Graph of the Day: Infrastructure Austerity Hurts the Recovery
It has been nearly seven years since Congress last passed a major transportation bill. Since then, funding for surface transportation infrastructure has been extended eight times by temporary stopgap measures without any agreement on long-term legislation to maintain—let alone improve—America’s crumbling infrastructure. Congressional staffers now report that the House will not take up the $109 billion Boxer-Inhofe transportation bill that passed the Senate with bipartisan support Wednesday, requiring a ninth stopgap until at least mid-April.
“This used to be the easiest bill to pass on Capitol Hill,” Sen. Richard Durbin (D-IL) told reporters last week. “That’s why the House Public Works Committee has so many members–people couldn’t wait to get on that committee to pass this bill every five years.” But today’s hyper-polarized Congress can’t even agree on basic funding for the nation’s highways, bridges and railroads, which now require trillions in upgrades. Public spending on transport and water infrastructure is near historic lows at just 2.4% of GDP (less than half what Europe spends) and the cost of fixing the whole mess increases with every year we put it off. We’re not exactly “winning the future.”
That’s unfortunate because there has probably never been a better time to reinvest in America. The economy faces a massive aggregate demand shortage. The unemployment rate among construction workers is near 18 percent. And, thanks to negative real yields on treasury debt, money is essentially free. So a major investment in infrastructure should be a no-brainer for Washington, right?
Yet in the months since the recession ended and the stimulus ran out, federal grants to state and local governments have plummeted, causing real state and local investment to drop nearly 15%. Public spending on highway and transportation construction is stagnant or in decline, even as more than 1 million construction workers remain unemployed.
Even to fiscal conservatives it should be obvious that such infrastructure austerity is bad economic policy. America will have to rebuild its aging infrastructure eventually; why not right now?
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: 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.
The Trouble with the December Jobs Report
There’s certainly good reason to cheer the latest employment figures from the Bureau of Labor Statistics—according to this morning’s jobs report, the economy added 200,000 net jobs in December, bringing the headline unemployment rate down to 8.5 percent, the lowest level in nearly three years. Still, the public sector continued to shed jobs, with budget shortfalls forcing state and local governments to layoff another 12,000 employees, for a total of 280,000 fewer government jobs in 2011.
And while employment gains were felt widely throughout the private sector, with new hires in transportation and warehousing, retail trade, manufacturing, health care and mining, among others—job security remains weak for many millions of Americans. The U6 unemployment rate—which measures formal unemployment as well as marginally attached workers and workers who are part-time but wish to be full-time—remains uncomfortably high at 15.6 percent, despite dropping nearly one and a half percent from this time last year.
And though 1.6 million new jobs were added in 2011, workers saw virtually no gains in the number of hours they could work, leading about 150,000 people to take on multiple jobs to make ends meet. The long-term unemployment rate dropped slightly but remains at historic highs, while 1.5 million Americans dropped out of the labor force entirely, bringing the participation rate to historic lows. That means that the unemployment rate is artificially depressed, and will likely increase or plateau as a broader economic recovery encourages millions of labor force drop-outs to start looking for jobs again.
Of course, there are plenty of reasons to applaud today’s jobs report—this is the sixth straight month that we have seen over 100,000 workers rejoin the work force, a statistic that is sure to help President Obama in his quest for reelection. But a healthy dose of negativity is a helpful reminder that millions of Americans remain outside our more conventional metrics of economic well-being, and despite the currently upbeat media narrative, they still need support. Extending the payroll tax-cut, for instance, will go a long way towards maintaining this momentum, as will a new round of stimulus for infrastructure investments. The optics on the economy may be shifting in favor of the President, but too many Americans are still struggling to get back on their feet to let such policy opportunities slide.
Graph of the Day: How Many Americans Are Really Unemployed?
By Benjamin Landy
The number 9.1 has been repeated so often in the news media and on the campaign trail that it has taken on an almost totemic significance for policy makers—a numerical representation of all that is wrong with America today. And yet that number—which for the last several months has been the given unemployment rate—vastly distorts the current economic picture. The true number is at least 81 percent higher.
If you didn’t know better, you would probably assume that the unemployment rate reflects the number of people who want a job but can’t find one. But it doesn’t. The problem is that the Bureau of Labor Statistics counts only people who “had made specific efforts to find unemployment sometimes during the [previous] 4-week period” in its official calculation of “unemployed persons.” If, after four weeks without a job, you are not actively looking for work, you cease to be counted as unemployed under the standard definition. This excludes so-called “marginally attached workers,” who have not searched for work in the four weeks proceding the BLS survey, but who want and are available for work. Many of them—i.e. “discouraged workers”—have stopped looking for work because they believe there are no jobs available, or none for which they would qualify.
The “U6” unemployment rate displayed above gives a far more accurate picture of the current jobs crisis. This alternative rate, calculated by the BLS, includes not only discourageed workers, but also marginally attached workers and the underemployed—part time workers who “want to work full time, but cannot due to economic reasons.” That rate was estimated to be 16.5 percent last month, far above the 9.1 percent typically cited in the media.
But the real number could be higher still. Economist Nouriel Roubini is pessimistic:
If you add to it the millions of people that you have in jail in the U.S. — which is four times the amount of any civilized country as a share of population — than unemployment is probably closer to 20 percent. And that’s just among the average population. For minorities, the youth, or unskilled people that don’t have a high school degree, the number is closer to 30 percent.
It’s not surprising that the federal government and the news media choose to distort these facts by reporting only the “U3” official unemployment rate. But big problems require bold solutions. If we want to see more action from Congress, more Americans must understand the scale of the profound jobs crisis we now face.
Graph of the Day: Income Inequality Weakens Economic Growth
By Benjamin Landy
Soaring income inequality may be holding the United States back from a broader economic recovery, according to a newly released study by the International Monetary Fund. Although political scientists have long debated whether social justice comes at the expense of social product—theoretically by reducing incentives to work and invest—the report provides strong evidence that an unequal distribution of wealth actually causes economies to experience deeper recessions and weaker recoveries. “Sustainable economic reform,” the authors warn, “is possible only when its benefits are widely shared.”
The report’s authors studied a wide range of international data spanning nearly sixty years, and found that there was a positive correlation between the equality of a society and the strength and duration of its economic growth during expansionary periods. Based on their model, a 10 percent decrease in income inequality could actually extend U.S. economic growth by a full 50 percent. Higher levels of income equality were also found to correspond more strongly to sustained economic growth than any other factor, including trade openness, political institutions, and lower debt levels.
Perhaps most importantly, the study found that “igniting growth is much less difficult than sustaining it.” Sustained economic growth, the authors suggest, requires the participation and involvement of an entire economy—not just its most affluent members. When there is high income inequality, the risk of future financial crises and political instability increases substantially, undermining economic confidence. Moreover, a highly unequal distribution of wealth “may make it harder for governments to make difficult but necessary choices in the face of shocks, such as raising taxes or cutting public spending to avoid a debt crisis.”
Although incomes for the top 1 percent are growing faster than ever, this data suggests that no broad economic recovery will be possible if the wages of the bottom 90 percent of Americans continue to stagnate or decline. For a time, this lopsidedness was obscured by the mountain of household debt ordinary Americans took on to maintain their customary high levels of consumption. Now, with the collapse of the housing bubble, the illusion of easy credit is behind us. Without a truly revived middle class—once the core of U.S. economic strength—it seems less and less likely that we will experience more than anemic growth.
What’s So Great About Small Businesses?
Brad Plumer asks whether they are really the key to stronger job growth:
Just about the only thing Republicans and Democrats can agree on nowadays is that small businesses are the key to economic growth and hauling the economy out of recession. Trouble is, as Charles Kenny argues in Bloomberg BusinessWeek, there doesn’t seem to be a lot of evidence to prop up this view.
While small businesses obviously play an important role in the U.S. economy, the vast majority of them — think restaurants, beauticians, independent retailers, plumbers — will remain small forever, according to a recent survey by two University of Chicago economists. The bulk of them have no plans to grow further. Occasionally there’s a future Apple or Hewlett-Packard among the vast and varied potpourri of small businesses (both firms started out as garage-sized operations), but that’s a relative rarity. Fairly few small businesses are applying for patents, and only a very small slice of them are creating new jobs. “Eighty percent of U.S. small companies that remained in business from 2000 to 2003,” Kenny points out, “didn’t add a single employee.”
[via Wonkblog]
The “Buffett Rule” Is Simple Math
By Benjamin Landy
After going before Congress to declare that “millionaires and billionaires” should pay their “fair share” of taxes, President Obama was swiftly condemned by conservatives for engaging in what House Republicans Paul Ryan and John Boehner have unapologetically termed “class warfare.” To most Americans, however, the principle behind what Obama is now calling the “Buffett Rule” seems pretty straightforward: there is no reason why the ultra-rich—like the eponymous Warren Buffett—should ever pay less taxes than their secretaries. Or, as the White House puts it, no household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families pay. “This isn’t class warfare,” Obama insists. “This is simple math.” Numerous polls show the American people agree.
Unfortunately, nothing about increasing taxes is ever that simple: in the three weeks since Obama first unveiled his jobs plan, the conservative commentariat have been unrelenting in their distortions of the facts about tax progressivity and income inequality in this country. It is not uncommon to hear, for instance, that the 10 percent of households with the highest incomes pay more than half of all federal taxes and contribute over 70 percent of income taxes. This is true. But it ignores the crucial fact that this same “top ten” also controls more than 70 percent of all U.S. wealth, while the bottom 50 percent holds barely 2 percent.
The most recent distortion making the rounds is that Obama was lying when he claimed that some millionaires are getting away with paying lower tax rates than their secretaries, since those in the top tax brackets pay more on average than middle-class Americans. But that “average” conceals a reality obvious to anyone who bothers to check the IRS data: many millionaires are cheating the system. A quick glance at the effective tax rates of the 400 richest Americans reveals that the majority of them paid between zero and 20 percent of their income in 2007, less than most families making just $50,000 a year.
In the table above, you can see the approximate number of millionaires paying less than middle-income families; highlighted in yellow are any rates that appear regressive relative to similar rates at other income levels—the most egregious examples are highlighted in blue. This allows us to see that in 2011, 40 percent of taxpayers with incomes between $30,000 and $40,000 paid more than 12.9 percent of their income in taxes, while a full quarter of millionaires paid less than 12.6 percent. That’s 108,293 people in the top 1 percent of income earners who paid less than the average for a median income household. Close to 50,000 of them paid less than 5 percent.
The main reason the effective tax rate appears so low for millionaires is that wealthy Americans tend to make more of their income from capital gains than the midde class; in fact, 93 percent of all financial wealth in the United States is held by the top quintile. Since long-term capital gains are taxed at a maximum of 15 percent, we now have a situation where 40 percent of people making more than a million dollars a year pay nearly the same rate as those making a tenth of that. The graph to the right illustrates how the effective tax rate for the ultra-rich drops dramatically as their share of income coming from capital gains increases.
Of course, legislating a “Buffett Rule” would not by itself solve the problem of income inequality, as it fails to address the abundance of tax loopholes and deductions that also enable higher-income earners to dodge taxes. But as an alternative minimum tax, it would effectively end at least one major loophole—the preferential treatment given to those wealthy few who make their money from non-labor income—and would act as a powerful symbolic gesture to the 90 percent of Americans who should never be asked to pay more than the nation’s millionaires and billionaires. That’s not class warfare. It’s simple math.
“THE financial crisis and its aftermath have taken a significant toll on American households, but many of the country’s economic problems predate the crisis. New data on income and poverty released by the Census Bureau reveal a picture of sustained stagnation in incomes for most American households. From the richest to the poorest, inflation-adjusted incomes were lower in 2010 than they were a decade ago. Stagnation is a relatively new phenomenon for the rich, but not for the rest. In 2010, the typical American household earned an inflation-adjusted income of $49,445, scarcely different from that in 1989 and a fall of 2.3% since 2009. Current incomes are at roughly the level of the late 1970s for those near the bottom of the income spectrum.
Of course, many of today’s consumer products are of higher quality today than they were in the 1970s, and the typical household has access now to things like iPods and flatscreen televisions that didn’t exist then. On the other hand, the cost of everything from housing to education has risen steadily in recent decades. From a real income perspective, the American economy has already experienced a lost decade, but for the median household the picture is one of a generation of stagnation.”
—The Economist (link)
ONE of the biggest headaches for policymakers in many rich countries has been how to create jobs during a period of fiscal austerity and anaemic growth. The private sector has been slow to generate jobs, and government-spending cuts usually end up cutting jobs. And governments employ a lot of people: in our chart of the ten biggest global employers, below, seven are government-run. America’s defence department had 3.2m people on its payroll last year, equivalent to 1% of the country’s population. China, the world’s most populous nation and a big military spender, employs 2.3m people in its armed forces. And the number of people working for the National Health Service in England is equivalent to over 2.5% of the country’s population. The three private companies are Walmart, McDonald’s and Taiwan’s Hon Hai Precision Industry Company, a subsidiary of which is Foxconn, a secretive electronics manufacturer.
—The Economist
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.
What Can We Expect from Obama’s Jobs Speech?
At this point, it seems unlikely that Obama will be able to deliver more than empty rhetoric at his upcoming jobs speech, absent a bold plan on mortgage refinancing (as I discussed in a recent post). This kind of politics, unfortunately, is relevant for few outside of the punditocracy — and, as Yglesias notes, won’t accomplish anything meaningful in the real world. You know, the one that real, unemployed people still live in.
The fact that President Obama is requesting a joint session of congress to hear his jobs speech certainly reflects an effort to raise the political stakes around it, despite the considerable evidence that presidential speeches don’t move the needle on politics. Still, let’s assume for the sake of argument that a presidential speech can be a big deal. What do progressives want to hear? Paul Krugman, for example, says “let’s see what the jobs plan looks like — and more important, since the GOP will block everything, how (and if) he makes a political issue of that obstruction.”
As I said yesterday, the problem here is that the kind of robust jobs plan Krugman or I would like to see is probably quite different from the kind of jobs plan that makes for optimal politics. If you’re talking about a purely political speech then dwelling on the fact that negative real interest rates are crazy or how the Federal Reserve should be more tolerant of higher prices and especially higher prices for food and gasoline is a bad strategy. The public doesn’t have a deep understanding of the deficit or passionate views about it, but they know that they’re “bad.” The public has less understanding of monetary policy, but they know that inflation is “bad.” You can revive the economy with higher deficits and more tolerance for inflation, but you don’t inspire the public with it. If the speech is just about politics, you have to judge it purely as political messaging and not for agreement with wonky accounts of the truth.
The GOP’s “Boundless Cynicism”
James Fallows over at The Atlantic has some harsh words for the GOP’s “boundless cynicism”:
Through the artificial debt-ceiling “crisis,” through the Moonie-like spectacle in Iowa of candidates […] raising hands to promise never to accept any tax increase, the Republican field has been absolutist and inflexible about not letting any revenue increase, in any form, be part of dealing with debts and deficits.
Except, it now turns out, when the taxes are those that (a) weigh most heavily on the people who are already struggling, and (b) would have the most obvious “job-killing” effect if they went up.
When it comes to those taxes — hell, we’re easy! According to the AP and Business Insider, Rep. Jeb Hensarling of Texas, the Republican co-chair of the all-powerful budget Super Committee, is dead set against letting the Bush-era tax cuts expire for anyone, including millionaires. But he sees no problem in letting the current cut in payroll-tax rates — you know, the main tax burden for most Americans — run out.
It’s time we stopped talking about the Republicans as the party of low taxes and started seeing them for what they are: not merely “pro-rich” but actively anti-poor. Two months ago, when Democrats were still talking about raising taxes on the rich as part of a debt-reduction deal, Republicans balked, and the country nearly defaulted. But when it comes to extending the payroll tax cut – which overwhelmingly favors low income workers – Republicans want rates to go back up. Why?
It’s ugly politics, plain and simple. Republicans don’t want to be seen siding with the Obama administration on any issue, even if it’s lower taxes – the GOP’s modus operandi . The payroll tax break is also considered a stimulative measure, which offers little benefit to the wealthy, instead putting more money into the pockets of lower and middle class workers – what the Tea Party is increasingly identifying as the “moocher class.” Not to mention that any kind of stimulus is anathema to the Tea Party base these days, even if it comes in the form of a tax cut.
The Republicans are showing their true colors now more than ever; this is precisely the kind of hypocrisy that Democrats should be exploiting as the 2012 election cycle shifts into high gear.
Ezra Klein gets to the heart of the ideological divide:
Republicans believe, either implicitly or explicitly, that the economy is really driven by well-compensated, wildly productive geniuses at the top, and so the true aim of tax policy is keeping their tax burden low so they have sufficient encouragement to unleash their potential. Democrats believe those folks have so much money that they’re no longer primarily driven by monetary concerns and that, either way, the key question for the economy is how to get more demand into it quickly, and for that, tax cuts to the poor are clearly superior, as the poor spend the money they get.
If Democrats can effectively communicate that underlying dichotomy, my sense is that the American people will listen.
