“Almost Anything Would Be More Important”: Memo To Fiscal Hawks, The Long-Term Deficit Doesn’t Matter
Over the weekend I got in a long argument with some ally of the deficit hawk group Fix the Debt on Twitter, and while most of the conversation turned on who should be blamed for mass unemployment, it did reach an interesting place in one respect. This person took as a given that long-term deficit reduction is a policy priority of the first rank — a belief that is very common among America’s elite.
This priority is misguided both in detail and in general. Here’s why.
There are two points to make here: First, long-term deficits are entirely about the rising cost of health care. Centrist elites insist that this is a reason to make our social insurance programs less generous, but the reality is that America’s high prices are driven by inefficient service provision, not by excessively generous programs. American health care is unfair, monopolistic, and captured by specialist doctors, and our policies are designed poorly, which is why we pay about half again as much as the next-most-expensive developed nation for what is in fact a pretty threadbare safety net.
This point is crucial. What it means is that making our social insurance more stingy, by raising the Medicare eligibility age for example, will accomplish almost nothing. Unless you tackle the skyrocketing cost problem, the budgetary headroom created by benefit cuts will be eaten almost immediately by rising prices. In other words, no matter how many grannies you put into the poorhouse, on predicted trends eventually a single ibuprofen will cost the entire federal budget. (Unless, of course, you just repeal all social insurance altogether and let sick, poor, and old people go bankrupt and die in the hundreds of thousands per year.)
Fortunately, we just passed a gigantic health care reform package. You might have heard of it: It’s called ObamaCare, and it seems to be helping slow health care inflation.
Second, even if we set that issue aside and talk about the Platonic ideal of long-term deficits, there again the case for action is weak at best. The political problem is that America does not actually have the consensus necessary to reduce deficits on a long-term basis, despite the constant whining about it one hears all the time on cable news. One of our two political parties is composed of total hypocrites on this issue — just look at Paul Ryan. It is a near-certainty that any long-term work on the deficit would be immediately squandered on tax cuts for the rich the moment Republicans got a chance — it’s what happened in 2001.
But even on the merits, if you actually run through the economic reasoning (PDF), the case for worrying about the long-term deficit is weak at best. The U.S. is indebted in its own sovereign currency and cannot go bankrupt. Inflation could be a worry, but given current mass unemployment it’s a hypothetical concern at best.
So don’t worry about the deficit in 2050 or whatever. People ain’t got no jobs. People ain’t got no money. That’s what matters.
By: Ryan Cooper, The Week, March 3, 2014
“They Never Really Cared In The First Place”: Why Republicans Don’t Want To Acknowledge The Falling Deficit
An important budget memo was issued this week celebrating just how far the deficit had fallen over the last five years. But in one of the incongruities that define the political moment, the memo was issued by a Democrat, Senator Patty Murray of Washington, chairwoman of the Budget Committee, not a Republican.
The steep decline of the deficit is not something Republicans really want to talk about, even though their austerity policies were largely responsible for it. If the public really understood how much the deficit has fallen, it would undermine the party’s excuse for opposing every single spending program, exposing the “cost to future generations” as a hyped-up hoax. In fact, it would lead to exactly the conclusion that Ms. Murray reached in her memo to Senate Democrats: that the country can now afford to spend money to boost employment, stay competitive with the rest of the globe in education and research, and finally deal with the long-deferred repairs to public works.
In 2009, the deficit was more than $1.4 trillion, which was nearly 10 percent of the nation’s gross domestic product. This year, the deficit will be a little more than a third that size: $520 billion, or 3 percent of G.D.P. The Treasury Department said on Thursday that the deficit fell more sharply in the last fiscal year than in any year since the end of World War II.
Some of the deficit reduction — about 23 percent — is due to tax revenue increases, mostly from the deal to raise income tax rates to Clinton-era levels on households making $450,000 or more. And some is due to lower interest costs, and the slowing growth of health care costs, which is partly attributable to the health care reform law.
But about half of the reduction, the biggest part, is the result of $1.6 trillion in cuts over several years to discretionary spending demanded by Republicans in several rounds of budget negotiations. As a recent Times editorial noted, this has become the tragedy of the Obama administration, undoing the positive effects of the 2009 stimulus, keeping the economic recovery sluggish, and hurting millions of vulnerable people who depended on that spending for shelter, food and education.
Having prevailed over all of those liberal programs, why can’t Republicans acknowledge that the deficit has been vanquished? Just yesterday, they blocked a bill to provide expanded medical and education benefits for veterans, citing the looming deficit. “This bill would spend more than we agreed to spend,” said Senator Jeff Sessions of Alabama. “The ink is hardly dry and here we have another bill to raise that spending again.”
The answer, of course, is that Republicans never really cared about the deficit, having raised it to enormous proportions during the administration of George W. Bush. Their real goals were to stop government spending at any cost, and to deny President Obama even a hint of political victory or economic success.
And so Republicans will resist any attempt to use their budget triumphs for Democratic purposes. As Ms. Murray writes, that will create different kinds of deficits: a deficit of people working, of students studying, of roads and bridges and research projects that can lead to prosperity instead of the gloom of austerity.
By: David Firestone, Editor’s Blog, The New York Times, February 28, 2014
“Contrary To Popular Belief”: In Real Life, Higher Minimum Wage Doesn’t Kill Jobs
Economists and government officials endlessly speculate on the impact of raising the $7.25 federal minimum wage.
Most recently, a report by the nonpartisan Congressional Budget Office said that raising the federal minimum wage to $10.10 an hour might cut employment by 500,000 workers. That is balanced by the projection that higher pay could also boost about 900,000 people out of poverty.
But some places in the U.S. already have real-life experience with raising their minimum wage.
Washington state, for example, has the nation’s highest rate, $9.32 an hour. Despite dire predictions that increases would cripple job growth and boost unemployment, this isn’t what happened.
At 6.6 percent, the unemployment rate in December was a click below the U.S. average, 6.7 percent, and the state’s job creation is sturdy, 16th in the nation, according to a report by Stateline, the news service of the Pew Charitable Trusts.
In Seattle, where metropolitan-area unemployment is 5.3 percent, that $9.32 sounds so yesterday. The mayor and city council are practically in a race to see who can move faster and with more gusto to increase the minimum wage to $15 an hour.
Safe bet: They will make a move by summer. Seattle could then surpass San Francisco, another city that fancies its role as a laboratory. The City by the Bay’s minimum wage is the highest (not counting airport workers), at $10.74 an hour, and officials are discussing a new rate of about $15.
While Seattle and San Francisco are unrepresentative of the nation, they have helped pressure their states to raise their minimum wages. Fifteen years ago, Washington voters approved an initiative giving the lowest-paid workers a raise almost every year, with increases now tied to inflation. Those increases produced the highest U.S. rate, although California could lap that in 2016 when it hits $10 an hour. Washington governor Jay Inslee and Democratic legislators have been pushing to raise the statewide amount to almost $11 or $12 an hour, but that now seems unlikely this year.
Critics of the voter-approved increase in Washington said it would harm the economy and cause businesses to flee to lower-wage states, such as neighboring Idaho, where the minimum wage is $7.25 an hour. That didn’t happen, as the experience of Washington counties bordering Idaho show.
At the Olive Garden in Coeur D’Alene, Idaho, the spaghetti and meatballs are about $1.70 cheaper than at the Olive Garden about a half-hour away in Spokane, Washington. That may be explained by Idaho’s lower minimum wage, taxes, land costs or something else. A restaurant spokeswoman would only cite vague costs of products and of doing business in various locations. Whatever it is hasn’t stopped Olive Garden from operating two restaurants in the Spokane area.
Bruce Beckett, government affairs director of the Washington Restaurant Association, said he wasn’t aware of any restaurants bailing out of Spokane for Idaho. He said he had heard anecdotes about local restaurateurs buying cheaper supplies in Idaho — fairly small potatoes.
Two bakeries moved across the border a few years ago, said Robin Toth of Greater Spokane Incorporated, a Chamber of Commerce and economic-development organization, but she said those businesses cited Washington’s taxes, not its higher minimum wage, as the reason for doing so.
Yes, but what about businesses that can be based anywhere?
The Spokane chamber group had heard of one telemarketing company that had considered an operation in Spokane, then chose El Paso, Texas, instead. The company mentioned the higher minimum wage.
To be fair, it is difficult to measure what didn’t happen: the businesses that didn’t locate in the state, the job growth that vanished, the young people who missed opportunities. There is fear that adults are taking some jobs from teenagers. The state teenage unemployment rate is about 30.6 percent, compared with a national figure of 22.9 percent.
But over the years, states have raised the minimum wage above the federal level without major harm.
A study at the University of California at Berkeley compared hundreds of pairs of adjacent counties in states with differing minimum-wage rates and concluded that a higher minimum wage didn’t significantly affect employment.
“We found in these cross-border comparisons that employment did not decline on the higher wage side of the border,’’ said Michael Reich, one of three authors.
The research found that employers in places in the U.S. where the minimum wage was higher, as in eastern Washington, had an easier time recruiting and retaining workers, said Reich, who directs Berkeley’s Institute for Research on Labor and Employment.
“As a result, they saved on hiring and turnover costs, as well as the costs of not being able to fill all their vacancies,” he said. “Increased labor supply, together with small price increases in restaurants, could explain why we did not find employment moving to lower wage areas, such as in western Idaho.’’
Minimum-wage workers are younger, often single, perhaps working two jobs in leisure, hospitality, food preparation and serving. A single individual working full time and being paid Washington’s minimum wage earns more than the federal poverty level.
That changes if the earner is supporting a family. Maybe Seattle’s ascent into $15 territory — along with a few other cities — will eventually give Washington and other states the political will to follow this path. There is little real-life evidence to discourage them.
By: Joni Balter, The National Memo, February 24, 2014
“Minimum Truth”: The Hollow Argument Against Higher Wages
In the midst of a crucial political debate that plainly favored proponents of a higher minimum wage, the Congressional Budget Office dropped a bombshell headline this week. Increasing the minimum to $10.10 an hour – as demanded by President Obama and Democrats on Capitol Hill – will “cost 500,000 jobs.” At a moment when employment still lags badly, that assertion was potentially devastating.
Almost lost in much of the predictable media coverage was the CBO’s estimate that a minimum-wage increase would lift at least 900,000 workers and their families out of poverty – and boost incomes for at least 15 million more.
But as top economists have repeatedly pointed out, such damning employment numbers are fuzzy and unreliable, while the CBO’s poverty numbers probably underestimated the positive impact of a higher minimum.
Moreover, those 500,000-jobs-lost headlines were highly misleading, with the strong implication that more than half a million actual people would be laid off — which is wrong. In fact, the CBO number is meant to estimate the number of jobs that employers might not fill when workers leave, or the number of jobs that employers might not create as quickly if they must pay a higher wage. It doesn’t mean that people will lose their current jobs, but those people seeking low-wage jobs may have to look slightly longer to find them.
What about that nice round number of 500,000? Naturally it is rounded to the nearest hundred thousand, but more to the point is that the headlined number is simply the midpoint of an estimated range from “slight impact” or zero lost jobs on the low end to one million on the high end.
Such a million-job spread represents substantial uncertainty. Skeptics may consider the uncertainty even greater because the CBO report relied heavily on disputed assumptions by conservative economists – and diverged from the consensus of top US economists, who expect that moderate increases have a vanishingly small impact on employment.
But even if 500,000 fewer jobs are created in the short run, that somewhat notional cost must be weighed against the indisputable benefit to low-wage workers. As economist Dean Baker explains:
With 25 million people projected to be in the pool of beneficiaries from a higher minimum wage, this means that we can expect affected workers to put in on average about 2 percent fewer hours a year. However when they do work, those at the bottom will see a 39.3 percent increase in pay.
While overstating the negative effect of raising the minimum wage on jobs, the CBO study understated the positive effect on families living in poverty. Its estimate of 900,000 families lifted above the poverty line is based on computer simulations. But historical research into the effect of previous minimum-wage increases suggest a much more robust benefit to the working poor.
According to University of Massachusetts economist Arindrajit Dube, who has studied the effects of minimum-wage increases in recent decades, the impact on poverty is much more powerful than the CBO suggests. He quotes a study by the Hamilton Project, a centrist economic think-tank based at the Brookings Institution, which suggests that as many as 35 million families will benefit from an increase to $10.10 an hour due to “spillover effects” raising income among workers who already make slightly more than the minimum.
Dube’s studies of the historical effect of past minimum-wage increases indicate that raising the federal minimum to $10.10 would lift somewhere between 4.6 and 6 million households above the poverty line.
Raising the minimum wage will also reduce profiteering by large, highly profitable employers like Walmart and McDonalds, whose workers rely on government benefits – such as the Earned Income Tax Credit and food stamps – to supplement inadequate paychecks. Survey after survey reflects the strong public appetite for higher wages at the low end. But popular approval is not the only way that companies can actually benefit from improving workers’ earnings and livelihoods.
The Gap clothing chain just announced that its workers will soon receive better pay to bring them above the current federal minimum. Announcing that his company will voluntarily raise its lowest-paid workers to $9 this year and $10 next year, Gap CEO Glenn Murphy said he regards the expense as a “strategic investment” that would pay for itself many times over in better productivity and morale (as well as lower job turnover and training costs).
When the clear social benefits of raising wages are contrasted with the dubious warnings of lost jobs, there is no real argument. If we intend to address poverty and reduce inequality, higher wages across the workforce are imperative – but especially at the bottom.
By: Joe Conason, The National Memo, February 21, 2014
“Ignore The Prophets Of Economic Doom”: Why The Government Should Help The Unemployed Even If It Might Not Work
The United States is now starting its sixth year of mass unemployment, a grinding economic disaster that shows no sign of relenting. As Brad DeLong has written, very soon our current mess will result in something worse than the Great Depression: “Future economic historians will not regard the Great Depression as the worst business-cycle disaster of the industrial age. It is we who are living in their worst case.” (Though the Depression was deeper, the U.S. economy recovered much more quickly.)
That is the context in which we should look at a new spate of pessimistic economic arguments about the future. On Tuesday, the famed economist Robert Gordon released a new paper arguing that future economic growth will be awful.
Here’s a section from Gordon’s abstract:
This paper predicts that growth in the 25 to 40 years after 2007 will be much slower, particularly for the great majority of the population… The primary cause of this growth slowdown is a set of four headwinds, all of them widely recognized and uncontroversial. Demographic shifts will reduce hours worked per capita… Educational attainment, a central driver of growth over the past century, stagnates at a plateau… Inequality continues to increase, resulting in real income growth for the bottom 99 percent of the income distribution that is fully half a point per year below the average growth of all incomes. [NBER]
This may be right and it may not. (Personally, I’m not at all convinced — see Kevin Drum and Tyler Cowen for a good discussion.) But the great danger is that these predictions could be self-fulfilling, discouraging Congress from taking immediate action in the face of economic trends that will overwhelm its comparatively puny efforts.
What we must remember is that there is a strong case that additional effort could solve at least part of our mass unemployment problem at low cost. We owe it to ourselves and our fellow citizens to try to restore full employment, even if it might not work.
The case against the stagnationist position goes something like this: America is not primarily suffering economically because of the factors Gordon pointed out. Rather, as during the Great Depression, we’ve suffered a collapse of aggregate demand, and institutional arrangements and political gridlock prevent us from fully addressing the problem through monetary or fiscal stimulus. This dynamic is also quite similar to that of the Great Depression — it took World War II to break through the political gridlock and get enough deficit spending to restore full employment.
If the stagnationists are right, then government attempts to restore employment with monetary or fiscal stimulus will result in little more than inflation. But they might be wrong, and the relative downside risks to their positions aren’t even close to comparable. A bit of moderate inflation is no big deal — it came in at around 4 percent during most of Reagan’s term, and the Fed has the tools to easily rein inflation back in if it rises above the central bank’s target rate of 2 percent. In fact, a little inflation could even help matters, by eroding household debt burdens and reducing real interest rates.
On the other hand, mass unemployment is an ongoing economic and humanitarian catastrophe.
It’s like if your house is on fire, and you’re worried that spraying it with a firehose might break some windows. Maybe true! Also a terrible set of priorities!
So whether Gordon and others have a good theoretical case for their pessimism is not remotely enough to justify inaction on unemployment. Policymakers should keep that at the front of their mind.
By: Ryan Cooer, The Week, February 19, 2014
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