Mitt’s “Entitlement Society” is a Myth
As I wrote earlier this week, the idea that the United States has become an “Entitlement Society,” as Mitt Romney recently put it, is a myth unsupported by the most basic facts. Although the former Massachusetts governor has written that government benefits engender “passivity and sloth,” the truth is that over 90 percent of benefit dollars are spent on the elderly, the seriously disabled, and members of working households—hardly the “welfare queens” that Republican rhetoric evokes.
But the misinformation extends beyond the welfare queen trope. As Lawrence Mishel points out, the argument that the welfare state has significantly expanded under President Obama only works if you calculate that growth by dividing mandatory spending by government revenues. That trick allows you to use as your denominator revenues that are at their lowest levels in 60 years, in addition to a numerator distorted by an unemployment figure more than double the rate a decade ago.
A better way to evaluate the expansion of government benefits is to look at total mandatory human resource expenditures as a share of government outlays. By that standard, entitlements as a share of federal expenditures barely changed between the 1990s and 2007, before the financial crisis. After the recession hit, mandatory spending did rise slightly, to 55 percent in 2010 and 56 percent in 2011—but that is exactly what we would expect from the social safety net during a severe economic downturn. The picture is even rosier if you take the size of the economy as your denominator: mandatory spending as a share of GDP remains essentially unchanged in two decades, and is actually down slightly in 2012.
Source: U.S. Office of Management and Budget Historical Tables
Fiscal Drag Still Threatens the Recovery
Last week brought good news for the U.S. economy: according to the Labor Department, the headline unemployment rate fell to 8.3 percent as payrolls added 243,000 new jobs in January. That number climbs to 304,000 if you include the revised numbers for November and December, which underestimated employment by a full 60,000. And job growth was well distributed throughout the private sector, with impressive gains in professional and businesses services, leisure and hospitality, and manufacturing. “That sound you hear is champagne corks in the west wing,” tweeted Washington Post economics reporter Neil Irwin at the news.
But while it’s surely five o’clock somewhere (probably China, in this particular metaphor), champagne-soaked celebration would be premature. There are, as Ezra Klein points out, “fiscal bombs”—or perhaps more accurately a “fiscal minefield”—about to explode beneath our feet.
The problem is this: if current law holds, the payroll tax cut and expanded unemployment benefits will soon end, followed by the expiration of the Bush tax cuts and the winding down of what remains of the stimulus money. Then comes the implementation of the $1.2 trillion automatic sequester, which will take a huge bite out of Medicare and other non-defense discretionary spending. According to the CBO—which, crucially, must base its analysis solely on current law—those higher taxes and lower deficits will costs us 0.5 percent of GDP in 2012 and 1.65 percent in 2012—enough to slow economic growth to just 1 percent. The IMF agrees: they estimate such “fiscal drag” could cost the U.S. as much as 2 percent of GDP in 2012—”the largest annual fall in at least four decades.”
Decisive action from lawmakers to extend the payroll tax holiday, reinvest in infrastructure, and support state and local governments would go a long way toward preventing that fiscal drag until the economy is more solidly on its feet. As Jared Bernstein notes, the Recovery Act demonstrated just how effective state fiscal relief was for preserving local government jobs. Unfortunately, that money was temporary; now that the stimulus has run its course, we have returned to a hemorrhaging public sector, with 14,000 jobs lost just last month. Immediate action to keep police, teachers, and other state government employees on the payroll would go a long way toward avoiding “fiscal drag” and giving our local economies time to secure a meaningful recovery.
Graph of the Day: Why Does the U.S. Have Lower-Wage Jobs than Europe?
The folks at the Center for Economic and Policy Research have a new report out this week that provides an interesting perspective on the now hot-button issue of income inequality. According to John Schmitt, the report’s author, nearly a quarter of American workers were in low-wage jobs in 2009, a higher percentage than in any other rich, developed country. What’s more, the number of low-wage workers—defined as those earning less than two-thirds the national median hourly wage—has been rising in the United States for “at least three decades,” from around 20 percent in 1979 to nearly 30 percent in 2010.
Of course, a high incidence of low-wage jobs does not by itself indicate income inequality. If, as Schmitt points out, “low wage jobs act as a stepping stone to higher-paying work, then even a relatively high share of low-wage work may not be a serious social problem.” But that is no longer the case, at least in the United States. Even Republican lawmakers are acknowledging that social mobility in the U.S. has fallen behind much of the rest of the developed world, with low-wage work “a persistent and recurring state for many workers.”
But, you may ask, doesn’t the United States have a higher standard of living? Aren’t our low-wage earners still better off than their counterparts in Europe? Well, not really. Low-wage workers in the United States have no legal right to paid vacation, sick days or parental leave, not to mention the lowest incidence of employer-sponsored health insurance—54 percent of workers in the bottom wage quintile have no insurance at all. And though the U.S. does enjoy a high GDP per capita, the OECD data shows no association with a reduction in the share of low-wage workers. Comparing median household income yields the same result:
Stronger labor market institutions, like those in Europe, could certainly help reduce our high proportion of low-wage jobs. Collective bargaining, a higher minimum wage, employment protection legislation, and more rigorous enforcement of national labor laws would all raise wages for the quarter of Americans struggling with low wages and ever-lower social mobility.
Graph of the Day: Busting the Myths About Food Stamps
Last week I commented on a terrific graph published by the Center on Budget and Policy Priorities, which refuted presidential candidate Mitt Romney’s false claim that the majority of federal funding for poverty prevention programs like Medicaid and food stamps (now called the Supplemental Nutrition Assistance Program, or SNAP) is wasted on “massive overhead,” leaving few dollars for the intended beneficiaries. In fact, the CBPP found that the administrative expenses for these and other social programs range from less than 1 percent to just 8 percent of total costs, hardly the bureaucratic bloodsucking Romney claimed.
But Romney is far from alone in his grandiose and off the mark allegations; just last week rival presidential candidate Newt Gingrich doubled down on his controversial comments tarring President Obama as a “food stamp president,” who, the former House speaker proclaimed, has put more people on food stamps “than any president in American history.” A recent USA Today fact check corrects that mistake: while the percentage of Americans on food stamps is at historic highs, fewer people have applied for SNAP under Obama than during George W. Bush’s tenure, when 14.7 million joined the rolls. What’s more, the current growth rate has been declining since the end of the recession in 2009, when there is a clear inflection point in the graph below.
Of course, there shouldn’t be anything alarming about the SNAP participation rate rising during the most severe economic downturn since the Great Depression. That the number of Americans receiving food stamps has increased demonstrates only that the program, designed to combat hunger and even starvation, is working. A quick comparison with the more accurate U6 unemployment rate shows that the percentage of SNAP beneficiaries has moved predictably with unemployment. If that trend continues, the food stamp rolls ought to begin falling this year as the economy continues to recover.
Getting the Numbers Right on Social Assistance
The 2012 campaign cycle has felt extraordinary for the sheer volume of lies and distortions that have been allowed to filter, unchallenged, through the mainstream media and into the national debate. So I was happy to see presidential hopeful Mitt Romney receive a harsh rebuttal yesterday from the Center on Budget and Policy Priorities for claiming, during Sunday’s GOP debate, that the majority of federal funding for assistance programs for the poor—like Medicaid and food stamps—is wasted on administrative costs:
“What unfortunately happens is with all the multiplicity of federal programs, you have massive overhead, with government bureaucrats in Washington administering all these programs, very little of the money that’s actually needed by those that really need help, those that can’t care for themselves, actually reaches them.”
This is categorically untrue. Thankfully, Robert Greenstein and his staff at CBPP took the time to rebut Romney’s claim—the latest in a series of misleading attacks intended to persuade Americans to eliminate federal assistance for low-income families.
The fact is, these administrative expenses range from less than 1 percent to just 8 percent of total program costs, a far cry from the “massive overhead” that Romney believes is being siphoned off by government bureaucrats. In 2010, the last year in which full data are available, 90 to 99 percent of combined federal and state spending went straight to program beneficiaries.
Still, all evidence to the contrary, the conviction behind Romney’s comment is widely-held among conservatives. Last night, Senator Jim DeMint stopped by The Daily Show with Jon Stewart to discuss his new book, “Now or Never: Saving America from Economic Collapse.” When Stewart pressed him to differentiate “between money that is squandered and invested,” DeMint replied,
“The problem we have is from the federal level, it’s very hard to do things well. I mean, you don’t find too many federal programs that are working. When we politically manage the programs, the money is not distributed well.”
Unfortunately, until Democrats become better at promoting the incredible success (and low overhead) of these programs, such misconceptions will continue to hold sway with the electorate. With more than 15 percent, or 46.2 million Americans, below the poverty line in 2010, proud support for Medicaid, food stamps, and other federal assistance ought to be a winning strategy.
Graph of the Day: One Job Available for Every Four Unemployed
The recently released December job numbers were a mixed bag in many ways, with optimism over the lower headline unemployment rate tempered by still historically high long-term unemployment, a 15.6 percent “U6” unemployment rate (a broader definition of unemployment), and critically low labor force participation.
The latest data from Washington is similarly difficult to get excited about. According to the Labor Department’s new JOLTS survey (Job Openings and Labor Turnover), there were 3.16 million job openings in November, or approximately one job for every 4.2 unemployed workers. That’s a 30 percent improvement since the trough of the Great Recession in June 2009, but a 2 percent decrease from the number of job openings in October, pointing to a still dismal job market. What’s more, JOLTS makes no distinction between part-time and full-time job openings, meaning many millions of Americas are still working fewer hours than they need to make ends meet.
Graph of the Day: Did Stimulus Money Hire the Unemployed?
By Benjamin Landy
According to a new research paper (PDF) by economists Garett Jones and Daniel Rothschild, “Did Stimulus Dollars Hire the Unemployed?” published by the conservative Mercatus Center, less than half of all employees hired with American Recovery and Reinvestment Act funds actually came from the ranks of the unemployed. “Hiring isn’t the same as net job creation,” the report argues. “In our survey, just 42.1 percent of the workers hired at ARRA-receiving organizations … were unemployed at the time they were hired. More were hired directly from other organizations (47.3 percent of post-ARRA workers), while a handful came from school (6.5%) or from outside the labor force (4.1%) … This suggests just how hard it is for Keynesian job creation to work in a modern, expertise-based economy: even in a weak economy, organizations hired the employed about as often as the unemployed.”
Unsurprisingly, conservative economists like Tyler Cowen see Jones and Rothschild’s research as proof that the stimulus failed. “This paper goes a long way toward explaining why fiscal stimulus usually doesn’t have such a great ‘bang for the buck,’” writes Cowen on his blog Marginal Revolution. “It raises the question of whether as ‘twice as big’ [sic] stimulus really would have been enough.”
However, if you look more closely at the numbers, an alternative, more optimistic story about the ARRA emerges. First of all, for each of the 47.3 percent of workers who left their jobs for new, ARRA-subsidized positions, it is likely that another worker, potentially one who was previously unemployed, took their place. That means that job-shifters weren’t taking away opportunities from the unemployed; on the contrary, their stimulus-sponsored job mobility created a trickle-down effect, leading to new hiring at the businesses they left. Even if only half of these ‘second-order’ hires came from the ranks of the unemployed, that means that the true percentage of ARRA-subsidized jobs going to the unemployed is closer to 66 percent, not 42 percent.
Moreover, the report does not specifically detail how many people were able to keep their jobs thanks to ARRA funds. Even if no new jobs were created, a large amount of the stimulus money that went to the states enabled local governments to employ workers that would otherwise have been laid off. And in fact, Jones and Rothschild’s research indicates that the average organization receiving stimulus funds equal to 10 percent of its annual revenue reported retaining or hiring workers equal to 6 percent of its workforce. Which helps explain why, according to Recovery.gov, over 550,000 have been created or maintained by ARRA funds just between April and July of this year.
Of course, no one is claiming that the ARRA funds have been apportioned or managed perfectly — $787 billion is a lot of money. But considering the time constraints that the Obama administration was working under, it would be unreasonable to expect that such a massive economic stimulus could be implemented without some waste. That being said, the CBO estimates that relative to what would have happened without the law, the ARRA raised real GDP by between 1.5 percent and 4.2 percent in 2010, and boosted employment by as much as 3.3 million. That may be the kind of recovery that Cowen dismisses as not much “bang for the buck”, but I’d wager that the majority of the 14 million Americans who are currently unemployed would like to see more such stimulus, not less.
America’s Crumbling Infrastructure
By Benjamin Landy
In January 2009, as the American economy faltered and Congress struggled to agree on the size of an economic stimulus package, the American Society of Civil Engineers (ASCE) issued more disheartening news: according to their most recent assessment, the nation’s infrastructure was in its worst state in decades. “More than 26%, or one in four, of the nation’s bridges are either structurally deficient or functionally obsolete,” stated the report. “The number of deficient dams has risen to more than 4,000, including 1,819 high hazard potential dams… Poor road conditions cost motorists $67 billion a year in repairs and operating costs, and cost 14,000 Americans their lives. One-third of America’s major roads are in poor or mediocre condition and 36% of major urban highways are congested.” The ASCE gave America’s overall infrastructure a ‘D.’
For a moment, it seemed the ideal time to rebuild, putting millions of unemployed Americans to work in the spirit of FDR’s Civilian Conservation Corps or the Public Works Administration. “We can put Americans to work today building the infrastructure of tomorrow,” Barack Obama declared in his 2010 State of the Union Address, to thunderous applause. “From the first railroads to the Interstate Highway System, our nation has always been built to compete. There’s no reason Europe or China should have the fastest trains, or the new factories that manufacture clean energy products.”
And yet, since the American Recovery and Reinvestment Act was signed into law, little more than $100 billion has been allocated and spent on renewing the nation’s crumbling infrastructure, far short of the $2.2 trillion the ASCE estimated would be required over a five year period to raise their grade from ‘poor’ to ‘acceptable.’
Source: Congressional Budget Office, US Government Printing Office
Unfortunately, this current state of neglect is actually part of a much longer historical trend of de-investment. While the amount of money lavished on defense continues to rise far above the Cold War average, the United States spends less and less of its GDP on roads, bridges, rail and waterways every year. Infrastructure spending has been steadily declining since it peaked at 5.6% of GDP in 1961, and has fallen to around 2.5% today.
As Henry Petroski of Duke University points out, “infrastructure is a fancy contemporary term for what used to be known as public works.” Perhaps if Americans were more aware of the original terminology, they would once again recognize investing in their shared infrastructure as the civic responsibility that it truly is.
Productivity Is Rising, So Why Aren’t Workers Profiting?
By Benjamin Landy
The specter of “market inefficiency” is commonly invoked as a reason to fear higher taxes and new regulations. But productivity -– a measure of economic efficiency in terms of output per hour worked -– actually grew at the relatively fast rate of 2.8 percent between 1948 and 1973, when tax rates were far higher and regulations were more extensive in many industries, relative to 1973 to 2010, when average productivity growth slowed to 1.9%.
In addition, during the period from 1948 until 1973, almost all Americans were seeing their average income rise as productivity climbed. Income inequality in the United States was at its lowest levels in history, with the rising economic tide lifting all boats. But beginning in the mid 1970s, the income of the bottom 90% –- all but the highest earners -– started to fall behind productivity increases. As the graph shows, though,the incomes of the top 10% and 1% continued to track productivity growth. As of 2008, the average American’s real wages were no higher than they were forty years ago. Since all workers are collectively enhancing the efficiency of the economy, there’s little justification for perpetuating policies that have enabled only the wealthiest to benefit from those improvements.
Graph of the Day: Is the ‘Great Recession’ Really a Household Debt Crisis?
By Benjamin Landy
“Why is everyone still referring to the recent financial crisis as the ‘Great Recession’?” asks Harvard economist and former IMF chief Kenneth Rogoff, in a recent article for Project Syndicate. “The phrase ‘Great Recession’ creates the impression that the economy is following the contours of a typical recession, only more severe – something like a really bad cold,” he adds. “But the real problem is that the global economy is badly overleveraged.”
Unfortunately, the American household is no exception. While political discourse has been dominated in recent months by arguments over our enormous national debt, climaxing with the tense mid-summer negotiations over the debt ceiling in Washington, the problem of household debt has gone largely unmentioned in the media. Now that is beginning to change, as a consensus develops among economists, pundits, and policymakers that Americans’ paralyzing mortgage and credit card debt is the main factor holding the economy back from recovery.
The facts are these: although household debt peaked at $116,457 per household in 2008—nearly 100 percent of GDP at the time the financial markets collapsed—mortgage and credit debt has decreased merely seven percent as of 2010. The average American household would have to deleverage an additional 97 percent to return to 1976 levels. And while no one is arguing that household debt needs to be at those levels to restart the economy, it is generally understood that consumption will not increase adequately until Americans’ debts are significantly reduced.
When we last experienced a deep recession in 1982, the household debt-to-GDP ratio was about 45 percent, or $17,286. So when the government adjusted its monetary policy, the economy was able to recover quickly. Today, with the average household still holding over $100,000 of debt, a more ambitious program will be required to return demand—and thus unemployment—to pre-recession levels.
Thankfully, a recent New York Times report indicates that the Obama administration may be planning just that. According to the article’s sources, who would not be named, White House officials are currently weighing a variety of proposals to allow millions of homeowners to refinance their homes with government-backed mortgages at current low interest rates of about 4 percent, saving those homeowners $85 billion a year and creating a strong stimulus to the economy.
The Washington Post’s Ezra Klein, for one, is not optimistic that this kind of government-backed refinancing scheme could work in the current political climate, but at least it proves that the administration is paying attention to the household debt problem and trying to come up with creative solutions to stimulate demand. Until we find a way to do that, millions of Americans will remain jobless, and the economic recovery will continue at its anemic pace. At the very least, the administration’s recognition that the “Great Recession” is really a household-debt crisis sends the positive message that Obama’s “pivot” to job creation is more than just hot air.
In Defense of Warren Buffett
By Benjamin Landy
Billionaire investor Warren Buffett became a controversial figure last week, when his provocative op-ed, Stop Coddling the Super-Rich,” landed prominently on the New York Times editorial page. “My friends and I have been coddled long enough by a billionaire-friendly Congress,” Buffett wrote. “ It’s time for our government to get serious about shared sacrifice.” His suggestion, that the government immediately raise taxes on Americans making more than $1 million — and even more so on those making in excess of $10 million — set off a firestorm of criticism from conservatives.
Among the more misguided attacks was a CNN.com opinion piece by Jeffrey Miron, a senior fellow at the Cato Institute and director of undergraduate studies at Harvard University, who outright dismissed the significance of increased government revenues. “The first problem with Buffett’s view,” Miron writes, “is that the number of super-rich is too small for higher rates to make much difference to our budget problems. […] Imposing a 10% surcharge on this income would generate at most $73 billion in new revenue – only about 2% of federal spending.”
Miron is right that $73 billion won’t solve our “budget problems,” which I take to mean our $14.4 trillion national debt. Nobody is arguing that. But that hardly means $73 billion is inconsequential. In order to illustrate just how much money $73 billion is, I did some research to discover some of the things you could buy with that kind of money. The graphic below shows just a few examples.
If you were more militarily inclined, $73 billion could also buy you 16 Nimitz-class nuclear-powered aircraft carriers — the largest and most powerful capital ship in the world — or 1,327 brand new F/A-18 Super Hornets from Boeing. And $73 billion could quintuple NASA’s operating budget, providing enough funds to develop and maintain an international lunar base for the next five years, according to CSIS cost analysis. Less than half that amount would provide safe drinking water for the entire planet, helping save the nearly 6,000 children who die every day from diseases associated with contaminated water supplies.
No matter how you choose to look at it, $73 billion is a lot of money. With all of the problems our country is facing today, can we afford to turn it down?
Graph of the Day: For the Long-Term Unemployed, Finding a Job is Only Getting Harder
By Benjamin Landy
For the long-term unemployed in America, life is only getting harder. While national unemployment remains high at 9.2 percent, near where the rate has stuck for the last two years, the average number of weeks an unemployed worker has been jobless is still growing. According to the Bureau of Labor Statistics, if you are one of the 14 million unemployed today, the odds are you’ve been unemployed for at least five months, or nine months if you look at the arithmetic mean.
Source: Bureau of Labor Statistics
Unfortunately, more and more businesses are using current employment as a proxy for employability, meaning the long-term unemployed face mounting discrimination and ever diminishing prospects compared to their recently laid-off peers. And, unlike discrimination based on race, ethnicity, disability, religion, sex and age, employers are entirely within their legal rights to use unemployment –especially long-term unemployment – as grounds for rejection. So while the number of people unemployed for less than 5 weeks declined by 387,000 in July, the number of people unemployed for over 27 weeks barely changed, holding steady at 6.2 million.
Only New Jersey has outlawed this kind of discrimination, and although several other states are considering similar legislation, the 6 million Americans who have been without work for over six months are still in serious trouble. According to a new report by the National Employment Law Project - an advocacy group for the employment rights of low wage workers - the half-year mark is a watershed moment in the eyes of many employers. Many companies are far less likely, even unwilling, to hire people who have been unemployed for over six months.
Until the unemployed are able to find work, we should extend their jobless benefits for another six months, which studies show generates two dollars of economic growth for every one dollar the federal government spends. Without bipartisan support to continue these unemployment insurance programs, many millions of Americans may find themselves in poverty when their benefits expire at the end of this year.
Graph of the Day: The New Politics of Austerity
By Benjamin Landy
With millions of Americans out of work, slow economic growth, and now Standard and Poor’s downgrade of U.S. debt, consumer confidence is plummeting to new lows, making the prospect of a double-dip recession all the more likely. According to the latest Gallup poll, Americans’ economic confidence fell to -53 this week, a level not seen since the peak of the recession in 2009, while 77 percent now believe that economic conditions are only getting worse – nearly 20 percent more than this time last year. Without fast, meaningful action by Washington, aggregate demand will fall and consumer confidence will further collapse — yet both House Republicans and the Obama administration continue to insist on contractionary austerity measures that will do nothing to create jobs or help ordinary Americans.
When consumer confidence is this low, government spending is generally used to temporarily boost demand, creating a positive feedback loop of economic growth; this is the crux of Keynesian economics. Governments, unlike families, can run large deficits during recessions so long as revenues increase once the economy recovers.
Recently however, it has become clearer that the last 30 years of borrowing have been something of a crutch. We have been artificially bolstering demand that should otherwise have been significantly decreased by the demographic force of the Baby Boomer retirement, and the ever-growing income inequality that has drained the resources of the middle and lower class. By eliminating the Bush Tax Cuts, we could generate substantial new revenues to inject back into the economy. Instead, the bottom 90 percent of American households are deleveraging, painfully, and will continue to do so for some time.
But the United States — again, unlike a household — does not have to do this. As the recent surge in bond prices indicates, there is still massive demand for American debt, despite S&P’s downgrade. In a consumption-driven economy such as ours, we should be spending more now, to create new jobs and self-sustaining growth, not tightening the purse strings even further. Anti-Keynesian fiscal conservatism cannot create growth during a recession. Instead, it will strangle what little demand is left in the economy, and consumer confidence with it.
Graph(s) of the Day: Can Higher Education Solve the Jobs Crisis?
By Benjamin Landy
With the fragile U.S. economy struggling to recover and millions of Americans still out of work, many pundits and policy makers have taken to claiming that high unemployment is a structural, not cyclical problem. In other words, the issue is not that there is low consumer demand — and therefore low demand for workers — but rather that unemployed workers do not have the skills or education that employers require. Further, it is claimed that as the economy returns to full employment, businesses will be stymied by a significant lack of qualified college graduates.
However, a recent report (PDF) by the Economic Policy Institute shows that there is little evidence to support the claim that higher education is the solution to the current jobs crisis, including rising wage and income inequality.
According to Lawrence Mishel, the author of the report, there have been far too few job openings for all of the unemployed looking for work, suggesting the underlyling economic problem remains cyclical low demand. As the above graph from the report shows, the ratio of unemployed workers per job opening remains nearly twice as high as at the peak of the 2001 recession. And the current jobs shortfall is not just in one or two affected industries, like construction, but across all sectors. Neither does one education group account for the increase in long term unemployment, as the structural argument would suggest.
