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Economix Blog: Labs for Testing Fiscal Policy Positions

February 28, 2013 by Leave a Comment

Owen Zidar, a doctoral student in economics at the University of California, Berkeley, was previously a staff economist at the Council of Economic Advisers and an analyst at Bain Capital Ventures.

Owen Zidar, a doctoral student in economics at the University of California, Berkeley, was previously a staff economist at the Council of Economic Advisers and, in 2008-9, an analyst at Bain Capital Ventures.

Many of the fiercest disagreements about fiscal policy today stem from disagreements about the causes of the slow recovery – whether government-induced uncertainty and excessive spending or low aggregate demand and insufficient government spending.

Because of the economic, political and social differences between the United States and other countries, or even the altered circumstances today in comparison with past American recoveries, there may seem to be little evidence from which to project the likely outcomes of such policy choices. But as it happens, economists have increasingly been using regions within the United States as labs of democracy, measuring contrasting approaches in various states to determine both why the recovery is sluggish and what to do about it.

This regional analysis about different types of economic medicine and their effects on job creation points to some useful insights for policy makers and Congress as they struggle through another standoff on fiscal policy. The findings on the effects of government spending in hard economic times strongly suggest, for example, that cutting spending today will hurt growth and reduce job creation.

Here are a few instances in which this research approach has been fruitful.

UNCERTAINTY: In a study published this month, AtifMian of Princeton and Amir Sufi of the University of Chicago pointed out that if uncertainty about prospective government regulation and taxes is the primary reason for the sluggish recovery, then states where policy uncertainty is high should tend to have lower job growth. Using state-level data from National Federation of Independent Businesses, however, they found almost no relationship between job growth and the share of small businesses that cite regulation and taxes as their top concern. (Rather, they found a strong correlation between weak job growth and complaints of a lack of demand.) Their results do not provide much support for idea that apprehensiveness about regulation and taxation is holding back the recovery.

FISCAL RELIEF: Gabe Chodorow-Reich of the University of California, Berkeley, and three colleagues used similar methods to investigate whether fiscal relief during the Great Recession increased employment. In an article published last August in the American Economic Journal, they looked at how much faster employment grew in states that received more fiscal support (for Medicaid because of mechanical and predetermined reasons). The findings showed that focused fiscal relief during hard times can effectively stimulate employment. An important and timely implication of this finding is that the contrary policy of cutting spending during hard times can reduce employment. Nonpartisan private forecasters, like Macroadvisers, agree – in an analysis last week of the prospective impact of the mandatory spending cuts known as sequestration, it estimated that the spending cuts due to the sequester will result in 700,000 lost jobs by the end of next year.

SPENDING CUTS VS. TAX INCREASES: Many Republicans say that spending cuts from the sequester would have a less damaging effect on the economy than increasing taxes on upper-income earners. But some of my own recent research uses regional variation to show that this belief is at odds with the evidence. I find that modestly sized tax increases on upper-income taxpayers have a negligible to small impact on job creation. These magnitudes are much smaller than those of cutting government spending in hard times, which suggests that using modest upper-income tax increases to offset some required spending cuts would help cushion the impact of the sequester on the labor market.

Article source: http://economix.blogs.nytimes.com/2013/02/28/labs-for-testing-fiscal-policy-positions/?partner=rss&emc=rss

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Today’s Economist: Laura D’Andrea Tyson: The Family and Medical Leave Act, 20 Years Later

February 8, 2013 by Leave a Comment

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Laura D’Andrea Tyson is a professor at the Haas School of Business at the University of California, Berkeley, and was chairwoman of the Council of Economic Advisers under President Bill Clinton.

Twenty years ago, just a few weeks after his inauguration, President Clinton fulfilled a campaign pledge and signed his first bill – the Family and Medical Leave Act. The law sent a strong signal of his commitment to provide more opportunities for American workers in return for more personal responsibility.

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The legislation covers workers in businesses with more than 50 employees who satisfy additional eligibility conditions, such as hours worked during the last year. About 60 percent of all workers are covered and eligible for leave under the act. Covered and eligible workers are allowed to take up to 12 weeks of unpaid, job-protected leave to recover from a medical condition or to provide care for sick family members or a new child.

The benefits of the Family and Medical Leave Act are real and significant. Although the provided leave is unpaid, it ensures job protection and the extension of health insurance when workers are temporarily unable to work for medical or family reasons. Moreover, a just-published Labor Department survey finds that most employees who take leave for family and medical reasons receive partial pay (17 percent) or full pay (48 percent ) for short leaves (fewer than 10 days), often drawing on paid leave days they have accrued during the previous year. However, workers in low-wage jobs are much less likely to receive even partial pay during a leave than workers in high-wage jobs.

Since its passage, the law has been used more than 100 million times to improve the lives of American workers. Meanwhile, dire predictions by critics that it would destroy jobs and harm business have proven wrong. Employers covered by the law report little or no difficulty complying with its provisions. Indeed, many businesses credit the law with reducing turnover and increasing worker morale.

The Labor Department survey also reveals how American workers choose to use their rights under the law. About 16 percent of covered and eligible workers under the Family and Medical Leave Act took leave last year, a share comparable to that in 2000. About 5 percent reported that they needed leave but were unable to take it, primarily because they could not afford to sacrifice their pay. This is about double the share in 2000 when real median wages and family incomes were higher. About 57 percent of all leaves are taken by workers because of their own medical conditions, with another 22 percent for pregnancy or birth of a child and 20 percent to care for a sick family member.

Most leaves are short – about 42 percent last fewer than 10 days and about 17 percent last more than 60 days. Almost all workers who take leave return to their employers. Less than 10 percent decide not to return to work. The Family and Medical Leave Act appears to strengthen, not weaken, worker attachment to the labor force, increasing employment and income stability over time.

Not surprisingly, because they bear children and still shoulder much of child- and elder-care responsibilities in families, women are a third more likely to take leave than men, and women with children are significantly more likely than men to report unmet leave needs. Over all, however, it appears that the Family and Medical Leave Act has had a small effect on parental-leave usage by mothers and no discernible effect on parental leave usage by fathers, indicating that there are financial limits on the extent to which families are willing and able to use unpaid leave for this purpose.

Women account for about 50 percent of all workers in the United States, which boasts one of the highest labor-force participation rates for women in the world – about 70 percent for women with children and about 60 percent for women with children under the age of 6 in 2011.

Most children now grow up in families without a full-time stay-at-home parental caregiver. More than 25 percent of American children live in single-parent households, the highest share in the developed countries, and about 75 percent of these households are headed by a woman. In the United States, single mothers work more hours and yet have higher poverty rates than single mothers in other high-income countries. The percentage of children living in poverty in the United States is considerably higher as a result.

Yet the United States is the only developed country that does not provide paid parental leave to women workers (or their spouses) to bear and care for children.

And businesses have not filled the policy void. Only about 25 percent of employers in the United States offer fully paid “maternity-related” leave and about 20 percent offer no such leave whether paid or unpaid. About 46 percent of workers have access to some paid parental leave, sometimes through a combination of earned sick days or vacation time, but access varies by wages and education.

Workers whose average wages are in the lowest 25 percent within their industry are about one-fourth as likely to have access to paid family leave than those whose wages are in the highest 25 percent. According to the Census Bureau, between 2006 and 2008 about two-thirds of new mothers with a bachelor’s degree or higher had access to paid parental leave, compared with only 18 percent of new mothers with a high school diploma or less.

Like other employee benefits, employer-sponsored parental leave programs heighten inequality among American workers and fail to address the daunting problems confronting low-income single mothers and their children. This population is the most vulnerable and least served by the current mix of family-support policies.

Contrary to concerns that paid parental leave is a disincentive to work, access to parental leave, paid or unpaid, increases the likelihood that a woman will return to work after the birth of a child. Among new mothers who work while pregnant and are able to take paid leave, almost 90 percent return to work within one year. And harsh necessity makes these “return to work” incentives stronger for less-educated and lower-income women.

According to research by the Organization for Economic Cooperation and Development and the World Economic Forum, paid parental leave programs, along with affordable child care, improve employment levels among women, increase the returns to their education and reduce gender inequalities in earnings and promotion opportunities. The results are faster and more equitable growth and a lower incidence of poverty among children.

The Family and Medical Leave Act has been a success. But its effectiveness at addressing the challenges confronting American workers is limited for two reasons. First, the law is not universal and many of those not covered and eligible are young adults in their childbearing years, are from minority backgrounds and are low-wage workers. Second, many eligible workers are not able to take leave because it is unpaid and they cannot afford to give up their wages.

It is time to consider extending the Family and Medical Leave Act to provide all workers with access to paid family and medical leaves that are job-protected and include some financial support. Researchers at the Center for American Progress have outlined a plan, called Social Security Cares, to achieve this goal. Social Security Cares is a family and medical leave insurance program that would cover all workers for the same life events covered by the Family and Medical Leave Act and offer partial wage replacement. The Social Security Administration would administer the program, which would be paid for with a small increase in the payroll tax. California has had a similar paid family-leave insurance plan for the last decade, and New Jersey and Washington have passed comparable legislation.

Back in 1993, when President Clinton signed the Family and Medical Leave Act after more than 10 years of debate and opposition, it was clear that American families were changing. Change has continued. We should open a new debate about how to modernize the Family and Medical Leave Act to address the needs of modern American families.

Article source: http://economix.blogs.nytimes.com/2013/02/08/the-family-and-medical-leave-act-20-years-later/?partner=rss&emc=rss

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Economix Blog: Continuity on Obama’s Economic Team

January 9, 2013 by Leave a Comment

After President Obama took office in 2009, Jacob J. Lew became a deputy secretary of state within days. Gene Sperling was serving as an adviser to the Treasury secretary. Austan Goolsbee, a longtime Obama adviser, was serving on Mr. Obama’s Council of Economic Advisers. Alan B. Krueger would become an assistant secretary of the Treasury within a few months.

In the last four years, all of these men have gone on to higher jobs within the Obama administration, and Mr. Lew is expected to be named Treasury secretary soon. Mr. Sperling is the top economic adviser inside the West Wing, while Mr. Krueger is the chairman of the Council of Economic Advisers. Mr. Goolsbee preceded him at the council before returning to the University of Chicago.

As a picture on Wednesday’s front page of The New York Times makes clear, Mr. Obama’s economic team is made up almost entirely of people who have been with the administration from the very beginning. This approach has benefits, especially because many of the budget battles of the second term will be extensions of the battles of the first.

“We’ve got a weird negotiation — let’s call it a multiyear negotiation,” Mr. Goolsbee said this week on the Charlie Rose show. In 2011, the Obama administration and Congressional Republicans agreed to spending cuts with no new tax revenue, Mr. Goolsbee noted. Last month, the two sides agreed to new tax revenue with no spending cuts. In coming talks, the parties will discuss more of each, with Democrats pushing for more tax revenue and Republicans for more spending cuts.

“After a year and a half of negotiating, we may have a grand bargain; it’s just not a grand bargain they actually struck all at once at the same table,” Mr. Goolsbee added.

But if Mr. Obama’s personnel strategy brings the benefit of consistency, it also has downsides. “Can it really be the case,” Ezra Klein of The Washington Post asked, “that after four very difficult years, there is nothing the White House would gain in its second term by bringing in outsiders with fresh experience, different relationships and a new perspective?”

For more on Mr. Lew, currently the White House chief of staff, see this recent profile by Sheryl Gay Stolberg or this 2010 profile by Jackie Calmes. In May, Annie Lowrey noted that his name seemed logical to include in any list of potential nominees. A 2009 article by Eric Lipton described the significant salary Mr. Lew made while working at Citigroup.

In January, Noah Rosenberg noted that Mr. Lew, who grew up in Queens, continued to live in the Riverdale section of the Bronx. In 1999, when Mr. Lew was the Clinton administration’s budget director, Tim Weiner dug into his New York roots.

Washington Jewish Week profiled Mr. Lew last year, describing him as a “‘regular guy’ who values the importance of friendship.” National Journal described him this way: “Tall and thin, with Harry Potter-like glasses and salt-and-pepper hair, he looks like a typical Washington technocrat, an image that belies his talent for combat.”

The Hill contrasted his speaking style with that of Rahm Emanuel, a former chief of staff. In 2001, The Washington Post noted Mr. Lew’s long history as a budget negotiator, including in the 1980’s debate over Social Security.

Article source: http://economix.blogs.nytimes.com/2013/01/09/continuity-on-obamas-economic-team/?partner=rss&emc=rss

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Economix Blog: Laura D’Andrea Tyson: The Infrastructure Two-Fer: Jobs Now and Future Growth

October 22, 2011 by Leave a Comment

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Laura D’Andrea Tyson is a professor at the Haas School of Business at the University of California, Berkeley, and served as chairwoman of the Council of Economic Advisers under President Clinton.

Two credible reports issued last week present compelling and complementary cases for infrastructure investment and should be required reading by members of Congress before their next vote on President Obama’s American Jobs Act.

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Perspectives from expert contributors.

One report was from President Obama’s Council on Jobs and Competitiveness (on which I serve), a nonpartisan group of business and labor leaders, and the other from the New America Foundation, an influential Washington think tank. According to nonpartisan economic forecasters, the jobs act, which proposes about $90 billion in infrastructure spending as part of a $450 billion package of tax cuts and spending, would create about two million jobs.

Echoing the views of many economists, the foundation report asserts: “Long-term investment in public infrastructure is the best way to simultaneously create jobs, crowd in private investment, make the economy more productive and generate a multiplier of growth in other sectors of the economy.” In less technical language, the council’s report makes the same point, arguing that infrastructure investment is a “twofer” that creates jobs in the near term and promotes competitiveness and productivity in the long term.

Both reports provide sobering evidence of the growing deficiencies of infrastructure in the United States, which millions of Americans experience every day in traffic and airport delays, crumbling and structurally unsafe schools and unreliable train and public transit systems.

These deficiencies impose significant costs on the economy. For example, the Department of Transportation estimates that freight bottlenecks cost the American economy about $200 billion a year, the equivalent of more than 1 percent of gross domestic product; the Federal Aviation Administration estimates that air traffic delays cost the economy nearly $33 billion a year.

Both reports cite a study by the American Society of Civil Engineers that documents a five-year gap of more than $1.1 trillion between the amount needed for maintenance and improvements of the nation’s public infrastructure and the amount of public funds available for such investment.

The American Society of Civil Engineers has estimated the gap between needs and cost across all forms of infrastructure.President’s Council on Jobs and Competitive, using data from American Society of Civil EngineersThe American Society of Civil Engineers has estimated the gap between needs and cost across all forms of infrastructure.

Several recent bipartisan reports, including one by the former transportation secretaries Norman Mineta and Samuel Skinner, find that the annual spending gap in transportation infrastructure alone is $200 billion.

Based on such estimates, the New America Foundation report calls for a five-year public investment program of $1.2 trillion, encompassing transportation, energy, communications and water infrastructure as well as science and technology research and human capital. (In a report I did for the New America Foundation a year ago, I proposed a five-year increase of $1 trillion for infrastructure investment.) The Jobs Council report recommends a significant increase in infrastructure investment but does not set a target.

The two reports concur that the multiplier effects of an increase in infrastructure spending are substantial, citing recent estimates by Moody’s and the Congressional Budget Office that $1 billion of infrastructure spending generates about a $1.6 billion increase in G.D.P. According to Moody’s, the multiplier for government spending on infrastructure is even larger than the multiplier for a payroll tax cut, the largest component of the president’s proposed jobs act.

And according to the C.B.O., infrastructure spending is one of the most cost-effective forms of government spending in terms of the number of jobs created per dollar of budgetary cost. The Jobs Council report cites studies indicating that each $1 billion of government infrastructure spending creates 4,000 to 18,000 jobs. Most of these jobs are relatively well paid.

Critics of infrastructure spending as a form of fiscal stimulus point out that the lags in such spending are long and variable. It often takes considerable time to initiate and complete infrastructure projects, even those deemed “shovel-ready” with engineering plans in place.

In 2009, when many economists thought (or hoped) the recession’s effects would be temporary, the conventional wisdom was that fiscal stimulus measures should be “targeted, timely and temporary.” Nearly three years later, the consensus among economists is that the United States will be mired in an anemic recovery with high unemployment for several years.

So what the country needs now is not temporary stimulus measures that increase consumer spending but sustained stimulus that increases investment spending over several years.

Yet more than just additional money is required. As the Jobs Council report highlights, an increase in funds must be coupled with reforms to select and carry out projects efficiently, based on cost-benefit analysis.

The Obama administration has urged the Congress to adopt such reforms in its reauthorization of multiyear surface-transportation legislation, because political pressures more often drive project selection than cost-benefit considerations. For example, state and local governments frequently allocate federal infrastructure funds to build roads and bridges rather than to fix existing ones, despite compelling evidence that repairs are more cost-effective. A recent study for the Hamilton Project lays out the efficiency case for a “fix it” strategy for spending on transportation infrastructure.

Road pavement tends to deteriorate slowly at first; its rate of deterioration accelerates over time. It’s often much cheaper to repair a road early on, when it’s still in fair condition, than when it falls into a condition of serious disrepair.

The foundation report makes a related argument, noting that deteriorating infrastructure is subject to “cost acceleration,” as repair and replacement costs rise over time. A project that costs $5 million to repair now may cost more than $30 million to repair two years from now. Deferred maintenance on essential infrastructure is not fiscally wise but fiscally irresponsible. That’s why many of the infrastructure investments in the American Jobs Act focus on rebuilding and repairing roads, bridges and schools.

Even when infrastructure projects are carefully selected, they often face permit and approval delays that can last for months, even years — though, recently, far less than the C.B.O. had anticipated. Eighty percent of the highway funds in the American Recovery and Reinvestment Act were deployed between February 2009, when the act was passed, and the end of fiscal year 2011 (far exceeding the C.B.O.’s prediction of 55 percent).

The Jobs Council report includes numerous recommendations to reduce permitting and approval delays, calling on local, state and federal agencies to develop coordinated one-stop shops to eliminate duplication and harmonize project approval standards and practices.

As a first step, President Obama has identified 14 high-priority infrastructure projects for expedited review and permitting by the relevant federal agencies and has announced the creation of a “Projects Dashboard,” to track the projects as they move through the expedited process.

Members of Congress who argue that the federal government cannot afford the infrastructure investments in the American Jobs Act are wrong — the government’s borrowing costs are at a historic low. Borrowing now to fund efficient infrastructure projects will reap returns that exceed these costs and will reduce future deficits through job creation and higher growth.

An investment of $10 billion by the federal government to establish a national infrastructure bank, as proposed in the jobs act, would also unleash additional private funds for infrastructure by fostering public-private partnerships. Many other developed countries have similar institutions and have successfully used them to tap private funds for infrastructure. Both of the new reports recommend the establishment of a national infrastructure bank, and bipartisan Congressional support for the idea is growing.

As the Jobs Council warns, there is no “silver bullet” that will solve the nation’s jobs crisis. But as the mounting protests around the country warn, the federal government must take concrete steps to address the crisis. Significant, timely and targeted investments in the nation’s deteriorating infrastructure should be one of these steps.

Article source: http://feeds.nytimes.com/click.phdo?i=d43e270fc2c32052eb1b8a3736e94d88

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Economix: Jobs Deficit, Investment Deficit, Fiscal Deficit

July 29, 2011 by Leave a Comment

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Laura D’Andrea Tyson is a professor at the Haas School of Business at the University of California, Berkeley, and served as chairwoman of the Council of Economic Advisers under President Clinton.

Like many economists, I believe that the immediate crisis facing the United States economy is the jobs deficit, not the budget deficit. The magnitude of the jobs crisis is clearly illustrated by the jobs gap – currently around 12.3 million jobs.

Today’s Economist

Perspectives from expert contributors.

That is how many jobs the economy must add to return to its peak employment level before the 2008-9 recession and to absorb the 125,000 people who enter the labor force each month. At the current pace of recovery, the gap will be not closed until 2020 or later.

The Hamilton Project, the Brookings Institution

History suggests that recovery from a debt-fueled asset bubble and ensuing balance-sheet recession is long and painful, with significantly slower growth in gross domestic product and significantly higher unemployment for a least a decade. Right now it looks as though the United States is following this pattern.

The jobs gap is primarily the result of the dramatic collapse in aggregate demand that began with the financial crisis of 2008. Even with unprecedented amounts of monetary and fiscal stimulus, the recovery that began in June 2009 has remained anemic, because consumers, the major driver of private demand, have curbed their spending, increased their saving and started to deleverage and reduce their debt — and they still have a long way to go.

As I asserted in my last post (and many other economists, including Lawrence Summers, Alan Blinder, Christina Romer, Peter Orzsag and Robert Shiller, have made this point, too), the jobs gap warrants additional fiscal measures to increase private-sector demand and promote job creation.

Sadly, current signals from Washington indicate that such measures will not be taken.

Instead, the risk grows that large, premature cuts in government spending will reduce aggregate demand, will tip the economy back into recession and drive the unemployment rate back into double digits.

Even if no budget deal is reached and no major spending cuts are made in the near future, there is now a serious risk that the rating agencies will downgrade government debt because of the political stalemate over a long-run deficit reduction plan. That would almost surely produce higher interest rates that could sink the economy into recession again.

Although the jobs gap and the high unemployment rate are the immediate problems in the American labor market, they are not the only ones. And there is no sign that the budget negotiations in Washington are going to address these other problems, either.

Even before the onslaught of the Great Recession, the labor market was in serious trouble. Job growth between 2000 and 2007 was only half what it had been in the preceding three decades.

Bureau of Economic Analysis, Bureau of Labor Statistics, McKinsey Global Institute

Productivity growth was strong, but far outpaced compensation growth. Between 2002 and 2007, productivity grew by 11 percent, but the hourly compensation of both the median high-school-educated worker and the median college-educated worker fell.

Lawrence Mishel and Heidi Shierholz, Economic Policy Institute

During the same period, the real median income for working-age households declined by more than $2,000. The 2002-7 recovery was the only American recovery on record during which the income of the typical working family dropped.

Lawrence Mishel and Heid Sheirholz, Economic Policy Institute

And despite the recovery, job opportunities continued to polarize. Employment grew in high-education, high-wage professional technical and managerial occupations and in low-education, low-wage food-service, personal-care and protective-service occupations; employment fell in middle-skill, white-collar and blue-collar occupations. The drop in middle-income manufacturing jobs was especially precipitous.

Bureau of Labor Statistics, National Bureau of Economic Research, McKinsey Global Institute

To fashion the appropriate policy responses to these long-term structural problems in the labor market, it is first necessary to understand their causes. The key contributors are three:

    1. Skill-biased technological change that has automated routine work while increasing the demand for highly educated workers with at least a college education, preferably in science, engineering or math.

    2. Globalization or the integration of labor markets through trade and more recently through outsourcing.

    3. The declining competitiveness of the United States as a place to do business.

Recent studies by Michael Spence and Sandile Hlatschwayo (discussed last week in Economix by Uwe Reinhardt) and by David Autor describe how technological change and globalization are hollowing out job opportunities and depressing wage growth in the middle of the skill and occupational distributions.

A widely cited commentary by Andrew Grove, former chief executive of Intel, and a prize-winning article by Gary Pisano and Willy Shih make similar arguments.

Many of the workers and jobs adversely affected by technological change and globalization are in the tradable goods sector, primarily in manufacturing. Nor is the United States labor market the only one to be affected by these forces: the polarization of employment opportunities is also occurring in the other advanced industrial countries.

Many of them, like Germany, are doing something about it. The United States is not. According to a recent McKinsey study, the United States is becoming a less attractive place to locate production and employment compared with many other countries.

McKinsey Global Institute

A newly published study by the Information Technology and Innovation Foundation reaches a similar conclusion. The United States is underinvesting in three major areas that help a country create and retain high-wage jobs: skills and training of the work force, infrastructure, and research and development.

Spending in these areas currently accounts for less than 10 percent of all federal government spending, and this share has been declining over time. And that’s despite the fact that the borrowing costs of the federal government have been near historic lows and much lower than the returns on economically justifiable investments in these areas.

Such investments fall into the “non-security discretionary spending” category of the federal budget, the category in line to be cut to historic lows to reduce the government deficit over the next decade.

In my previous Economix post, I said a budget deal should pair fiscal measures aimed at job creation now with a credible plan to reduce the deficit gradually and that both should be passed at once as a package. I also urged that the plan include an unemployment rate target that would postpone serious deficit-reduction measures until the target had been achieved.

I also think the plan should include a separate capital budget that distinguishes government spending on education, infrastructure and research as investments with committed revenues over several years. A capital budget would close the investment deficit in those areas that strengthen American competitiveness and promote high-wage job creation. None of the budget plans currently under debate include a separate capital budget.

The labor market is suffering from two problems: an immediate jobs gap, primarily the result of inadequate demand, and a long-term shortfall in rewarding employment opportunities for American workers, primarily the result of structural forces.

As a result of these forces, even when demand has recovered, many of the good jobs lost during the last decade will not be replaced by new good jobs without significant public investments to strengthen the attractiveness of the United States as a production location.

So far, the deficit-reduction proposals attracting attention do not address the labor market’s dual problems and leave many American workers and their families to face another lost decade.

Article source: http://feeds.nytimes.com/click.phdo?i=2e9ab8029a0cdd7086fb958d8967fec9

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Economix: What’s a Crisis and What Isn’t

July 1, 2011 by Leave a Comment

Today's Economist

Laura D’Andrea Tyson is a professor at the Haas School of Business at the University of California, Berkeley, and served as chairwoman of the Council of Economic Advisers under President Clinton.

Long term, the United States faces a fiscal challenge that must be tackled –- but it is not an immediate fiscal emergency. In the labor market, though, there is an immediate crisis, the worst since the Great Depression.

According to the latest estimates from the Congressional Budget Office, if current fiscal policies are maintained, federal debt held by the public could rise to an unprecedented 187 percent of gross domestic product in 2035 from 62 percent of gross domestic product at the end of 2010.

This is neither a desirable nor a sustainable outcome. Long before we got there, the United States would lose the confidence of investors, igniting a spike in interest rates, a collapse of the dollar, a global financial crisis and a devastating recession.

But with substantial excess capacity in the economy, there is no evidence that the federal deficit is driving up interest rates and crowding out private spending. What’s slowing the pace of recovery is not too much government borrowing but too little private spending.

Nor are there symptoms of an imminent sovereign debt crisis facing the American government over the next few years. Rather, worries about slower growth in the United States, along with a flight to safe assets and a reduction in risk appetite by global investors, have kept the federal government’s borrowing rates near historic lows.

And that’s despite threats by irresponsible members of Congress to initiate a default on the government’s debt by failing to pass an increase in the debt limit.

In the labor market, the situation is dire. Almost 14 million people –- 9.1 percent of the labor force –- were unemployed in May. About 45 percent of those had been unemployed for 27 weeks or more, according to the Bureau of Labor Statistics. Another 8.5 million part-time workers wanted but could not find full-time jobs; an additional 2.2 million dropped out of the labor force because they could not find work.

During the last five years, the percentage of the population working has fallen to 58 percent from 63 percent, reducing the number of Americans with jobs by 10 million.

The economic and human costs associated with the jobs crisis are staggering. An extended period of unemployment means lower earnings: workers who return after long-term unemployment earn 20 percent less over the next 15 to 20 years than a worker who was continuously employed.

The longer workers are unemployed the more likely they are to lose their skills and drop out of the labor force. And the longer workers are unemployed, the more likely they are to lose their homes, their health and their marriages –- and the more likely their children will grow up in poverty –- with adverse implications for their health, education, and future incomes.

The primary cause of the jobs crisis is a lack of demand, the same problem that bedeviled the economy in the 1930s. Consumers, long the primary engine of economic growth in the United States, are in the midst of an unprecedented retrenchment.

High debt levels, falling housing prices, a lack of employment opportunities and wage stagnation are forcing people to curb their spending, pay down their debt and increase their saving. In the 13 quarters since the beginning of 2008, the annual growth of real consumption, which still accounts for about 70 percent of gross domestic product in the United States, averaged just 0.5 percent. Not since the end of World War II has consumption been this weak for this long.

Speaker John A. Boehner and the Republican majority in the House say the way to address the immediate jobs crisis and the long-term fiscal challenge is to make deep cuts in federal spending. Indeed, a recent study by the Republicans on the Joint Economic Committee concluded that “quick, decisive government spending reductions” can promote growth and jobs in the short term.

But the overwhelming evidence suggests the opposite: when the economy has excess capacity, high unemployment and weak private demand, cuts in government spending reduce growth and eliminate jobs.

On this point, there is widespread agreement among experts. Ben Bernanke, chairman of the Federal Reserve, recently warned that sudden fiscal contraction might put the still fragile recovery at risk. The June report from the C.B.O. contains a similar warning. Even William Gross of Pimco, a vocal critic of the long-term fiscal position of the government, cautions that a move toward fiscal balance, if implemented too quickly, could “stultify economic growth.”

As Simon Johnson noted in his recent Economix post, fiscal contractions are expansionary only under special conditions. None of these apply to the United States today.

So what should policy makers do? They should pair fiscal measures aimed at job creation now with a credible plan to reduce the deficit gradually –- and pass both at once, as a package. Approving a deficit-reduction plan but deferring its starting date until the economy is near full employment will cut the odds that immediate contraction will tip the faltering economy back into recession.

Indeed, passage of such a package could bolster growth by easing investor concerns about future deficits, reducing long-term interest rates and strengthening consumer and business confidence.

There is strong bipartisan support among budget negotiators in Washington for an enforceable debt target as an essential component of a credible deficit-reduction plan. Breaching the target would lead to automatic changes in spending and revenues. I believe we should pair an unemployment-rate target with a debt target. The unemployment-rate target would postpone significant spending cuts or revenue increases to achieve the debt target until the economy is closer to full employment.

Most economists believe that full employment for the American economy implies a structural unemployment rate of 5 to 6 percent. The unemployment-rate target should be set within that range. Current forecasts by the C.B.O., the Office of Management and Budget, the Hamilton Project and most private-sector economists predict that this target will not be achieved until 2015 or later. That’s when serious actions to narrow the long-run fiscal gap would begin to take effect.

Can we afford to defer such actions until the economy is much closer to full employment? Yes.

As the economy recovers and temporary fiscal stimulus measures are phased out, the deficit as a share of gross domestic product is expected to decline markedly during the next few years. Extending some measures enacted at the end of 2010 –- the payroll tax cut for employees, the capital investment expensing deduction and long-term unemployment benefits –- would add little to the long-run fiscal gap and would boost the flagging recovery.

Given the magnitude of the jobs crisis, we should go further by cutting payroll taxes for employers on new hires, including all hires by new firms. David Leonhardt, a columnist at The New York Times; Michael Greenstone, an economics professor at the Massachusetts Institute of Technology; and Robert H. Frank, an economics professor at Cornell, have recently proposed this approach. Mr. Frank estimated that eliminating the employer payroll tax on new hires could result in more than five million new jobs. A cut in payroll taxes should be maintained until the unemployment rate target is reached.

As long as there is considerable slack in the economy and inflation remains low, the government should be able to finance targeted fiscal measures for job creation at reasonable interest rates, provided such measures are paired with a credible and enforceable deficit reduction plan. And provided that gamesmanship and blackmailing tactics over the debt limit do not undermine the creditworthiness of the United States on global markets.

Painful choices about how to close the long-run fiscal gap –- primarily the result of imprudent fiscal decisions before the Great Recession, escalating health-care costs and an aging population –- must be shaped now and enacted promptly over many years once the economy has recovered.

But in the next few years, the priorities of fiscal policy should be growth and jobs.

Article source: http://feeds.nytimes.com/click.phdo?i=0d25f09fd6b38708b103c4ab5c4e9fe9

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