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In Support of a Jobs Program (working title)

Fed Chief Jerome Powell, most of his life a fiscal conservative, has lately sounded like anything but:

“Given the number of people who have lost their jobs and the likelihood that some will struggle to find work in the post-pandemic economy, achieving and sustaining maximum employment will require more than supportive monetary policy,” Powell said in remarks to the Economic Club of New York. “It will require a society-wide commitment, with contributions from across government and the private sector.”

Recovery, Powell said, would require both “near-term policy and longer-run investments” to ensure anyone who wants a job can get one.

Powell on Wednesday cemented that stance, noting that after World War Two, as the economy transitioned from wartime and needed to absorb millions of returning soldiers into the labor force, the Employment Act of 1946 committed the government “to use all practicable means” to see that anyone willing and able to work can find “useful employment.”

Fed Chiefs typically stay out of fiscal policy debates; in being vocal, Powell is going against both tradition and his long held personal beliefs. But as a true expert he understands that appropriate economic policy is context sensitive, and as a dedicated public servant he understands what his priorities should be.

Powell is probably advocating for something temporary in nature, however I see the need for a more permanent expansion of the civil service. Whether such a program should be guaranteed to everyone, or just very large in scale, is open to debate (I would argue a guarantee is worth the higher price tag). What is not open to debate is the need to do something—the private sector is no longer up to the task of productively employing as many Americans as we ask it to:

“The labor market continues to work pretty well as an economic institution, matching labor to capital, for production. But it is no longer working so well as a social institution for distribution. Structural changes in the economy, in particular skills-based technological change, mean that the wages of less-productive workers are dropping. At the same time, the share of national income going to labor rather than capital is dropping.

This decoupling of the economic and social functions of the labor market poses a stark policy challenge. Well-intentioned attempts to improve the social performance of the labor market – through higher minimum wages, profit-sharing schemes, training and education – may not be enough; a series of sticking leaky band-aids over a growing gaping wound.

As Michael Howard, coordinator of the U.S. Basic Income Guarantee Network, told Newsweek magazine: “We may find ourselves going into the future with fewer jobs for everybody. So as a society, we need to think about partially decoupling income from employment.”

This decoupling of the economic and social functions of the labor market is most pronounced after recessions. It wasn’t until 5 years after the Great Recession “ended“ that employment reached its pre-recession level. This time around the CBO projects employment won’t hit its pre-pandemic peak until 2024, even though GDP is expected to recover midway through this year.

But workers getting a smaller piece of the pie is not just an issue during and after recessions—declining labor force participation and stagnant wages have persisted for decades. Even during the period before the pandemic—the longest economic expansion on record—labor force participation never really recovered from the Great Recession (which itself was lower than before the dotcom bubble burst). This gives reason to believe the COVID Recession might lead to permanent labor market scarring even with continued fiscal support.

Recessions aren’t just economic downturns, they also accelerate existing economic trends like automation. Cost reduction measures necessitated by the COVID Recession, combined with long overdue calls for a livable minimum wage, will likely accelerate the trend of less Americans (particularly the less educated) being employed through the private sector. If this is the case, the public sector will need to pick up the slack.

Universal Basic Income is an idea that gained mainstream attention in America during Andrew Yang’s 2020 Presidential bid. But giving everyone some money doesn’t really solve the financial problems of people whose jobs are displaced by automation and globalization, nor does it address the mental health impact of being disconnected from the labor force. A jobs program addresses both issues, and the jobs themselves can be used to address other social issues.

There is the question of what types of work we should prioritize, and there is a good argument for having some flexibility at the local level. But generally speaking there are needs which, while not profitable for the private sector to provide affordably, would nonetheless make us a more productive and cohesive society. The government already provides many of these things in some capacity, but they tend to be chronically underfunded. Notably they all address issues that were present before the pandemic, but have since been brought to light and exacerbated.

Lets start with infrastructure, historically a less contentious area for public investment and one where there is obvious need. America’s roads and bridges are in need of repair. Flint, Michigan didn’t have clean drinking water for years, and many other areas are at risk of similar crises. The “digital divide” (broadband internet availability and affordability) has been exposed as we scramble to educate children remotely, but is a problem that preceded and will outlast the pandemic. Climate change demands investments in clean energy infrastructure, and if we want to shift to electric vehicles we’ll need a reliable network of charging stations installed around the country.

For some types of infrastructure public-private partnerships could leverage taxpayer money to tease out private sector contributions, but not all of them. Recent history has made it pretty clear the government will have to do most of the heavy lifting if we want these investments made at scale.

Other areas of need exist in the education, healthcare, and social assistance sectors. Affordable childcare and universal pre-K help women enter the labor force, and have a strong positive impact on the development of young minds (increasing their future contributions to society). Mental healthcare is another area to invest in; improving mental health outcomes not only reduces human suffering, it also leads to an overall healthier and more productive society. Jobs in these sectors rely on a human touch, making them more difficult to automate.

America already had a lack-of-employment-induced mental health crisis before COVID—the “Opioid Crisis”. We need to try to address mental health issues preventatively by educating a more resilient and understanding youth through social and emotional learning (SEL) in K-12 schools. For adults we must address the difficulty of finding affordable mental healthcare by creating an corp of licensed mental health professionals. Police officers need more mental health professionals to effectively serve and protect their communities.

An Associates degree type program, developed in consultation with leaders in the field and focused on treating the most common mental health issues like anxiety and depression, could be administered at Community Colleges across the country. This corp of social workers is not intended to replace psychologists or psychiatrists, but rather operates under the belief that less-credentialed care is better than no care at all (which is what too many Americans are currently receiving).

There should be broad based support for such a jobs program. Progressive politicians need to make the case that these are the coal mining jobs, or the manufacturing jobs, of 21st century America; they won’t make you rich, but it’s meaningful work that provides a decent standard of living. We need to invest more in public higher education and apprenticeships, as President Biden is proposing, so new and existing jobs can be obtained without risking financial ruin by way of student loan debt (another drag on the economy and people’s mental health).

That is the promise America once provided, at least for some people—stable, meaningful employment you won’t go broke chasing the skills for. It is within our fiscal ability to provide these jobs, fulfills major societal needs, and complements the private sector by making it more productive in various ways. These are not just a scattershot of “progressive priorities”, taken together they synergize to form a visionary mosaic which would provide hope, direction, security and a sense of unity to the American people.

Yes, a jobs program would lead to some savings on welfare programs and the criminal justice system. Yes, health outcomes should generally improve as mental health issues are better addressed, resulting in increased tax revenues from a healthier, more productive society. But lets be honest–such a jobs program may or may not “pay for itself” in fiscal terms; forecasting a program of this scale, with all its unanticipated impacts, would ultimately be inaccurate. But factoring in what it would mean for America—by addressing the worsening and interrelated economic, social, emotional, and [literal] environmental storms the status quo has left brewing—how could it not be worthwhile? The question is not “can we afford to make these investments?”, but rather “can we afford not to?”

Social unrest this past year has proven people will not sit idly by while lawmakers figure out some elusive, deficit-neutral “grand compromise” to address the nation’s problems (as if they are even trying to). We will eventually have to pay for a jobs programs and other programs needed to promote economic opportunity, but low interest rates give us time to figure out that side of the equation. The Biden Administration is committed to international cooperation on taxation, a necessary precondition to building a global financial system that ensures the wealthiest and big corporations pay their fare share of taxes.

The levers of power and public opinion are aligned in a way our tilted electoral system doesn’t often allow for–the time for bold action is now.

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America’s Choice: Winner-Take-All or Social Democracy

Image result for social democracy america

The 2018 midterm elections, which saw significant gains for the Democratic Party, were in many ways a rejection of President Trump’s policies and worldview. But while the American people seemingly know what we don’t want, do we know what we do want? Those are the questions to be answered leading up to and by the 2020 elections, campaigning for which is already underway.

Ultimately we cannot have the “economic populism” many Americans across the political spectrum seem to want with our current tax code. Insufficient tax revenue means the government cannot provide what is needed to develop the next generation of Americans while simultaneously addressing more immediate concerns. In order to fulfill these two key responsibilities of governing, it is time to seriously consider ideas that have, for a while, been outside of mainstream political discourse.

One such idea is that taxes can be significantly higher at higher income levels. The vast majority of Americans believe that the wealthy and corporations do not pay their fair share of taxes (and these survey results are from before the new GOP tax code went into effect, which even further reduced taxes for the wealthy and corporations).

Alexandria Ocasio-Cortez has recently brought this idea to the forefront, proposing top income tax rates upwards of 70%. Nobel prize winners have said optimal rates may be as high as 80+%. I do not know what a politically viable top rate is, that’s for the American people to decide. I do know that it should be significantly higher than it is today.

Here are three things to consider regarding taxes in America:

  1. Marginal Income Tax Rates

    Whatever tax brackets we choose to have, they will work within the marginal tax rate system we currently use. What are marginal tax rates you ask? Well, imagine there are 3 tax brackets:

    10% for those making > $10,000
    20% for those making $10,000-$100,000
    30% for those making > $100,000

    If I got a raise from $90,000 to $110,000, only the $10,000 over 100,000 would be taxed at 30%. Dollars 1-9,999 would still be taxed at 10%, and dollars 10,000 – 100,000 would still be taxed at 20%. My income would not all now be taxed at the highest rate, only the amount over that top bracket threshold.

    The idea that people will work less hard because of higher marginal rates is silly–people typically can’t control their earnings that much (without the help of high priced accountants at least). Your average American works as hard as they can in hopes of earning as much as they can–they do not calibrate their level of effort based on what is typically a small tax increase that results from entering a higher bracket.

    Now having high marginal tax rates is admittedly harder in a globalized world than it was in the mid 20th century, because people can move themselves and their money around much more easily today. Having said that, and feel free call me a “homer” if you like, but I think that America is pretty unique and special place. If our leaders prioritized curtailing tax avoidance by coordinating with other countries and international organizations, I believe that people would still choose to live, operate businesses, and park their wealth here even if we had higher tax rates.

    In other words, if the choice was pay your fair share or leave, I believe that most wealthy people would choose to pay their fair share.

  2. Income as a Measure of Hard Work, and Inequality in the Age of Globalization

    Think about entrepreneurs in the 1950s. They brought their products mainly to domestic markets, which relied primarily on domestic infrastructure, court systems, and public goods to function. At the time, the government was able to provide these goods without running huge deficits, in large part by adequately taxing the rich.

    Now think about entrepreneurs in the 2010s. They bring their products to a global market. If it’s a popular product, global capital chases it, expanding operations and profits. Maybe they decide to sell their company to foreign firm for a huge pay day.

    The 1950s millionaire entrepreneur can easily be today’s billionaire. Does today’s billionaire work that much harder? Generally speaking, not really–both work(ed) very hard, and there are only so many hours in a day. The same is true of today’s business executives versus those of decades past. Today’s greater earnings, rather, are largely an effect of the global economy we operate in, not harder work–there are billions of potential customers out there instead of millions.

    The global economic system is expensive to maintain. Today the U.S. government needs to not only finance domestic infrastructure and institutions, it also has to help finance international institutions and (perhaps most importantly and expensively) global defense.

    The U.S., as a global leader, naturally pays a large portion of this global economic infrastructure. While it is impossible to quantify piece-by-piece, overall this is a good deal for Americans–just look at the world as it currently is as proof! America is leading the way in almost all macroeconomic metrics (despite what Trump may say about us getting “taken advantage of”, “losing”, or “not being respected”).

    Where America is lacking is in social cohesion, social mobility, and general optimism and happiness. This is not an accident, but rather a feature of our current winner-take-all economic system. This is not just a liberal “bleeding heart” speaking, just ask Fox News host Tucker Carlson.

    It is not difficult to understand the anger of Americans displaced by globalization. Over the past few decades, middle class workers have seen their incomes stagnate, even as their productivity has risen. Why should the wealthy see gains well beyond their hard work, while the average person doesn’t even see the gains their work should rightfully earn them?

    Wealth did not trickle-down as promised (no surprise there, it never does). People who could not afford the increasingly expensive baseline goods needed take advantage of the global economy (early childhood development, higher education, job [re]training) became disgruntled, believing politicians from neither party cared about them. They then went out and voted for any “outsider” offering simple solutions to complex problems, and we ended up with President Trump.

    The truth is that America’s economy has become unfair. In order to restore that fairness we need to provide certain public goods–like affordable (if not free) higher education and healthcare. In order to provide these things, we need more tax revenue, and that tax revenue has to come from the ever-wealthier wealthiest Americans.

    There are many types of taxes, aside from income tax, that are also in play. Some are currently part of the U.S. tax code, while others are not. Examples include corporate taxes, capital gains taxes, financial transaction taxes, carbon taxes, estate taxes, sales taxes and gasoline taxes. 2020 Democratic Presidential candidate Elizabeth Warren has proposed a first-of-its-kind-in-America wealth tax, which has certainly gotten people’s attention.

    Some of these taxes fall mostly on the rich, while others hit everyone. This is an important consideration when trying to address inequality through the tax code. There are also countless tax loopholes, some of which are useful but many of which should be closed.

    The appropriate top marginal income tax rate is a function of the overall tax code.

  3. Adequately Fund and Reprioritize the IRS

    “The [budget] cuts are depleting the staff members who help ensure that taxpayers pay what they owe. As of last year, the IRS had 9,510 auditors. That’s down a third from 2010. The last time the IRS had fewer than 10,000 revenue agents was 1953, when the economy was a seventh of its current size…the IRS conducted 675,000 fewer audits in 2017 than it did in 2010, a drop in the audit rate of 42 percent. But even those stark numbers don’t tell the whole story, say current and former IRS employees: Auditors are stretched thin, and they’re often forced to limit their investigations and move on to the next audit as quickly as they can.

    Corporations and the wealthy are the biggest beneficiaries of the IRS’ decay. Most Americans’ interaction with the IRS is largely automated. But it takes specialized, well-trained personnel to audit a business or a billionaire or to unravel a tax scheme — and those employees are leaving in droves and taking their expertise with them. For the country’s largest corporations, the danger of being hit with a billion-dollar tax bill has greatly diminished. For the rich, who research shows evade taxes the most, the IRS has become less and less of a force to be feared.

    The story has been different for poor taxpayers. The IRS oversees one of the government’s largest anti-poverty programs, the earned income tax credit, which provides cash to the working poor. Under continued pressure from Republicans, the IRS has long made a priority of auditing people who receive that money, and as the IRS has shrunk, those audits have consumed even more resources, accounting for 36 percent of audits last year. The credit’s recipients — whose annual income is typically less than $20,000 — are now examined at rates similar to those who make $500,000 to $1 million a year. Only people with incomes above $1 million are examined much more frequently.

    [Former IRS Commissioner Koskinen, in testimony about the IRS budget] told the Senate, “I don’t know any organization in my 20 years of experience in the private sector that has said, ‘I think I’ll take my revenue operation and starve it for funds.’”

    The idea that a resource-strapped IRS is auditing EITC recipients instead of millionaires and multinational corporations is as absurd economically as it is cruel morally. No wonder most Americans hate the tax man and think the wealthy don’t pay their fair share–they are right.

Being a “Competitive Economy” Need Not Be a Race to the Bottom

A friend recently shared a Breitbart article about America being “the world’s most competitive economy”. While this is good news, it definitely needs some context.

First, America wasn’t a slouch before Trump; we placed 2nd, 3rd, and 3rd in 2017, 2016, and 2015 respectively. I don’t feel like going further back, but I’m sure we’ve never been low on this list.

Second, look at the countries right after us. “Singapore, Germany, Switzerland, and Japan [make up the rest of the] top five. The top ten includes the Netherlands, Hong Kong, the U.K., Sweden, and Denmark.”

These countries almost all have higher levels of taxation, stronger safety nets, and stronger worker protections than the U.S. Some were the “most competitive” countries in past years. A country does not have to “race to the bottom” in order to be competitive.

Being first on this list, as opposed to being second or third, really doesn’t gain us anything other than a nice headline. Companies do not decide where to build plants or hire employees based on “most competitive” indexes, they do it based on their complex internal calculus (cost of labor, cost of moving goods around their supply chain, level of employee expertise needed, infrastructure needs, tax rates, etc.). In some cases this will be the U.S., in others it will not, regardless of meaningless titles.

Jobs and the “Green New Deal”

I am actually a fan of how Trump uses his bully pulpit to make hiring American workers an important consideration for companies–I like his tough rhetoric here. While I am not a fan of protectionism in general, in some cases the credible threat of tariffs is needed in order to show these are not just empty words. This is particularly true when another country isn’t playing fair on trade, which is certainly the case in some instances.

The problem is that Trump gets headlines for the jobs his policies creates or keeps, but not for the ones they lose. For example, job losses have exceeded gains when it comes to iron and steel tariffs and solar panel manufacturing tariffs. Aside from jobs, there is also the increasing prices of imports to consider, which make up about 15% of U.S. GDP–the American consumer likes options, including ones made abroad.

As I have said before, Trump’s worldview is too zero-sum and short-term. Specifically, he views addressing climate change only as a cost (which he always inflates), and not an opportunity for the U.S. to be a leader in emerging industries. Unfortunately, due to the 2013 sequester budget cuts, the Bureau of Labor Statistics stopped tracking “Green Jobs”, making it much more difficult to quantify the benefits of being a leader in these emerging industries.

Take electric vehicles (EVs) for example. General Motors is begging Trump to support a Nationwide Zero Emissions Vehicle program, to no avail. It’s like private sector lobbyists always have Trump’s ear, unless they are promoting something environmentally friendly.

ev investments by country

Credit: Reuters

Over the next decade car companies will invest over $300 billion in EVs, with the largest chunk going to China due to government incentives (Germany is second, while the U.S. is a distant third). As you can see from the image above, Trump’s stance towards EVs has resulted in us leaving other countries investment dollars on the table. It’s like Trump always wants to be tough on China and promote investing in the U.S., unless it has to do with something “green”.

Meanwhile, over in Germany, the government is paving the way for Volkswagen to position itself as a future leader in EVs. In fact, Ford just announced a partnership with VW on EVs. American automakers now need to look abroad for support because our President won’t help them–sad. Hey, remember when Obama saved the U.S. auto industry just a decade ago? That was pretty cool, but I guess Trump wants to undo that part of Obama’s legacy as well…

Auto companies are starting to reach a 200,000 vehicle sale threshold that triggers a gradual elimination of consumer tax credits for buying electric vehicles. Under normal circumstances, either a Republic or Democratic President would seriously consider extending these credits. Instead, the Trump administration has signaled it wants to eliminate the credits altogether.

The shift to a global economy was done on the backs of the commoner–global wealth soared, but so did wealth inequality. “Yellow Vest” protests in France show that regular people will not let the next major shift–from a fossil fuel based economy to a “green economy”–be solely placed on their backs as again (and rightly so!). Rather, this shift will need to be part of an “all hands on deck” approach, with everyone (rich, poor, and all those in between) contributing their fair share towards a greener, fairer, and more dynamic economy. This is the spirit of the “Green New Deal”.

America’s Choice: Social Democracy vs. Unbridled Capitalism

“Supply-side” GOP economics has always relied on questionable math (“magic asterisks“), Trump is just faster and looser with the rules. To Trump, numbers (and the truth in general) are things to be manipulated to promote his agenda. Lies about the value of the Saudi Arabian arms deal, the costs of addressing climate change, and the costs of illegal immigration are prime examples of this.

It is amazing how a man who casts doubt on so many things he disagrees with can speak with such confidence about things that actually are uncertain, like economic outcomes. But then again, humility and honesty have never been Trump’s forte.

Living in a democracy, the shape of our economic system is a choice we collectively make. In American democracy the means justify the ends, as long as the debate is honest and people can make informed decisions. To date, the debate on the structure of our economic system has been anything but honest. Those supporting wealthy interests pretend that any tax increases would ruin our economy, while simultaneously painting any social program as communism.

A choice does not have to be made between having a competitive economy, an environmentally sustainable economy, and a fair economy that promotes equality of opportunity–that is a false trichotomy. We can have all of those things with the right mix of public policy, hard work, and American ingenuity.


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Labor, Education, and Apprenticeships

Image result for apprenticeship

Long time no see folks. It’s well past time to shed that post-policy depression (tax code) and get back to it. In doing so let’s consider a topic I have discussed often, one that should have bipartisan and Trump administration support, but has unfortunately yet to get its due–apprenticeships.

The Trump administration just concluded it’s “Task Force on Apprenticeship Expansion” in May. Here are some key recommendations from the final report:

  • “The Subcommittee on Attracting Business to Apprenticeship recommended that the Industry Recognized Apprenticeship program should streamline and simplify program funding through various methods, such as updating Federal funding criteria, streamlining State grant access, and exploring sector-led financial options.” (p 10)
  • “According to recent research by the U.S. Government Accountability Office (GAO), there are more than 40 workforce development programs across nine Federal agencies. Data shows that these programs were funded with more than $42 billion, although less than half that amount ($17 billion) went to employment and training activities. Based on this data, there is a clear need to streamline and simplify programs by developing an organized approach that recognizes and preferentially funds apprenticeship.” (p 27,28)

Who can argue against greater efficiency? Nobody. However these efficiency increasing measures were already implemented, according to the Government Accountability Office (the very entity the Task Force cited regarding inefficiency in the first place)–that low hanging fruit has already been picked.

The Trump administration wants the private sector to share in the cost of scaling-up apprenticeship programs–another sentiment that is difficult to argue with. The problem is that it has not offered any incentive for the private sector to do so. Private companies are currently bringing in record profits while under-investing in apprenticeships; why would these companies change their behavior now, when times are good, without a new incentive to do so? Instead of increasing spending or leveraging the recent corporate tax giveaway to provide such an incentive, the Task Force cites measures to increase efficiency that have already been implemented.

The private sector needs to play a role in developing the curricula for apprenticeship programs, but can we stop pretending it will provide meaningful financing for them? Maybe if we cut corporate taxes even further they would, right!? If only we could’ve done away with that pesky corporate income tax completely, surely they would have (well, there is no more corporate alternative minimum tax now)…OK, clearly I’m still salty about tax reform…

It is time to admit that private businesses have largely abandoned the apprenticeship model. Sure there will always be anecdotes about successful training programs, particularly from large corporations that can afford to attract top talent. Unfortunately nothing currently exists on the scale required to meet the needs of the average American worker or business.

The results are obvious: underemployment, stagnant wages (a modest uptick in wage growth recently does not make up for decades of stagnancy), and ballooning tuition rates / student loan debt as everyone feels they must go to college to make a decent living. If the Trump administration’s answers to these societal problems are reaching some unattainable level of efficiency and expecting the private sector to suddenly become more altruistic, nothing will change from today’s unacceptable status-quo. If, on the other hand, apprenticeships were adequately invested in, they could provide an affordable alternative to the four-year college path, and revive America’s dwindling middle class.

The Trump administration just proposed merging the Labor and Education Departments. In talking about it, a friend asked me if I thought the proposal was a good idea. My answer was that it could be a good idea, but under this administration it would not be. If, for example, the merger really reduced redundancies and opened up more resources for programs like apprenticeships, that would be a positive trade-off in my opinion (again, greater efficiency is hard to argue against, in theory).

But lets be realistic, that is not the point of the Trump proposal. Look at Trump’s big Apprenticeship Task Force, which would fall squarely within the proposed agency’s mandate. Where’s the beef? SHOW ME THE MONEY! It’s simply not there…

As a nation we invest in what is important to us. No amount of free-market rhetoric, appeals to “greater efficiency”, or other forms of lip-service are going to shrink Americans’ skills gap or “make America great again”. Only investing adequately in our greatest asset–the American people–can accomplish that feat.

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(Note: When considering what we do spend tax dollars on, don’t forget that the recent spending bill appropriated $61 billion MORE for defense spending–$655 billion total, compared to $42 billion for workforce development programs. Also, don’t forget that the recently passed tax code will reduce tax revenue by over $1 trillion dollars over the next decade)

 


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Starved of New Ideas, the GOP Goes Back to “Starve The Beast”

“Starve the Beast”

The GOPs tax plan was the first part of a two-tiered approach to reduce the size of the government–it was never supposed to “pay for itself“. In order to keep the deficit from growing after cutting taxes, spending cuts–with “welfare” the common whipping boy–are necessary, or so the thinking goes. This method of governance, developed by the Republicans in the late 70s and 80s, is known as “starve the beast“.

History tells us that “starve the beast” does not work–it is a tried and failed policy. It turns out that when you get down to the actual programs involved, “welfare” is quite popular; it aligns with America’s collective moral compass, helps promote the “American Dream” (social mobility), and stimulates short-term economic growth. While there are reforms that could improve our welfare system, doing so responsibly requires complementary policies (more on this later).

There are again signs that the GOP will fail to fully implement its “starve the beast” agenda. The tax code is already the law of the land, yet the GOP does not seem to have the political will to tackle welfare reform. Far from starving the beast, Congress has just agreed on a budget deal that will increase spending by $300 billion dollars over the next two years.

I’m sure the GOP will come back to entitlement reform and overall government downsizing after the 2018 midterm elections. At this point the GOP will no longer have to worry about immediate electoral backslash from enacting unpopular welfare reforms, and probably believes the link between their tax cuts and the fiscal need to enact such reforms will have been severed in the average voters mind. But even when the political will to “starve the beast” resurfaces, I doubt the GOP will have sufficient Congressional support to actually implement the plan. Whether they have sufficient support will largely depend on the outcome of the 2018 elections–after all, “elections have consequences”.

Make no mistake, the likelihood that “starve the beast” will again fail is a good thing. The real crime is that the GOP passed a huge tax cut knowing it would not pay for itself, while also knowing that it would not be able to “starve the beast”. The results are ballooning deficits and insufficient resources to address America’s many needs. Sure, budgets may pass with small increases to existing programs, but new programs will not even be considered in this climate of huge (and increasing) national debt, rising interest rates on said debt, and much lower tax receipts.

Perhaps this is the true purpose of “starve the beast”–to restrict our country’s collective “policy imagination” (i.e. “fiscal space“). Instead of thinking about how to make America better, we will be stuck with the status-quo that people across the political spectrum are unhappy with (only now with even more inequality and debt).

Common Sense Welfare Reform

As mentioned before, there are some worthwhile welfare reforms to consider. Let’s look at a few of them, as well as the complementary policies needed to ensure they actually promote desirable results and don’t just place undue burden on America’s most vulnerable people.

SNAP

Let’s promote a healthy diet and save on our country’s medical spending! Why not go one step further and promote local produce wherever possible. Such a plan would benefit smaller farmers and local economies, promote greater public health, and reduce emissions from shipping food around the world.

Drug Testing for Welfare

I am not completely against drug testing people on welfare programs, or other oversight measures, but let’s be clear–such measures would require more spending to implement. It is entirely possible that the nation would spend more money on enforcement than it would save in rooting out welfare fraud–this has largely been the experience when states have experimented with such programs.

But money isn’t everything; in a democracy public support is the lifeblood of any policy, and clearly many people do not approve of our current welfare system. Surely even the most progressive person can see there is some benefit to addressing the concerns of a large portion of the electorate regarding our current welfare system. Addressing these concerns should ultimately increase public support for welfare programs.

The costs and benefits (monetary and otherwise) of various oversight measures are something we should study, so the American people can make an informed decision about whether such policies are truly worth pursuing.

Responsibly Reforming Welfare Programs

How else can we responsibly reform our welfare system, reduce disincentives to work, and promote gainful employment?

First of all, programs that benefit children, the non-wealthy elderly, persons with disabilities (including serious mental illnesses), and other vulnerable groups do not need more requirements–society’s most vulnerable do not need more hoops to jump through. Admittedly, just coming to an agreement on who should be considered ”able-bodied” is a difficult task itself.

But certain recipients, like healthy, prime working age people, can be reasonably expected to meet certain socially beneficial criteria in exchange for welfare benefits. One such example is a new “community engagement” requirement for Medicaid in Kentucky. Progressives may not like this plan, but as long as sufficient waivers exist for vulnerable groups, why should someone in the prime of their life not be working, looking for work, volunteering, and/or in a job training program for 80 hours a month? Such a change should lead to improved employability and mental health outcomes. This is a completely reasonable requirement, and the type of idea that responsible, bipartisan welfare reform can be built upon—leveraging welfare benefits to drive positive recipient behavior.

Aside from reforming welfare programs, other complementary programs targeting the labor market could help reduce reliance on government assistance. Higher minimum wages would reduce government spending on welfare programs, as we currently subsidize companies that do not pay a living wage. An expanded earned income tax credit (EITC) could help reduce disincentives to work by smoothing high marginal tax rates for people coming off welfare programs. We also need more job training and apprenticeship programs; we can’t just say there are job training requirements for welfare eligibility, but then not make these programs available! Just like with welfare oversight measures, expanding the EITC and sufficiently scaling up job training programs would both require significant government resources.

Simply put, there are upfront costs to responsibly reforming our welfare system. Unilaterally cutting welfare programs and hoping for the best will not work; any savings would ultimately be lost due to increased spending on the criminal justice system and decreased long term economic growth, as even more Americans would fail to reach their full economic potential.

Ideally, reducing the size of the “welfare state” would be an organic process by which we invest enough in our people, particularly early in life, to promote equality of opportunity. The complementary policies outlined above can help at the margins, but the real heavy lifting involves addressing the root developmental causes of poverty (early childhood development, housing, healthcare, education, etc.).

Progress Frozen in Time

This brings me to the main reason why the new tax plan is so regressive in the first place. It is not because it will be bad for the average American consumer or economic growth in the short-run; if anything, it should have positive short-term impacts in those regards. Those are, however, poor criteria for assessing the merits of a tax plan that will likely be in place for a long time and is directly related to our ability to fund programs that drive long term growth and social progress. In other words, what did we give up in exchange for these tax cuts?

Due to lower tax revenue, it will be very difficult to fund the aforementioned complementary programs needed to responsibly reform our welfare system, much less the more costly investments needed to promote equality of opportunity and drive long term economic growth (infrastructure, R&D, healthcare, education, job training and early childhood development).

On the topic of infrastructure, Trump’s “trillion dollar infrastructure plan” (now $1.7 trillion, if you still believe a word he says), will reportedly only use $200 billion in federal funds. The idea that $200 billion can leverage that much funding in mostly state and local tax money (as well as some private investment)–the crux of Trump’s plan–was a dubious claim when he made it while campaigning. With the caps on SALT deductions in the new tax code, and the resulting strain on state and local budgets, it can’t even be called wishful thinking–it is just a flat-out lie.

The results will be obvious in the type of infrastructure that ends up being built. Non-revenue producing infrastructure will fall almost completely to the wayside. There will not be enough funding for expanding broadband internet access and affordability in underserved areas, which would unlock better K-12 schooling and access to online job postings. In a sad irony, these underserved areas are mostly in “Trump country”.

EPA Chief Scott Pruitt has said combating lead poisoning is a top priority of his, but has offered no plan for how he will do it. Instead, he has undermined programs that protect children from lead based paint, and supported an overall downsizing of the EPA. In all likelihood there will not be enough funding for new water pipes to prevent people from getting lead poisoning, which stunts cognitive development in children. Stunted development compromises the future earning potential of those affected, increasing reliance on welfare programs–talk about being short-sighted.

Our country likely needed more tax revenue, not less, to promote equality of opportunity, meritocracy and social mobility–to make America fair again. People–albeit the minority of the electorate–elected Trump as a populist because they felt like they were being left behind. Trump has betrayed his base with his policies, whether they realize it yet or not.

The Same Old Blame Game

Absent the resources to actually address the needs of the average American, you will instead hear the GOP repeat its same old tired lines. Lets consider some of these talking points:

People are lazy

Well sure some are, but no more-so than they used to be…

It is true that labor force participation rates are down overall from highs in the 1990s, but this is less true among prime working-age people; the majority of labor force participation decline is due to an aging population.

Furthermore, many people collecting government assistance already work. As stated before, increasing the minimum wage and expanding the EITC would help promote gainful employment.

Traditional marriages / family structures / “values” are breaking down

This is really a societal shift, and in some ways is a natural consequence of a freer society. For example, a wife who is being beaten can more easily leave her husband now than she could decades ago.

This phenomenon is at the cross-section of many deeply personal, multifaceted, and interrelated choices people make (to get married or not, to have kids or not, to get divorced or not). As such, there is really very little the government can do to steer society back towards more traditional family structures. The common conservative call to block access to family planning services, contraception, and abortion, however, will only exacerbate these issues (and yes, likely lead to increased future welfare spending).

We Can Rely on the Private Sector to Fix Everything

Guess what, the private sector won’t just deliver on infrastructure, but job training too! Trickle-down economics! That sure sounds nice, too bad it has never actually worked out that way.

I listened to an event kicking off “National Apprenticeship Week” at the Department of Labor, and not once was government funding or a public-private partnership (PPP) mentioned. It was all about what the private sector can do; well guess what, the aren’t doing it! Absent some change in incentives, there is little reason to think that the private sector will all of a sudden start to prioritize job training programs. What America needs is drastically scaled-up apprenticeship programs developed and financed by community colleges, universities, and industry leaders.

Instead, “Jobs President” Trump has proposed cutting the DOL budget by 21% (from $12.1 billion to $9.6 billion), and the Department of Education budget by 13.5% (from $69.4 billion to $60 billion). Such a plan effectively rules out more funding for apprenticeships, as these would be the departments to administer such programs.

At the same time, the GOP will increase military spending by $82 billion, to $716 billion, by 2019. Imagine the impact that type of additional funding would have on our drastically underfunded job training programs and community colleges.

Hail the Almighty Job Creators! 

We need to stop treating companies as if they are doing some sort of public service by hiring people. Companies create jobs to maximize profits. Publicly traded companies operate to maximize stock prices. Private companies are not doing a public service by being in business.

A company’s social contributions are the taxes they pay. We should not be subsidizing jobs through direct subsidies to companies and unlivable minimum wages that drive people to welfare programs. We should not have reduced the tax burden of the wealthiest Americans in the hope that some scraps will trickle down to the average person. Absent such policies the American economy would still work, just with less extreme inequality.

Until there is a clear understanding on this across the political spectrum, the greedy will continue to use scare tactics to hold enough of the electorate hostage to perpetuate their position of power. We need politicians that will stand up to these people and call their bluffs, not politicians who will sell the American public out to the highest bidder.

Concluding Thoughts

Investing in human development takes time to manifest itself in positive outcomes, just as it takes time for a child to grow up. Therefore a responsible, holistic approach to welfare reform means there will be an overlap period where we will be paying more for both welfare reform and human development initiatives (which in some cases, like CHIP, are one in the same).

If, as a country, we are OK with $1 trillion more in debt (what Trump’s tax plan will cost us), this is the way to spend it—not another war or military buildup, not another trickle-down Hail Mary, but a real plan to promote economic opportunity and responsibly reform our welfare system. This new “Great Society”, with the benefit of 50+ years of lessons learned, could build upon the successes and avoid the shortcomings of the original, and ultimately make America greater than it ever has been.

Instead we are stuck with half a “starve the beast” strategy. This means more debt while cementing in place the status-quo that has failed too many Americans for too long. Thanks, GOP!


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Economic Outlook: Of Minimum Wages and Employment (Revisited)

Another hot button topic during the 2014 midterm election season are candidates stances on increasing the federal minimum wage.

This past February, the CBO released its analysis of the effects of a federal minimum wage increase on economic growth, employment, and poverty. Those on the political right seized on the reports projection that raising the minimum wage could result in 1 million fewer jobs in America.

I found Jared Bernstein’s Economix blog on the subject pretty even-handed (click here to see my previous blog on the topic):

It is important to recognize that there is a very wide range of estimates from which the budget agency can choose, as shown in the chart below, which plots results of the employment effect from dozens of studies (from a recent set of slides from the White House Council of Economic Advisers).  This wide range does not imply that the budget office made a mistake, though it looks to me as if it applied a higher job-loss estimate than is the current consensus among economists who’ve closely studied the issue.

Note:

As the chart shows, the employment impact from this “meta-analysis” clumps around zero, which is why the report finds that the policy is a significant net plus from the perspective of low-wage workers: Many more workers get a raise from the policy than are displaced from their jobs.” (Jared Bernstein, Economix blog)

There is no policy I can think of that generates only benefits without any costs, and policy makers always have to weigh the two sides. In the case of the minimum wage, on the benefits side of ledger, the budget office shows that 16.5 million low-wage workers would directly get a much-needed pay increase at no cost to the federal budget.

16.5 million workers will benefit from a $10.10 minimum wage by 2016, 900,000 will be raised out of poverty, with negligible effects on the federal budget.

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The CBO report was a projection. What have minimum wage “experiments”, carried out in America’s “laboratories of democracy” (states and municipalities), revealed?

The White House told us they were referring to the seasonally adjusted growth of non-farm jobs since December 2013. So we crunched the numbers for state-level employment data, which is collected by the Bureau of Labor Statistics.

The comparison involved nine states that increased their minimum wage automatically early in the year to keep pace with inflation (Arizona, Colorado, Florida, Missouri, Montana, Ohio, Oregon, Vermont and Washington) plus four more states that passed new laws to hike the wage (Connecticut, New Jersey, New York and Rhode Island). The other side consisted of 37 states that didn’t boost their minimum wage at all.

Using the second method — the one that gives greater weight to high-population states — we found that job growth over that eight-month period averaged 1.092 percent in the wage-raising states, compared to 1.090 percent in the non-wage-raising states. That’s a higher rate of job growth in the minimum-wage-raising states — but by the almost comically narrow margin of 2/1,000ths of one percent.

From this 8-month comparative analysis, we can see that minimum wage changes have had essentially no impact on employment levels. The meta-analysis seems to have been vindicated–I guess economists are good for something after-all.

What does this mean? Which stance on minimum wage increases has been vindicated? I would say it has to be the pro-minimum-wage-increase side of the debate.

Increasing the federal minimum wage is not meant to be a “job-creating” policy; its primary purpose is to redistribute income from the top of the economic pyramid (wage payers) to the bottom (wage earners). It is a “market” solution that does not require taxation and welfare spending, so money would not go to those “lazy welfare recipients” (this is not my view, however a significant proportion of Americans do view welfare recipients this way, and it is necessary to consider alternative perspectives when trying to pass legislation in a democracy).

One may think such an inequality / poverty reducing solution would be agreeable to proponents of “small government”, and one would be wrong. Since opponents of increasing the minimum wage cannot assail deficit spending going to undeserving recipients, they have relied on the “jobs lost” argument. Fortunately, this argument becomes less and less viable the more it is challenged and disproven.

Raising the minimum wage does not just address the “symptoms” of inequality / poverty–there are important long term / inter-generational implications of minimum wage increases. Having more money enables people to build their skills, take more entrepreneurial risks, and provide better upbringings for their children (which obviously affects their earning capacity later in life).

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“Meta-analysis” of the effects of minimum wage increases on employment clustered around zero, and these findings have been backed up by the non-partisan statistics produced by the Bureau of Labor Statistics (in the interest of full disclosure, I should mention that I work for the BLS, although my job has nothing to do with employment statistics).

The mechanism by which minimum wage increases raises poorer peoples income is straightforward. How people would choose to use their new-found income is less straightforward–some will predominately invest in into their and their families futures, while others will use the majority for instant gratification. While not as targeted as a welfare program, raising the minimum wage is the most politically viable solution to America’s inequality problems.

Contemporary American political discourse is dominated by the related themes of “equality of opportunity” and “social mobility”. Raising the federal minimum wage would bring immediate relief to America’s poorest workers, while moving closer to the utopian goal of “equality of opportunity”. Furthermore, it would accomplish these goals without any meaningful impact on employment rates or the federal budget.

Some redistribution of income in necessary; inequality is a drag on economic growth, and poverty is a root cause of many other societal ills. History has proven over and over again that “trickle-down” economics does not work. Minimum wages should also be linked to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), periodically (once per year?) increasing to reflect changes in cost of living.

If our federal government continues to fail in this regard, leaders at the state and municipal level must step-up–this is a matter of both present and future socioeconomic justice.

 


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Economic Outlook: Developing or Developed, National Investment Into “Quality” Jobs Yields Strong Returns

Original article:

Developing countries that invested in quality jobs from the early 2000s grew nearly one percentage point faster every year since 2007 and were better able to weather the economic crisis than comparable economies, according to a new report by the United Nations labour agency.

The annual report of the International Labour Organization (ILO), The World of Work 2014, focuses this year on the relationship between good jobs and national development through analysis of 140 developing and emerging nations.

“Decent work opportunities for women and men help trigger development and reduce poverty,” Guy Ryder, Director-General of the ILO,” said in a news release on the launch of the report, subtitled Developing with Jobs.

“Social protection, respect for core labour standards and policies that promote formal employment are also crucial for creating quality jobs that raise living standards, increase domestic consumption and drive overall growth,” he added.

“In view of the evidence, it is essential to make decent work a central goal in the post-2015 development agenda,” stressed Raymond Torres, Director of the ILO Research Department.

Quality jobs are an important tool for escaping poverty traps. In a recent post, I said that economics is always context sensitive; this does not mean, however, that certain things–such as quality jobs–are not important in all contexts. Whether in a rich or poor country, societies poorest are unable to escape poverty traps because they do not save–they either spend their entire income on survival or short-term luxuries to distract them from life’s problems. While “extreme poverty” (living on less than $1.25 /day, adjusted for purchasing power parity) is confined to the world’s least developed countries (LDCs), relative poverty exists everywhere. While the exact income level needed to escape a poverty trap (the inflection point on the graph above) is context sensitive, the general relationship holds in all contexts.

Underpinning the universality of relative poverty is the inverse relationship between marginal propensity to consume (MPC) and income; the lower ones income, the greater percentage of it they will consume. The flip side of this is low savings–the higher one’s MPC (ranging from 0-1), the lower one’s MPS (MPS + MPC = 1). This inability to save perpetuates a vicious cycle of low productivity, low wages, and low savings resulting in inadequate investment in “human capital” (education, healthcare, etc), which is what causes the low level of productivity in the first place–a poverty trap. While different income groups in different countries have different levels of MPC/S, this general relationship between income, consumption, savings, investment and poverty holds in all contexts.

The U.N. report cited at the beginning of this post focuses on quality job creation in developing countries; I would like to shift the focus to America’s political economy. No politician, particularly in a democracy, would ever say they are opposed to creating quality jobs. Therefore, we must assess the different ideological / policy approaches to quality job creation, in order to determine which approach is most likely to succeed:

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Liberals:

Invest in human capital, particularly needs-based investment (which, due to low levels of income / savings, these people cannot afford themselves) to boost worker productivity, physical capital (infrastructure projects),  and growth markets (such as renewable energy) to boost economic output and create jobs in a depressed economy (counter-cyclical fiscal policy).

Raise the minimum wage and support collective bargaining (unionization) to increase take home pay for “blue collar” workers.

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Conservatives:

Cut spending to reign in the deficit, restoring confidence in the economy so “job creators” (those who hold financial capital) will reinvest into the economy. Perpetuate a “race to the bottom” by discouraging collective bargaining and subsidizing private job creation by providing tax breaks / subsidies to private companies .

Reduce taxes and regulations as much as possible (starve the “beast”). Rely on private actors, market forces, and trickle-down economics to result in the optimal allocation of resources.

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Conservatives will point to a low unemployment rate (currently 6.3%) to prove that additional stimulus spending is not needed. Liberals will counter with evidence of wage stagnation and “working poor” to argue that greater labor market intervention is needed. The question then becomes, what is a quality job? Is it simply having a job, or is a minimum salary (perhaps that inflection point) needed? Further clouding the issue is the apparent disconnect between productivity and wages, implying that simply training low wage workers–the typical remedy for escaping “poverty traps”–may be insufficient to create “quality jobs” (and hence the growing minimum wage movement).

History has resoundingly and repeatedly debunked the concept of “trickle down economics” yet it keeps coming up in mainstream political economy discussions–something Paul Krugman would call a “Zombie Idea”. The reason this “zombie idea” persists is relatively straightforward–vested interests with large levels of wealth perpetuate this view through the mainstream media. They state any additional costs (taxes, regulations, wage increases) will cause massive job loss despite record high corporate profits (after taxes) and stock values , and (relatedly) historically low corporate income tax rates.

I leave my readers with this question; which plan to create quality jobs sounds more likely to work to you? Take that answer to the voting booth with you during the 2014 midterm elections, because quality jobs are the key to sustainable human development, economic growth, and social cohesion.