Graph of the Day: Going Over the “Fiscal Cliff” Would Cause Another Recession
Yesterday, the nonpartisan Congressional Budget Office released their analysis of the upcoming “fiscal cliff” (“taxmageddon,” for those more eschatologically inclined), and the results aren’t encouraging. Unless Congress finds a way to delay the $607 billion worth of tax increases and spending cuts that are scheduled to kick in automatically at the end of this year, the CBO expects the United States will fall briefly into another recession.
That presents policymakers with a dilemma. On the one hand, the expiration of the Bush tax cuts and the payroll tax holiday would generate over $300 billion in revenue next year. Deep cuts to the military budget and to safety net programs would save another $65 billion, shrinking the budget deficit by over 5 percent of GDP. But rapid debt reduction comes at a steep price (as Europe is well aware): the economy would take a sharp downturn, contracting 1.3 percent annualized in the first half of 2013, followed by 2.3 percent growth, for a measly 0.5 percent increase over all. Unemployment would rise above 9 percent, tax revenues would fall, and the government would be forced to increase spending on unemployment insurance, food stamps, and other social programs.
However, if Congress delays these deficit reduction measures in the near-term, the CBO predicts real GDP will expand by a robust 4.4 percent in 2013, and that unemployment will continue its downward trend. Comparable fiscal constraint would still be needed in the medium term (federal debt held by the public is at its highest level since 1950; a matter of bipartisan concern), but policymakers would minimize damage to the economy (and to the individuals, families and businesses that make up economies) by agreeing to tackle deficit reduction only after a meaningful recovery is secured.
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?
What Slowing Productivity Growth Means for Tomorrow’s Jobs Report
The U.S. economy went on something of a crash diet during the Great Recession, cutting millions of Americans from the workforce and squeezing dramatic productivity gains from those who remained. Unit labor costs dropped and output per hour rose as busiensses became leaner and meaner. But slimming down can only increase efficiency to a point, and as the economy has recovered, the pendulum has appeared to swing back in favor of workers. Revised estimates released yesterday by the Labor Department show that productivity growth slowed to 0.9 percent annualized at the end of last year, down from 1.8 percent in the previous quarter. And unit labor costs rose 2.8 percent, more than doubling earlier estimates.
That bodes well for tomorrow’s jobs report, which is expected to show modest gains throughout the economy. If productivity is slowing, than the only way businesses can expand output is to hire more people. Hopefully that will put sufficient pressure on wages, which have plenty of room to rise against price markup without any inflationary effect.
But let’s not miss the forest for the trees—or in this case, the historic trend for the market correction. The graph below—which plots productivity growth against labor costs since 1990—shows that the divergence between efficiency gains and wage compensation is a long-term trend that is not likely to be altered by the recovering labor market. The underlying problem remains intensifiying income inequality, here expressed as workers’ decreasing share of corporate profits. Although tomorrow’s job numbers are likely to be another piece of good news for the economy—joining high consumer confidence and declining unemployment insurance applications on a growing list of positive indicators—it is critical that we do not allow the conversation about systemic inequality to fade into the shadows. The graph below illustrates a tectonic, not cyclical, shift. We’ll need more than a band-aid to correct our course.
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.
Long-Term Unemployment Benefits Do Not Increase Unemployment
Although the official unemployment rate remains stuck at around 9 percent—significantly lower than the “U6” rate of 16 percent, which includes discouraged workers and those forced to work part-time for economic reasons—conservative lawmakers are eager to reduce the number of weeks unemployed workers can receive benefits. One potential bill would also require recipients without a high school diploma to enroll in a GED program or lose their benefits, and allow states to screen applicants with a drug test. That position isn’t particularly surprising, considering the typical conservative refrain that unemployment benefits reduce the incentive to look for work. By their account, if we would only take away unemployment insurance (UI), millions of lazy Americans would get to their feet and find jobs.
It’s a deeply flawed presumption, and one that has real world consequences for the 6.7 million families that rely on an average weekly benefit of $300 to afford food, heat, and shelter while they look for work. It also endangers the more than 2 million long‐term unemployed workers, who will lose their UI benefits entirely by the end of February if Congress fails to reauthorize those benefits before they expire.
Luckily, a new report from the U.S. Joint Economic Committee proves just how wrong the conservative position is. According to the report’s authors, there is no evidence that emergency UI benefits inflated the unemployment rate; the intensity with which the long-term unemployed searched for work actually tripled during the Great Recession. That analysis complements a similar study from Brookings earlier this year that found only 0.3 percent of the 4 percent increase in unemployment could be attributed to long-term benefits.
Unemployment benefits also function as extremely effective, targeted economic stimulus. Benefits are spent quickly on basic necessicities, creating a ripple effect throughout the economy that sustains consumer demand and supports employment. The authors of the JEC report argue that reauthorizing emergency UI benefits provide “the greatest ‘bang-for-the-buck’ among a range of fiscal policies,” boosting GDP with a multiplier effect that the CBO estimates to be as high as $1.90 for each dollar spent: far more than the negative multiplier of tax cuts.
As the report points out, Congress has continued to extend UI benefits until the unemployment rate fell substantially below peak in every major recession since the 1950s. And at 3.7 percent, the current long term unemployment rate is nearly three times higher than it has ever been when UI benefits were allowed to expire. It is estimated that, in 2010, over 3 million Americans were kept out of poverty by UI benefits. To allow the extension of those benefits to expire now would risk impoverishing millions of families at a time when consumer demand is already at historic lows.
Graph of the Day: Household Credit Market Recovering, But Student Debt Soars
By Benjamin Landy
Two years after the nadir of the recession in early 2009, the household credit market is slowly stabilizing. According to the latest data from the Federal Reserve Bank of New York, loan defaults and delinquency rates are falling for car payments, mortgages and credit cards, with total household debt down over a trillion dollars from its peak. In other words, Americans are finally getting their borrowing and debt payments under control—with one major exception. Student debt continues to rise ominously, with loan delinquency up 30 percent since 2009, and a whopping 400 percent in the last decade.
Bucking the deleveraging trend, total student loan debt has multiplied fivefold in the last ten years, from just $120 billion in 2001 to around $550 billion today—and shows no signs of stopping. Contra the NY Fed, the New York Times estimates that student loan debt has already outpaced credit card debt, and will likely top a trillion dollars this year.
Source: New York Federal Reserve Bank
The graph above illustrates how much better Americans have gotten at meeting their loan obligations on time: delinquency rates are generally back to where they were in late 2006, before the beginning of the financial crisis. But student loan delinquency has continued to rise, surpassing Home Equity Line of Credit (HELOC) and mortgages in growth.
The graph below zooms in on the change in loan delinquencies since 2009, at the trough of the recession, highlighting the seriousness of the problem: while students have less money than ever to pay for college, demand for higher education has only grown. Loans are the only available option for most students, even though they are finding them harder and harder to pay back.
Part of the problem is that, over time, the federal government’s commitment to student aid has changed in focus—increasingly relying on loans, rather than grants. Richard Kahlenberg, a Senior Fellow at The Century Foundation and an expert on education policy, is worried:
“Students, particularly those from low-income and working class families, are trapped in a double-bind. On the one hand, over time, federal financial aid has shifted from grants to loans. On the other hand, the institutional funds provided by colleges and universities has shifted from need-based to non-need merit aid. Low-income students are especially hurt by these trends, but in the end, we all lose out.”
View more from the Graph of the Day Series.
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: An ‘Occupy Wall Street’ Primer
By Benjamin Landy
As the Occupy Wall Street protest builds strength in lower Manhattan, inspiring offshoot movements to “occupy” Boston, Los Angeles, and numerous other cities, the mainstream media are finally beginning to address Americans’ growing discontent over income inequality, debt, corporate greed and corruption—a conversation dominated until very recently by the Tea Party. Unfortunately, class privilege remains an uncomfortable topic in most media circles, and the hard facts about rising income inequality go largely unreported.
Here, for those wondering what all the fuss is about—or those simply wanting to learn more—is the single most important graph concerning U.S. income inequality.
In the graph on the left (click to expand), it is difficult to discern any appreciable increase in real income for all but the top 15 percent of taxpayers since 1979. But while middle class wages have remained stagnant for the last 40 years, top incomes have skyrocketed, more than tripling in the same period. The graph on the right reframes this dramatic shift in terms of percent share of total income, illustrating a stark divergence between the most wealthy Americans and nearly everyone else.
Of course, it wasn’t always this way. For much of the twentieth century, the United States had a strong middle class. Incomes for all Americans were rising as wages tracked producitivity growth. Then, beginning around 1973, these two trends decoupled. Political scientists continue to debate the exact reasons—lower taxes on the rich, deregulation of business, a widening gap between the technological skills of the labor force and available jobs—but productivity soared while only the incomes of the top ten percent continued to rise in tandem. The middle class, as it had existed since the end of the Second World War, began to decline. The top one percent, meanwhile, now control a substantial majority of the nation’s wealth: In 2010, the 400 wealthiest individuals held more assets—in stocks, home equity and other investments—than the bottom 50 percent of Americans combined. The average wealth of the top 1 percent was nearly $14 million in 2009, down from a peak of $19.2 million before the financial crash.
When you look at the data, it’s not hard to see why so many Americans are upset, nor why Republican strategists are so concerned by the effectiveness of the protesters’ populist slogan, “We are the 99%.” It’s hard to defend tax breaks for millionaires when Congress is slashing budgets for social programs that help the poor, especially when the threshold income to join the top 1 percent is $516,633—about ten times median income.
That anger is now beginning to take form. When I walked down to Zuccotti Park in New York’s financial district last Wednesday to observe the thousands who had gathered there to protest, what I repeatedly overheard was some variation of “I’ve been waiting for this to happen.” And while it is too soon to say whether the Occupy Wall Street movement will grow into the Left’s answer to the Tea Party, the mainstream media and the Democratic Party are at least sitting up and taking notice. We’re long overdue for a national conversation about the unprecedented income inequality in this country, and Wall Street—the symbolic center of the financial world—is as good a place as any to start it.
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.
“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)
Graph of the Day: Why Deregulation Won’t Fix the Economy
By Benjamin Landy
The Republican media complex has been having a field day with last month’s dismal jobs report, taking the opportunity to blame every progressive achievement of the last hundred years—from Social Security to the EPA to Medicare—for the nation’s current economic woes. The latest target in this series of straw men is government regulation, which the Heritage Foundation yesterday labeled the number one impediment to job growth.
Setting aside for the moment that it was a lack of regulation that allowed the derivatives market to wreck the economy, this claim fails to take into account the real reasons business leaders themselves have given for laying off their employees. According to the Bureau of Labor Statistics, which conducts a yearly Mass Layoff Statistics program that requires businesses to report their reasons for firing employees, government regulation can account for only 0.2% of layoffs in 2009. A lack of business demand, on the other hand, accounted for nearly half of the 2.1 million people who lost their jobs that year.
The reason the average unemployment rate doubled between 2007 and 2009, rising from 4.6 percent to 9.3 percent, had nothing to do with new government regulation and everything to do with the deepening financial crisis. As the above graph demonstrates, government regulations and union labor disputes (another frequent scapegoat invoked by the GOP) combined accounted for only 0.3% of layoffs in 2009. In the vast majority of cases, it was insufficient demand and low consumption—caused by the massive overhang of household debt—that forced businesses to shed employees.
Nevertheless, Republicans continue to claim that any and all government programs are ultimately “job killers.” The Heritage Foundation, among other conservative think tanks, frequently refers to a paper drafted for the Small Business Administration’s Office of Advocacy by Nicole and Mark Crain, which estimates that regulations cost the U.S. economy $1.75 trillion dollars annually. They continue to cite this figure despite a recent report, “Setting the Record Straight: The Crain and Crain Report on Regulatory Costs,” which argues that the Crain’s calculations are wildly unreliable, based largely on opinion polling and using only the upper range of estimates given by the Office of Management and Budget. In fact, according to the OMB, the total benefits of regulation in 2008—including money saved from reduced health costs and increased life spans—ranged from $153 billion to $806 billion. Those numbers are backed up by similar analysis by the EPA, which estimates, for example, that the Clean Air Act prevented 160,000 cases of premature mortality, 130,000 heart attacks, and 13 million lost work days in 2010.
Republicans’ misguided focus on eliminating such regulations, which keep our air safe to breath and water clean to drink, will not convince businesses to begin hiring again. Only by investing in our economy and infrastructure and assisting homeowners with their unprecedented household debt will we be able to increase consumer spending and get unemployed Americans back to work.
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.
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.
