Macroeconomics

Automatic Stabilizers: There When Congress Isn't

Flickr/JMazzolaa
As we approach sequestration today the dominant narrative continues to be that the huge run-up in the deficit since the Great Recession has been our greatest political—perhaps even a moral—failure. But it isn’t a failure. This is exactly how the system was designed to work if the economy ever saw a downturn on the scale of the 2008 financial crisis. The deficit is collapsing through the same planned process. As the economy recovers, it is falling quickly, down to 7 percent in 2012, and an estimated 5.3 percent in 2013. These are our "automatic stabilizers" at play. Though it sounds vaguely hydrologic or like a bad steampunk creation, it’s straightforward: The economy will naturally suffer from periods of slack demand in which there isn't enough purchasing power in the economy to produce goods and employ all of our resources, including people. Automatic stabilizers then kick into motion in to counteract this. One important automatic stabilizer is the tax code, which has people pay less...

Trading The Blame Game for The Bully Pulpit

Flickr/Neon Tommy
The White House apparently believes the best way to strengthen its hand in the upcoming “sequester” showdown with Republicans is to tell Americans how awful the spending cuts will be and blame Republicans for them. It won’t work. These tactical messages are getting in the way of the larger truth, which the president must hammer home: The Republicans’ austerity and trickle-down economics are dangerous, bald-faced lies. Yes, the pending spending cuts will hurt. But even if some Americans begin to feel the pain when the cuts go into effect Friday, most won’t feel it for weeks or months, if ever. Half are cuts in the military, which will have a huge impact on jobs (the military is America’s only major jobs program), but the cuts will be felt mainly in states with large numbers of military contractors, and then only as those contractors shed employees. The other half are cuts in domestic discretionary spending, which will largely affect lower-income Americans. There will be sharp...

Why Republicans Should Want to Index the Minimum Wage

Flickr/FiddleFlix
If Republicans have any political sense at all, they’ll support not just raising the minimum wage, but indexing it. The economic case for raising the wage, at a time when economic inequality is rampant, working-class incomes are declining, and Wal-Mart sales are falling through the floor, is overwhelming. But while Republicans may blow off the economic consequences of not raising the federal standard, they can’t be so cavalier in dismissing the political consequences. The constituency that today’s GOP most desperately seeks to win, or at least neutralize, is Latinos—the ethnic group most clustered in low-wage jobs, and most certain to benefit from a minimum wage hike. In swing districts with substantial Latino populations, Democrats are certain to highlight Republican opposition to raising the wage in the 2014 elections. Nor is support for a higher wage limited to Latinos. On each occasion in the past decade that a state minimum wage increase has been put before voters as a referendum...

The No-Brainer Argument for $9 an Hour

flickr/B Unis
Raising the minimum wage from $7.25 to $9 should be a no-brainer. Republicans say it will cause employers to shed jobs, but that’s baloney. Employers won’t outsource the jobs abroad or substitute machines for them because jobs at this low level of pay are all in the local personal-service sector (retail, restaurant, hotel, and so on), where employers pass on any small wage hikes to customers as pennies more on their bills. States that have a minimum wage closer to $9 than the current federal minimum don’t have higher rates of unemployment than do states still at the federal minimum. A mere $9 an hour translates into about $18,000 a year—still under the poverty line. When you add in the Earned Income Tax Credit and food stamps it’s possible to barely rise above poverty at this wage, but even the poverty line of about $23,000 understates the true cost of living in most areas of the country. Besides, the proposed increase would put more money into the hands of families that desperately...

The Return of the Balanced Budget Amendment

Flickr/Gage Skidmore
S enate minority leader Mitch McConnell says Senate Republicans will unanimously support a balanced-budget amendment, to be unveiled Wednesday as the core of the GOP’s fiscal agenda. There’s no chance of passage so why are Republicans pushing it now? “Just because something may not pass doesn’t mean that the American people don’t expect us to stand up and be counted for the things that we believe in,” says McConnnell. The more honest explanation is that a fight over a balanced-budget amendment could get the GOP back on the same page—reuniting Republican government-haters with the Party’s fiscal conservatives. And it could change the subject away from social issues—women’s reproductive rights, immigration, gay marriage—that have split the Party and cost it many votes. It also gives the Party something to be for , in contrast to the upcoming fights in which its members will be voting against compromises to avoid the next fiscal cliff, continue funding the government, and raising the...

History Lesson: Tax Cuts Are No Magic Bullet

No idea is more central to conservative economic thinking than the belief that cutting taxes leads to higher economic growth. One can certainly understand the appeal of this belief: It would be great if government could collect the same amount of revenue, but with much lower tax rates, because those rates fostered strong growth. Alas, the historical record doesn't offer much validation of this sunny supply-side vision -- as I have noted here repeatedly. David Leonhardt discussed the record yesterday in the New York Times. One interesting point he noted was that cutting taxes may make a difference when taxes are extremely high, but the rate changes of recent years are relatively small and thus it's no surprise that the effects would be modest. Listening to today's tax debate, you'd think our political leaders were debating capitalism vs. socialism. In fact, though, going back to the Clinton-era tax rates would mean raising the top income tax bracket by less than 5 percent. That's not...

Ben Bernanke, the Newest Avenger

(AP Photo/Manuel Balce Ceneta)
Ben Bernanke’s announcement Thursday that the Fed would keep easing money sent the stock market soaring, but more important was his declaration that there is only so much the Federal Reserve can do. The Fed’s latest move, approved by the policy-setting Open Market Committee, will buy a total of $85 billion in bonds every month, including $40 billion per month of mortgage-backed securities. This pumps vast sums into the economy. It is the equivalent of printing money. Bernanke’s hope is to drive down interest rates generally, especially on home mortgages. The Fed will also extend its policy further into the future and keep interest rates close to zero through 2015. But as Bernanke himself put it, monetary policy alone can’t fix what’s broken. The more important tool in a severely depressed economy is fiscal policy. And here is where Bernanke is truly playing against type. The usual script calls for a Fed chair to demand fiscal tightening in exchange for liberal interest-rate policy. It...

Europe: Old Austerity in New Bottles

In late July, European Central Bank (ECB) President Mario Draghi, speaking off the cuff in London, pledged to do “whatever it takes” to save the Euro, including massive intervention in bond markets to keep speculators from extending the Greek disease to Spain and Italy, where interest rates were ominously rising. This impressed money markets for a few days—until investors realized that Draghi’s commitment came with big strings. Strapped countries benefitting from these purchases would first have to double down on austerity. No thanks, said the leaders of Spain and Italy. On September 6, Draghi tried once more. After more than a month of consultations with his own board and national leaders, he declared that the ECB would make unlimited purchases of short term government bonds. He claimed “a massive majority of the [ECB] governing council for this concept.” But the council member who mattered most, Bundesbank President Jens Weidmann, remained adamantly opposed. A Bundesbank press...

Where’s William Jennings Bryan When You Need Him?

(AP Photo)
The Financial Times is reporting that the Republican platform to be unveiled in Tampa next week calls for establishing a commission to examine whether the United States should go back on the gold standard. The theory behind this antiquarian fantasy, much loved by Ron Paul and his cult, is that by de-linking the dollar from the value of gold—a move begun by President Franklin Roosevelt in 1933 and completed by President Richard Nixon in 1971—America’s leaders have debased our currency and loosed the genies of inflation, since the Federal Reserve can print as many dollars as it likes. It’s a curious time to call for a reversion to gold, but then virtually nothing in the Republican platform speaks to the America of today. For one thing, America hasn’t had a real bout of inflation since the 1970s, and in recent years, inflation has been nowhere to be found. Second, the dollar has never been stronger. The world’s investors have flocked to buy dollars in recent years. The interest payments...

Four Things to Know About the July Jobs Report

(Wools/Flickr/Creative Commons)
Today is the first Friday of a new month ( i.e. , Christmas for wonks and political junkies), which means the Bureau of Labor Statistics (BLS) has released its monthly report on employment . The economy created 163,000 net jobs in July, an increase over projections—which hovered around 100,000 —and a substantial increase over June, when the economy added a scant 80,000 jobs. The unemployment rate remains unchanged at 8.25 percent (up from 8.21), but was rounded up to 8.3 percent for the purposes of the report. This isn’t a good number—a more rapid recovery would require up to 300,000 jobs a month—but it is a sign that the United States is not about to fall into another recession. Beyond the topline number, here are a few key things to take away from this month’s report. The revisions were … meh : The BLS revises its job statistics as it gets more accurate information. Today, job growth for May was revised from 77,000 to 87,000, but job growth for June—the most abysmal month of the...

Out of Work, Out of Luck

MIT Press
Back to Full Employment , by Robert Pollin. A Boston Review Book. The M.I.T. Press. 187 pages. $14.95 Achieving full employment has been at the center of the progressive project for more than a century. If work is available at decent wages for everyone who wants it, then the rest of the agenda is a lot easier. Opportunity proliferates. People feel a sense of dignity and worth. Human potential is fully utilized. In a virtuous circle, adequate purchasing power has a rendez-vous with the economy’s productive capacity. Tight labor markets give workers the leverage to bargain for decent wages. Social-transfer programs can be reserved for special needs rather than being strained to make up for the fundamental lack of decent income. As Robert Pollin writes in his important new book, Back to Full Employment , a society with jobs for all “is also the best tool for fighting poverty.” He reminds us that in the era of Lyndon Johnson’s Great Society, unemployment rates fell to below 4 percent,...

What's Next for Economic Policy?

Today's Balance Sheet

It's three days after the dismal May jobs report, and now that politicians are done trying to frame those 69,000 jobs added in their favor, it's time for them to figure our how to get the economic ball rolling again . Although the Federal Reserve has doggedly refused to change course lately, the new jobs numbers may force the institution into action—actions Fed Chair Ben Bernanke may unveil when he testifies in front of Congress on Thursday. One of the most foreboding things weighing on the United States' recovery is the euro crisis, which could be sent roiling if the Greek elections in two weeks bring in a coalition dead-set on opposing German chancellor Angela Merkel's iron-clad austerity policies. Regardless of what happens in the near future, the economy does not seem likely to get out of its funk pre-November, which means high unemployment and a dicey market at least until 2013—and a close presidential election. The Latest Congress Sets its Sights on Conventions POLITICO...

Fear the Reaper

Today's Balance Sheet

Unless Congress and the White House work together to manage the budget sequestration and tax hikes scheduled for the end of the year, the economy could plummet into a mild recession—growth contracting by an estimated annual rate of 1.3 percent— according to the Congressional Budget Office. If all the spending cuts and tax hikes are canceled, the economy will likely grow by 4.4 percent, and two million jobs will be added. "The idea of piling another recession on top of such a slow and incomplete recovery is quite horrifying from the standpoint of the well being of average families in this country," said William Galston at the Brookings Institution. "It would be unconscionable to permit that to happen if there were obvious policy alternatives." Complicating the impending negotiations is the debt ceiling, which Republicans say they are unwilling to raise without spending cuts, and which will need to be dealt with at the end of the year as well. The CBO also said that although next year...

We Won't Destroy Society If We Raise Taxes on the Rich

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Over at the Center on Budget and Policy Priorities, Chye-Ching Huang has written a massive review of the evidence and literature on the relationship between taxes on high-income earners and their effects on economic growth. Her key findings are surprisingly straightforward, and important for how we approach current debates over tax reform and economic policy: Taxable income and revenue. Opponents of raising the taxes that high-income households face often point to findings that high-income taxpayers respond to tax-rate increases by reporting less income to the Internal Revenue Service (IRS) as evidence that high marginal tax rates impose significant costs on the economy. However, an important study by tax economists Joel Slemrod and Alan Auerbach found that such reductions in reported income largely reflect timing and other tax avoidance strategies that taxpayers adopt to minimize their taxable income, not changes in real work, savings, and investment behavior. While such strategies...

Spain's Fiscal Fanaticism

The country's newly elected conservative government is pursuing austerity with zeal.

(AP Photo/Daniel Ochoa de Olza)
(AP Photo/Daniel Ochoa de Olza) Spain's Finance Minister Cristobal Montoro speaks during a press conference following the conservative government's weekly Cabinet meeting at the Moncloa Palace, in Madrid, Friday, March 30, 2012. Spain's government unveiled on Friday a euro 27 billion ($36 billion) deficit-reduction package including spending cuts and tax hikes on large companies, as it scrambles to convince the EU and investors that it won't need a bailout. It is a well-known maxim that to keep repeating the same action and expect a different result is a symptom of madness. It is hard to find a different way to account for the persistence of Eurozone leaders in inflicting punishing austerity on countries belonging to the common currency, a strategy that has proved both fiscally ineffective and socially destructive. In recent days, the focus of the crisis has returned to Spain, and for good reason. The country suffers from the highest unemployment rate in Europe: 24 percent, and it’s...

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