source: Fiscal Policy Institute.
I particularly like that the report attributes the rise in economic inequality primarily to political processes. FPI specifically rejects the standard economic explanation for rising inequality –a “skills shortage” that drives up wages of highly skilled workers at the top. “Among the well educated, too, there is an enormous degree of income polarization,” they write. “Those with the highest incomes do not simply have the best education. Something else must be at work since education, however important on an individual level, simply cannot serve as a compelling explanation for increased income concentration.” (p. 18)
That could have been the lead of a front page Washington Postnews story reporting on a press conference in which former President Bill Clinton touted the budget deal that President Obama negotiated with the Republicans. Remarkably, President Clinton's record on these issues was never mentioned in the article.
As many former aides have acknowledged, President Clinton had been considering a variety of options for partially privatizing Social Security in the beginning of 1998 when the Lewinsky scandal exploded. With his presidency in jeopardy, Clinton had to rely on his core constituencies -- labor, the African American community, women's organizations -- all groups that would have been infuriated by an effort to privatize Social Security. As a result, Clinton was forced to abandon this effort.
President Clinton also set the economy on a path of bubble led growth, touting the stock market bubble that drove growth in the late 90s.
He also pushed for the financial de-regulation that helped clear the way for the abuses of the housing bubble era. In addition, he also actively promoted the high dollar policy that led to the enormous trade deficit, which was another major imbalance distorting the economy's growth path.
During his campaign, President Obama openly criticized this bubble-led growth path. Competent news reporters would have pointed out the irony that at this moment Obama now appears to be embracing the economic legacy he criticized. They also would have pointed out that Obama is relying on a Democratic president who was actively planning to privatize Social Security, ostensibly to curb fears that his deal could lead to the privatization of Social Security.
Mary Bottari has a good post on the Federal Reserve Bank’s role in the ongoing financial bailout. The media and voters have focused on the Troubled Asset Relief Program (TARP) legislation passed in a hurry late in 2008. But, as Bottari emphasizes, the TARP is only a minor part of the federal bailout of the banks. As she writes: “TARP funds were a mere seven percent of total funds disbursed by federal government to aid the financial sector since 2007 … the more we focus on the much-despised TARP, the less we see the invisible hand of the Fed doing the heavy lifting.”
The most important elements of the government intervention on behalf of the financial sector have been Fed actions: low interest rates and Fed asset purchases. Rock-bottom interest rates have allowed banks to borrow money from the Fed at close to no cost and then to lend those funds to the Treasury at a several-percent, zero-risk, profit. (Maybe we should allow unemployed workers to form “banks” like these. It would take a lot of pressure off state unemployment insurance systems.)
The Fed has also purchased a lot of troubled assets from financial institutions, helping to clear those bad loans from the private sector’s balance sheets in quantities that dwarf the Bush administration’s TARP.
Where I differ from Bottari is on the implications for taxpayers. She argues that the Fed’s actions put taxpayers at risk. But, even if every asset the Fed bought suddenly lost all its value, US taxpayers need not be on the hook for any of the losses. The Fed has limitless ability to print money. The only risk here is that the Fed’s actions increase the money supply and that this results in inflation. But, as with other discussions of Fed policy (quantitative easing, for example), the challenge we face now is deflation, not inflation, so the risks are slight.
The spirited and principled rejection of the tax cut compromise by progressive Democrats in Congress is as welcome as it is unexpected. The deal between the White House and the Republicans , as Bob Borosage of Campaign for America’s Future observed, was “far more a deal to keep the economy from slowing than to get it going.” Facing negotiations with a nihilistic Republican leadership, avoiding a complete stalemate in which workers lost much needed unemployment insurance benefits, the Bush tax cuts for the middle class were rescinded, and low-income working families lost the expanded earned income tax and child tax credits seemed to be as much as could be hoped for.
The price exacted by the Republicans was steep: extension of the Bush tax cuts for the top 2% of households, exemption from inheritance taxes for estates up to $5 million dollars and a 35% maximum rate on estates in excess of that amount, and a 15% maximum tax rate on income from dividends and capital gains. As progressive Democrats in Congress have made clear, tax breaks for the wealthiest Americans are not only unconscionable but they make no economic sense. The Congressional Budget Office ranks these types of tax cuts as among the least effective ways to increase growth and jobs.
All the happy talk from the Administration and some economists about the boost to growth and jobs from the tax cut deal is just that – happy talk. Allowing tax cuts for the middle class and unemployment benefits for the long-term unemployed to expire would reduce incomes and are contractionary; letting them continue, however, does not raise incomes in January above where they were in December so these policies provide no additional stimulus to the economy. Very little in the tax package provides a stimulus. It is surprising, therefore, that Mark Zandi told reporters that he expects the tax compromise to add as much as a full percentage point to economic growth in 2011, bringing it to 4%. He also expects the unemployment rate to be under 9%, approaching 8.5% by the end of the year. This seems far too optimistic; based on this and other analyses, the Administration is once again overpromising what its policies can deliver.
But there is actually more to hate about the deal the White House struck with the Republican leadership than just the giveaway of tax cuts to the wealthy. Replacing the Making Work Pay Credit with a payroll tax cut is bad policy on multiple grounds. The MWP is a credit of up to $400 for workers earning less than $75,000 a year, with workers making as little as $5,000 a year receiving the $400. With the payroll tax cut, a worker would have to earn $20,000 a year to get a $400 tax break. Workers earning less than $20,000 would see their taxes rise, while those making over $20,000 would get a further tax reduction, obviously a bad deal for low-income workers. The most insidious aspect of the payroll tax cut, however, is that it threatens the idea that Social Security is sacrosanct, a reality so important to the economic security of the nation that the taxes that support it should never be tampered with.
The tax cut deal makes up the lost tax revenues from the partial payroll tax holiday out of general tax revenues. It would be far better to simply mail every working person and social security recipient a check from the Treasury out of general tax revenues – something I have advocated for in the past and that was done by both Presidents Clinton and Bush to deal with recession.
Congressional Democrats have already changed the terms on which future negotiations between the White House and the Republican leadership will proceed. Progressives in Congress will do a great good for the country if they succeed in getting a better deal with Republicans. But in their criticisms, they should also note the cynical way in which hysteria over the deficit and the debt has been promoted, and the willingness of the White House and the Republicans to jettison these concerns to make sure the wealthy get to keep their tax cuts. Talk of spending cuts to “pay for” extending middle class tax cuts and unemployment benefits must be met by progressive Democrats with the same vigorous opposition that greeted the tax breaks for the wealthy. As long as household spending and business investment remain weak and 25 million workers are unemployed or underemployed, spending by the federal government that raises the deficit and the debt poses no danger to the economy. On the contrary, short-term increases in the deficit and debt are essential to creating jobs and a growing economy.
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Eighteen consecutive months. That’s how long unemployment has been over 10.5 percent.
Officially, the worst spell of unemployment since the Great Depression came in 1982-83. Unemployment peaked in November and December of 1982 at a whopping 10.8 percent of the labor force. By contrast, the official rate of unemployment is only 9.8 percent, having peaked last October at 10.1.
So how can I say unemployment has been over 10.5 percent for a year and a half?
The official unemployment rate is a fine statistic as far as it goes. As unacceptable as 9.8 percent unemployment is on its face, it understates the historical depth of trouble in the labor market today. The U-6 alternative measure of unemployment is at 17.0 percent—more than 1 in 6 workers who have not completely dropped out of the labor force are unemployed or underemployed. Only 58.2 percent of the population age 16 and over are employed — the lowest rate of employment since the summer of 1983.
The tax cut deal between the White House and Congressional Republicans would reduce the payroll tax rate on employees by 2 percentage points (from 6.2 percent to 4.2 percent) for one year in 2011, but fails to extend the more progressive Making Work Pay tax credit. Authorized for tax years 2009 and 2010 in the Recovery Act, the Making Work Pay tax credit provided a refundable tax credit of up to 6.2 percent of earned income, capped at $400 ($800 for joint returns), for taxpayers with adjusted gross incomes below $95,000 ($190,000 for joint filers).
Because the payroll tax cut isn't capped, most tax filers (about 58 percent of those who benefit, according to the Tax Policy Center's preliminary estimates) will receive a greater benefit from it than they would have under the Making Work Pay credit. However, about 42 percent of tax filers will pay more in taxes in 2011 than they would of had the Making Work Pay Credit been extended. The chart below shows the average difference in taxes that workers will pay by income level.
The deal would extend three other fairly targeted tax benefits for certain low-wage workers that were included in the Recovery Act: 1) an increase in the EITC phaseout threshold for married couples filing jointly; 2) an increase in the Earned Income Tax Credit (EITC) for families with three or more children; and 3) allowing families with income between $3,000 and roughly $13,000 to receive a refundable Child Tax Credit. These extensions are a good thing, but it's worth noting that low-wage workers without children don't benefit at all from them, and that the EITC more generally provides only a tiny benefit for workers without children (and none at all for those under age 25 or over age 65). In fact, for minimum wage workers without children (and even many with children), the current combined amount of earnings and the EITC that they receive today is substantially lower than the minimum wage earnings alone that they received in 1979.
Instead of cutting payroll taxes directly, a better deal would extend the Making Work Pay tax credit and increase the cap to $600. If the misguided payroll tax cut stays in (for more on why it shouldn't, see this post by Dean), Congress should at least double the size of the EITC for workers without children (the maximum benefit is currently only $457) and extend it to workers under age 25 and age 65 or older, or adopt a partial restoration of Making Work Pay in a way that targets the benefits to workers with below-median incomes.
In a holiday season given mostly to Scrooge-like proposals for deficit reduction and belt-tightening that can only make recovery from the recession more difficult to achieve, the tax deal the White House struck with Congressional Republicans has what passes for virtue these days – it doesn’t make things worse.
Had the White House not reached this deal with the Republicans, about $700 billion in tax cuts and unemployment insurance benefits would have expired over the next two years, a cut in business and household after-tax incomes equal to about 2.5 percent of GDP each year. This is a hit the economy could ill afford.
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The extreme polarization of income and wealth in the U.S. has had a corrosive effect on the body politic. In this season that celebrates human generosity and compassion, our representatives in Washington could not muster the votes to reauthorize extended federal unemployment before the program expired on November 30.
This, despite the fact that for workers, the Great Recession is far from over. Yet, Congress and the administration appear ready to accede to Republican demands that tax benefits for the wealthiest 2 percent of households be extended. The job situation is grave. Unemployment remains near 10 percent of the labor force, and 15.1 million workers are unemployed, nearly 42 percent for more than 26 weeks. Job creation is anemic, and there are still five unemployed workers for every job opening. And that’s just considering official unemployment. Counting everyone who wants a fulltime job and doesn’t have one brings the number of unemployed and underemployed to more than 25 million Americans.
Despite this job outlook, Congress failed for the first time in 60 years to provide extended unemployment benefits during a period of high unemployment. Some 800,000 workers began losing their benefits at the stroke of midnight on November 30. If no action is taken, the Department of Labor estimates this lifeline will be cut for 2 million unemployed workers by the end of December.
Unemployment crept up to 9.8 percent after the economy added just 39,000 jobs in November, according to the latest Bureau of Labor Statistics' employment report. One notable finding in the report: The retail trade lost 28,100 jobs in November, with a decline of 14,500 jobs in general merchandise stores leading the way. The November drop in retail employment suggests that sales were inflated by an early holiday season — with stores beginning their hiring in October instead of November. This should dampen the optimism around the relatively good November sales figures released this week.
The data in the establishment survey offer little hope of the labor market improving anytime soon. With perhaps the exception of employment services, which saw modest job growth, there is no sector showing strong growth. Furthermore, average weekly hours actually fell slightly for non-supervisory workers, suggesting the demand for labor might actually be weakening. With house prices again dropping rapidly and additional cutbacks coming at all levels of government, there are no obvious engines of growth in this economy.
University of Chicago economist Casey Mulligan has a post on the New York Times Economix blog comparing the US and French tax systems. He argues, correctly, that the US tax system is almost certainly more progressive than the French tax system.
Our tax system is more progressive than most European systems because we raise a lot of government revenue through a progressive federal income tax. Europeans meanwhile rely much more heavily on regressive payroll and value-added taxes.
But, beyond that simple economic observation, Mulligan makes claims that are innaccurate and misleading.
The first problem is that Mulligan looks at only one side of the ledger –taxes– and not the other –government expenditures. What matters to people is not their income after taxes, but rather their income after taxes and transfers (including government services such as health care). Europeans, rich and poor, pay higher taxes than we do here, but they also receive much higher levels of government transfers, from more generous unemployment insurance benefits to subsidized day care to universal health care. These transfers, in cash and services, are generally highly progressive. The net result is that the European tax-and-transfer systems are substantially more progressive than our tax-and-transfer system, even though our tax system, on its own, is more progressive than the typical European tax system.
We have our own experience of this phenomenon in the United States with Social Security. The payroll tax used to finance Social Security is fairly regressive. Every worker pays Social Security tax at the same rate (12.4 percent, employee plus employer contribution) on the first $106,800 earned, and then no tax at all on earnings above that cutoff. As a result, in percent terms, the Social Security tax rate paid by workers making more than $106,800 per year is lower than the rate paid by, say, a worker earning the federal minimum wage (about $14,500 per year for a full-time, full-year worker). Nevertheless, Social Security is a strongly progressive program once the progressive retirement benefits (and survivor and other benefits) are factored in.
A second problem with Mulligan’s piece is that it subtly suggests that the choice Americans face is between big but regressive (in a fiscal sense) government, on the one hand, and small but progressive (again, in a fiscal sense) government, on the other.
Within our own system, the “big” federal government is financed overwhelmingly by progressives taxes (the federal income tax), while our “small” state and local governments are financed largely (and increasingly) by regressive taxes (such as sales and property taxes). In the United States, “smaller” government is the threat to our progressive tax structure, not “big” government. And, of course, Mulligan’s conservative political allies have pushed relentlessly to reduce the progressivity of the federal tax system. Conservatives have, for example, long championed replacing the progressive federal income tax with a single-rate “flat-tax” that would likely be highly regressive in practice. If they have their way, we won’t have a small, but progressive, tax system; we’ll just have small and regressive.
The Fed released most of the data on its special lending facilities yesterday. (We are still waiting for fuller information on the collateral that was posted.) The world did not end. In fact, there is no evidence that the release of the data created any economic or financial disruptions whatsoever.
This is not surprising, since there is no reason that informing the public about what the Fed did with their money should create financial disruptions, however this is exactly what Fed Chairman Ben Bernanke and others argued when they originally objected to the release of this information. The origins of this release are in an audit the Fed bill that had Ron Paul as it original sponsor. He was later joined on the left by Alan Grayson and Bernie Sanders, as the leading proponents of the bill.
The idea that the Fed should be held accountable to the Congress and the public was originally treated as a crank notion pushed by extremists who did not understand modern finance. Well, the data are now public and there has been no implosion. Yet again, it turns out that the cranks were right, and those in positions of authority were either ill-informed or lying.
The following highlights CEPR's latest research, publications, events and much more.
CEPR Talks Back to the Co-Chairs of the Deficit Commission CEPR Co-Director Dean Baker issued a statement following the recent release of the draft of the President’s Deficit Commission Co-Chairs report. Dean questioned the logic behind many of the spending cut proposals in the draft, including the lack of attention paid to long-term health care costs, the main factor behind the rise in future deficits. Dean also points out that Social Security is actually outside the mandate of the commission. He reiterated these thoughts in a piece in theNew Republic.
CEPR on the US Election… CEPR Co-Director Mark Weisbrot’s McClatchy News column, “Failure to Enact Bigger Stimulus Was Fatal Mistake” appeared in dozens of U.S. newspapers. In the article, Mark points out that “the overwhelming reason for the Democrats’ losses was their failure to take the necessary measures to ensure a robust recovery from the recession.” He also discussed the implications for the 2012 election in his Guardian column as well as in an interview with The Real News.
The economist Dean Baker calculated that the yearly tax increase at the lower end of that bracket, for those with earnings between $200,000 and $500,000, would amount to $700 — which “isn’t enough to hire anyone.”
The New York Times' deficit-reduction calculator is worth playing around with, though the Center for a Responsible Federal Budget's calculator is more comprehensive, and the calculator from the Center for Economic and Policy Research works harder to include policies that are too often left out of the mainstream debate. But they're all good, clean fun, and they all make the same basic point: It's the health-care system, stupid.
...In some ways, my favorite budget calculator is an older one released by the Center for Economic and Policy Research. This calculator doesn't give you any viable choices. Instead it allows you to plug in the per-capita health-care spending of other countries and then see what happens to our deficit. I've looked at this dozens of times, and I still find it startling: If we spent what high-performing, fully universal systems like France and Germany spend, we'd have no budget deficit.
Even worse, Geithner reiterated that the U.S. "will bring our fiscal position back to a sustainable balance."
Loosely speaking, our national income is equal to what we produce in any given year-- that is, GDP (Y). GDP may be broken down into private consumption (C), private investment (I), government consumption and investment (G), and trade surplus-- exports minus imports (X-M).
If we take national savings (S) to be income which is not consumed, then S=Y-(C+G)=I+(X-M). If "we haven't saved enough" then by definition we have insufficiently invested or we have too large a trade deficit. There is no escape from the iron grip of elementary mathematics.
In turn, national savings may be private or public, where public savings is taxes minus government spending. If the private sector suddenly decides to save more-- as they did with the collapse of the housing bubble-- then the public sector must save less. That is, budget deficits must rise.
As a matter of pure accounting, there are exactly the two ways to avoid large government deficit. One is for private investment to rise. Unfortunately, unemployment is at 9.6 percent and capacity utilization is low. Businesses have no incentive to invest in more capital when they have existing capital already going to waste. The only other way to avoid increasing government deficits is to increase net exports. Econ 101 says the dollar must fall relative to other currencies in the world.
So when unemployment is high, capacity utilization is low, and devaluation is unprincipled, what is left to do to increase national savings? Declare war on algebra?
As for Geithner, he has a little more wiggle room, reportedly declaring that the fiscal consolidation will wait until the recovery strengthens. Currently, CBO projects unemployment to average 9 percent next year and finally fall below 8 percent... sometime in late 2012.