Category Archives: Macro

Taxes, Incentives, and Being Poor

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Now Updated with proofreading!

Political debates about taxes and tax rates in the U.S. often focus on the rich and claims about the incentive effects of different tax rates. Rarely mentioned these days are the poor.  Indeed, the Republican demands in the last few years that tax rates should be cut  for the high-income rich are primarily about claims of incentive effects. And, no, high-income rich isn’t redundant; it’s precise.  There are at least two types of “rich”: High-income rich, which pay income taxes, and the high-asset, low income rich which pay much less. (I suppose there’s another type, the spiritually-rich, but that’s the domain of some other blog.) The claim is made that if tax rates are raised or raised too high, then that provides a disincentive to work and the rich will not work as much. It is often asserted that this is simple micro-economics–that people respond to incentives–and should be obvious.

There’s a problem with the claim, though.  Actually there are two problems. First, there’s very little empirical evidence of higher tax rates on the highest end, the rich, actually reducing their efforts to earn income.  Indeed, numerous studies (I don’t have time at the moment to look for citations) have found in “natural experiments” that the rich really don’t respond to higher tax rates by working less and earning less. Several studies have found that in situations where a large metropolis straddles two or more states, such as NYC, and different neighboring states changed their tax rates on the rich, the rich did not in fact do what they threatened or what would appear “rational”: move to the lower tax state in the same metro area.  There’s also substantial longitudinal evidence in the U.S. and other countries that shows when tax rates on the rich were a lot higher, such as in the 60′s and 70′s, effort and incomes were no less than in more recent times.

The other problem is the whole idea that the “rational” response to higher tax rates is to reduce one’s effort and income actually doesn’t hold microeconomic water.  It’s actually irrational to respond that way unless the marginal tax rate is truly so high that it approaches or exceeds 100%. The average tax rate, the percents you normally hear on TV, isn’t what affects incentives. Instead, it’s the marginal rate, or how much an extra dollar earned is taxed, that changes how we behave. Even then, a raising a marginal tax rate might reduce the incentive or attractiveness of additional effort and gross income, but won’t become a true dis-incentive until it becomes very, very high. An example:  Let’s suppose someone makes $1,000,000 a year and is taxed $400,000. Such a person is said to pay a 40% average tax rate or effective tax rate. But averages and effective rates tell us nothing about incentives.  Incentives deal with changes in behavior at the margins – the incremental changes.  If micro is clear about one thing and has been since the 1870′s, it’s that decisions and changes in behavior depend on changes in marginal costs and marginal benefits.  What matters is the taxes on the marginal, the incremental, change in income.  What matters is the marginal tax rate.  The only reliable way to figure the marginal tax rate is to compare two different amounts of income, preferably with only a small difference between them, the taxes paid and the after-tax-income that results.  What people work for is to get after-tax, spendable income.

So let’s continue the example.  Suppose the existing tax code, with all of its exemptions, deductions, rates, credits, etc, says that $1,000,000 income pays $400,000, but that $1,010,000 income pays $405,000 in taxes, then we have an increase in income of $10,000 of which $5,000 is used to pay the additional taxes. After-tax income rises from $600,000 to $605,000, leaving a net increase in after-tax income of $5,000. This means we have a marginal tax rate of 50%.  There be a disincentive effect only if opportunity cost (usually leisure) of the additional time/effort needed to generate the higher income is judged to be greater than the $5,000 increase in after-tax income.  Empirical evidence indicates that is not likely.  On the other hand, if the marginal tax rate were 100%, it would mean that $1,010,000 in income requires $410,000 in taxes. At a 100% marginal tax rate none of the additional effort results in more after-tax spendable income, so obviously it doesn’t make sense to exert the extra effort.

So what are the marginal tax rates for the highest brackets in the U.S.?  Even if all income comes from wages, the highest marginal rate is now around 38%.  Even if you include state or city income taxes, the marginal rates faced by the rich aren’t greater than 50% even in the most onerous tax-happy states. For the really rich, most income comes from capital gains and not wages.  Capital gains have a much lower marginal tax rate of close to 23-24% (including the 2013 Medicare tax on capital gains).  Evidence is pretty clear that such marginal rates do not provide a disincentive to additional work.

But, now I want to return to the poor.  We often assume that the poor don’t pay much in taxes.  That’s true in total  since they’re poor–there’s not much there to tax. But, marginal tax rates still exist. And they affect incentives.  In fact, it’s the working poor that face the most serious disincentives to work and earn income.  Our tax code is actually set up to make it rational for the poor to not try to earn more income!  As University of Southern Cal Professor Edward McCaffery notes on CNN.com,

…some of the working poor face marginal tax rates “approaching 90% as they lose benefits attempting to better themselves.”

Readers were incredulous, asking how it could be that in a nation with a top federal income tax rate of 39.6% on individuals making more than $400,000 a year, anyone could face a 90% rate.

It is true. Marginal tax rates, especially for those below the top rate brackets, are chaotic, confusing, and all over the map.

As a result, some of the working poor face extremely high rates on their next dollar earned. Tax scholars and economists have long known this. Dan Shaviro of NYU published a study in 1999 showing marginal tax rates above 100% on the working poor; specifically, he illustrated that a single parent earning $10,000 would lose over $2,500, after taxes, by earning another $15,000, pushing her income to $25,000.

Obviously, this is a policy failure.  We want to support the working poor, but we want them to be able to increase their incomes, join the middle class, and leave dependency behind.  Yet the way most welfare and aid to working poor programs are structured, a working poor person can find themselves in a situation where working additional hours or getting a modest raise in wage will actually result in less after-tax spendable money.

The problem is even worse, as Professor McCaffery points out.  The tax code exerts a genuine disincentive to getting married or to staying married if you are among the working poor.  Yet, we know that stable marriages and two-income households are often the key to escaping poverty for both the present and next generations .

It’s appropriate to talk about the incentive effects of tax rates.  Incentive effects should be part of the thinking when writing the tax code, just as reasons for government revenue should be a part.  But when we talk about incentive effects of tax rates, we must focus on the marginal rates and we really should be talking about the poor.  Not the rich.

Talking At TEDx Lansing 2012

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I promise I’ll start regular posting again soon.  If nothing else, my special strategic planning project at the college should be wrapping up soon.

The latest delay in blogging is an opportunity that I’m pretty excited about.  I’ve been invited to speak at TEDx Lansing.  From the college’s announcement:

LCCTV is once again teaming up with organizers of TEDxLansing to live stream the upcoming event featuring more than a dozen presenters including one of Lansing Community College’s own Jim Luke.

When: April 13th 9am-2pm

Where: Washington Street Armory

Live Stream: www.lcc.edu/tv/watch

Buy Tickets/More Info: www.tedxlansing.com

Many of you are familiar with TED talks and their mission to promote Ideas Worth Spreading with a focus on technology, entertainment and design. At TEDx Lansing local thought leaders are handpicked from the community and are given 20 minutes to share their idea, inspiration or research.

TEDxLansing offers 11 speakers who explore creativity in its myriad forms, including filmmaking, engineering, advocacy and zombies. The event will include performers as well as TED Talk videos designed to spark deep conversation and connection.

Here’s the lineup for this year, it’s a diverse cast of characters including LCC economics professor, Jim Luke talking about education and technology, an idea further influenced by his role with LCC’s Learn Forward campaign.

His presentation is called “Will Plato Hack the iPAD?”

If you’re going to watch the live streaming on Friday, I’m scheduled to speak at 10:43 am to 11:00.

Yes, Inflation/Deflation is Hard to Measure

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One of the hardest concepts for Principles students, politicians and pundits, oh heck, just about everyone to fully grasp is inflation.  A big part of the reason is because inflation is an abstract concept that is not directly measurable.  We can conceive of it, but we can’t measure it.  I’m no physicist (and open to correction) but it strikes me that it’s a bit on par with “momentum” or “latent energy” in physics.   We don’t have direct-measuring energy-o-meters.  We measure the effects and infer the energy.  Inflation is similar.  We can conceive of a generalized, across-the-economy, sustained trend pushing all/most prices upward such that the unit of money is losing real value in general terms.  Inflation is the sustained push behind all prices. We can’t measure that directly. But we can measure the effect it has: rising prices. The problem comes in that not all prices will be rising at the same time or by the same amount.  Further, during any time period, at least part of the change in price for any good is it’s change in real price relative to all other goods (supply and demand as taught in micro).

We try to deal with this measurement issue by creating a price index – an index that tracks the changes in shopping list of goods over time.  But any price index is a just a subset of all the prices.  Even the Billion Price Project index at MIT admittedly misses most services and lots of consumer goods that aren’t available online.  Price indices are very imperfect beasts.  They have many faults, not the least of them being that they often tend to be volatile in nature.  Since we’re looking for an estimate of inflation which means sustained increases, we need to massage the data further by creating some kind of “core inflation” measure or “trimmed means” type price index.  I’ll explain those some other time.

What prompted today’s post is an article in Bloomberg and a post by Krugman about it.  Together they illustrate one of the reasons so many people want to believe we have greater inflation than we really do.  Companies like to disguise price changes.  They don’t want to be known that prices could be cut in response to demand. Example: auto company offers $2000 rebate on $20,000 car but won’t cut price by 10%, or a firm offers a “value meal”, or they offer a freebie bundled product.  Similarly they often disguise price increases by reducing sizes or portions or by changing the financing.  From Krugman:

Good article in Bloomberg:

Procter & Gamble Co.’s failure to raise the price of Cascade dishwashing soap shows why investors are buying Treasuries at the lowest yields in history, giving the Federal Reserve more scope to boost the economy.

The world’s largest consumer-products company rolled back prices after an 8 percent increase lost the firm 7 percentage points of market share. Kimberly-Clark Corp. (KMB) started offering coupons on Huggies after resistance to the diapers’ cost. Darden Restaurants Inc. (DRI) raised prices at less than the inflation rate as patrons order more of Olive Garden’s discounted stuffed rigatoni than it anticipated.

This is basic economics; prices tend to fall, or at least slow their rise, when there is vast excess capacity and weak demand.

As both the article and Krugman’s excerpt show, we’re closer to deflation than most people realize.  They don’t see the failed attempts to raise prices.  They don’t see the shifts in portions or increase in coupons that reduce effective prices.  What they do see and remember is the $.50 increase in a loaf of bread or the $.70 increase in a gallon of gas.  But even with the gas, they selectively remember the $.70 price increase in summer, but forget the $.75 price drop in autumn.  Inflation and deflation are tricky things to measure.

 

David McWilliams Explains Why Austerity Is Doomed In Europe

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A very interesting video by an Irish economist explaining how the current reduce government spending (“austerity”) approach to the Eurozone debt and currency crisis is doomed to fail. It is doomed because cutting government spending in a recession only makes the recession worse, which in turn, reduces tax collections which then makes the government deficits worse not better.  But not only is the austerity approach all wrong to solving the debt crisis, it carries very significant risk of social upheaval.  (hat tip to Philip Pilkington and New Economic Perspectives).

Now I’ll offer one pre-emptive comment.  Critics of the arguments McWilliams makes often claim that either government spending isn’t really effective, that somehow only private investment spending will stimulate an economy.  Or, the critics claim that any resources the government puts into use through spending actually detract from the economy by denying those resources to some supposedly better, privately chosen use. Both of these criticism fail.  We are clearly discussing a situation in which there are excess, unused economic resources in the economy.  In plain language:  there’s high unemployment and people are out of work.  The criticisms are all based on an idea called “crowding out”.  For crowding out to occur, the economy must be at full employment – the opposite of being in a recession.

Government and the Slow Jobs “Recovery”

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Government finally starts to get out of the way of recovery. In an earlier post today on the good news of the January 2012 employment report, I observed that one of the major factors resulting in an improved (but not good enough) jobs report was that government employment numbers stopped dragging down the total.  I wanted to briefly expand on that idea here.

First, let’s make no mistake the “recovery” from this last recession has been very, very weak.  Private sector growth has been anemic at best. In employment, the recovery has largely been missing in action.  Today, 31 months after the supposed end of the recession, we have only recovered 1/3 of the jobs we lost during the 19 months of recession. As I’ve mentioned before, we are well on our way to a lost decade or more before we regain full employment.  A huge part of the weak recovery has been slow and at times negative growth in private sector employment.

But a bigger problem has been government.  Government has a three-fold impact on employment during a recovery.  Government spending by itself will create employment in the private sector.  For example, if the government chooses to react to a recession and high cyclical unemployment by increasing it’s spending it can create new private sector employment. This would be a classical stimulus program.  The government could embark on highway, bridge, or school construction.  The spending with construction contractors causes those contractors to hire employees. That’s direct private sector employment through government spending.  As long as there are significant unemployed resources (workers), such government spending will increase employment.  Arguments about crowding out do not apply when large unemployed resources exist.

The increased government spending then has a second effect, a “multiplier” effect.  The multiplier effect reflects the idea that workers who got jobs in the initial round of spending themselves spend their incomes and create more demand for more goods. This increased demand for goods results in even more employment.  In other words, the construction workers hired to build the new bridges or schools spend their paychecks.  The firms selling those workers goods then have to hire in order to produce the goods/services the construction workers want.  The exact size of the multiplier effect is uncertain and subject to dispute depending on the econometric methods used to measure it.  However, it’s clear that as long there were substantial unemployed resources to begin with, there is a positive multiplier effect on private employment from increased government spending.

But what I want to draw attention to today is direct employment effect of government.  One of the greatest reasons why we have had a very slow employment recovery is because government in the U.S. has been aggressively cutting jobs for the last 2-3 years. Conservative critics of government have been partially right. Government has been part of the problem – but not in the way they think.  Let’s look at total government employment in recent years:

The data series can be a bit tough to read because government employment has a very seasonal pattern to it.  That’s shows up by the regular up-and-down pattern each year.  Let’s focus on the trend, smoothing out the ups-and-downs. There’s four patterns. Government employment was essentially flat in 2002 and 2003.  Then a period of employment growth in government began running form 2004 through early 2008.  During the recession itself government employment was essentially flat.  Since 2009, though, government employment has been declining.  Cutting government employment is contractionary.  It directly reduces retail demand for goods and services by reducing the incomes of what were formerly government workers.

The pattern is a little clearer if we look at the data in a slightly different way.  The following graph, courtesy of Menzie Chinn at Econbrowser.com, shows the a smoothed trend.  It does this by plotting the 12-month change in government employment (000′s of jobs) by month.

While private employment continues to grow, government employment continues to fall; the decline is most pronounced at the state and local level (Wisconsin is a good example of the contractionary impact of such measures [1] [2]). However, civilian Federal government employment is also declining.

janempsit3.gif
Figure 3: Twelve month change in government local employment (blue), in state employment (red), and government employment ex.-temporary Census workers (geen), 000’s, seasonally adjusted. NBER defined recession dates shaded gray. Source: BLS via FRED, NBER and 

One thing I particularly like about this graph is that it shows the relative contribution of federal, state, and local governments. What this graph shows is that before the recession (the grey zone), government was net hiring approximately 250,000 additional jobs per year. Of that, most was at the local level and some at the state. Very little was federal hiring.

Since the end of the recession in June 2009, government has been firing more workers than it hires.  It has been reducing employment.  The federal government, contrary to popular belief, began shrinking (in employment terms).  State governments were largely able to hold the line on employment until early 2011.  Then state governments began reducing employment in rapidly increasing numbers.  But the big impact again came from local governments.  For the last 30 months, they have been laying off large numbers of workers. The reductions have slowed in 2011, but they are still cutting workers at nearly the same rate that they added them in 2007 – hundreds of thousands of lost jobs each year.

There is a temptation among politicians and commenters to think of government employees as representing largely just some bureaucrats mindlessly pushing paper in large bland office buildings.  That is not true.  At the federal level, most federal government employees are either soldiers or part of some security forces (TSA, FBI, ICE, etc).  At the local level, the vast majority of local government employees are police, fire and emergency workers, and teachers. Reductions in local government employment directly translate into fewer services and less education for children.

Why are state and local governments cutting employment?  Simple.  It’s reduced taxes combined with balanced budget requirements.  State and local governments, unlike a sovereign national government, must balance their budgets.  They are budget constrained.  The recession and weak recovery have hit income and sales taxes hard.  Even more significant is that the collapse of home prices a few years ago has translated into lower property tax collections.  Either way, state and local governments have been pinched.  The response has been to reduce government employment – fire police, firefighters, and teachers.

Paul Krugman notes the how this reduction in state and local government revenue has translated into reduced spending, which in turn has translated into lower employment.  Despite the federal government embarking on a stimulus spending program in early 2009, a program which is over and done with now, it was not large enough to offset the reduction in state and local spending.

if you look at what’s being cut, it’s heavily focused on investment:

That is, we’re sacrificing the future as well as the present. Oh, and the cuts that aren’t falling on investment in physical capital are largely falling on human capital, that is, education.

It’s hard to overstate just how wrong all this is. We have a situation in which resources are sitting idle looking for uses — massive unemployment of workers, especially construction workers, capital so bereft of good investment opportunities that it’s available to the federal government at negative real interest rates. Never mind multipliers and all that (although they exist too); this is a time when government investment should be pushed very hard. Instead, it’s being slashed.

What an utter disaster.

On this point, I have to agree with Paul.  Unless we reverse course and do it strongly, we are flirting with a long-term disaster.  We are under-investing in our future.

A Journey of 100 Months Starts With the First Month

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Finally we are getting some good news. At least most people will consider it good news. Republican Presidential candidates hoping to run against Obama on “weak economy platform” might not happy with the news.

Today the Bureau of Labor Statistics (BLS) released the January 2012 employment data.   The unemployment rate has declined again. It is now down to 8.3%.  The number of net new jobs was pleasantly above the consensus expectations.  Calculated Risk quotes the BLS for us:

From the BLS:

Total nonfarm payroll employment rose by 243,000 in January, and the unemployment rate decreased to 8.3 percent, the U.S. Bureau of Labor Statistics reported today. Job growth was widespread in the private sector, with large employment gains in professional and business services, leisure and hospitality, and manufacturing. Government employment changed little over the month. … Private-sector employment grew by 257,000 …

The change in total nonfarm payroll employment for November was revised from +100,000 to +157,000, and the change for December was revised from +200,000 to +203,000..

So what accounts for the increase?  As the BLS states, large gains were widespread – services, hospitality/leisure, and manufacturing. But overall positive effect compared to what was expected and to what we’ve grown accustomed is strongly due to two factors we didn’t see.  We didn’t see reductions in government employment dragging down the total numbers. I’ll have another post on that later today.  The other effect is that the weather was nice – the exact opposite of last January (2011) when the weather adversely affected the numbers.

Nonetheless, a solid increase is a solid increase and something to feel good about.  But in keeping with my skeptical self, it’s also very important to not declare victory yet. We’re not out of the woods by a long shot.  I can think of four reasons right away.

First, we’ve been here before.  As Calculated Risk explains,

Job growth started picking up early last year, but then the economy was hit by a series of shocks (oil price increase, tsunami in Japan, debt ceiling debate) – and now it appears job growth is picking up again.

Payroll jobs added per monthClick on graph for larger image.

This is the third or fourth time in this “recovery” that it appeared employment would finally be accelerating into the kind of “V-shaped” recovery we really need.  Each time before, something (often politics) interfered.

A second reason for caution involves both the employment-population ratio and the labor-force-participation rate.  Both rates are at lows we haven’t seen for 30 some years.  Both ratios indicate that large numbers of people have left the labor force and simply aren’t looking for work.  If they change their minds and start to look for work, then the unemployment rate could easily begin rising again as the denominator of the unemployment rate rises faster than employment (the numerator).

A third reason is that there are still too many unknowns on the horizon and most of them carry downside risk.  The UK and the Eurozone continue their self-inflicted austerity march into recession and flirtation with banking and default crises. House prices have continued to decline, threatening the ability of households to sustain increases in consumer spending. And there’s always the completely unknown.  Twelve months ago nobody would have considered the risk to economic growth from an earthquake that created a nuclear disaster.

The fourth reason to be cautious is the mismatch between the positive increase in employment we’ve just seen and the size of the employment gap we are facing.  This is the graph we need to keep in mind.  Again from Calculated Risk:

Percent Job Losses During Recessions

… third graph shows the job losses from the start of the employment recession, in percentage terms. The dotted line is ex-Census hiring.

This shows the depth of the recent employment recession – much worst than any other post-war recession – and the relatively slow recovery due to the lingering effects of the housing bust and financial crisis.

We are far, far from leaving this employment depression behind.  Dean Baker of the Center for Economic Policy and Research cautioned today that, while it appears that we are on stronger path, it is still too weak.  January’s numbers seem strong only because we have grown accustomed to such abysmal recovery for the last 2-3 years.  Even at the pace January showed, it will still be 2020 before we regain full employment.  That’s 8 years away – 100 months.  Government and central banks easily lose focus on growth in a period that long.  Congress and the President, while returning to jobs now in this election season, have already shown that they couldn’t sustain a focus on job growth last year as they turned to imaginary concerns over government debt instead.

We have a long way to go.  We should be running but we’re only walking. Nonetheless, at least we’re walking forward now instead of backwards they way we were in mid-2011.

Does Anybody Understand Debt?

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Does anybody understand debt?  Some – but not many.  Today’s post is less of my normal extended prose and more of an outline.  I’ve been invited to speak at some writing classes here at the college and this is intended to serve as my speaking notes.

Background: What have you heard?

Krugman in New York Times

Harvey in Forbes

Background Info on U.S. National Debt

Brazelton:  The US CANNOT Go Broke

Numbers, Metaphors, and Stories

Get the terms right

Debt, Deficit, and tr/b/m-illions

$1,000,000,000,000

$1,000,000,000

$1,000,000

$1 trillion =  1 million times $1 million

Debt

Deficit

1984-present U.S. Federal Budget

Measuring the Debt

Counting Absolute Dollars of Debt Deceives. It's All Relative.

Three Bad Metaphors

Government is NOT a Household

Government is NOT like a Household!

Econproph: Once Again, Government is Not Like  a Household

 Govt Debt is NOT a Burden on future generations

Private Debt is NOT like Government Debt

Federal Reserve Breakdown of Household Debt

Foreigners Don’t Control

So…

A Sovereign Government Cannot “Go Broke”

Eurozone Countries Can “Go Broke”

Government Debt is Like Money that Pays Interest

But What About Inflation?  Printing money?

Inflation involves real demand vs. real supply, not just $

Test on Debt:  Interest Rates

Rates are historically low and staying low.

Are Gov. Deficits Necessary?

Yes, if you want to save money.

Forever?   Yes.

Econproph: But What About National Debt-to-GDP Ratio? Not a Problem, Really

Are There Limits to Deficits?

Yes, but related to full employment and capacity.

In Practice, Nobody Understands Money.

Well they understand yesterday’s money, not modern money.

That’s why they don’t understand debt.

The Problem in One Graph

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Yesterday I said I was reluctant to get over-optimistic about the recent slight upturn in employment data. This year may truly be different from the last few, but there’s a nagging feeling that we’ve seen this movie before. I’m not alone in the feeling. As 2012 dawns, Tim Duy summarizes the problem in one graph (emphasis is mine):

I have been hesitant to embrace the recent positive data flow - once bitten, twice shy perhaps.  Something about the current dynamics that seems a little too familiar.  Indeed, I felt something of relief when FT Alphaville came to a similar conclusion in the waning days of 2011.  Cardiff Garcia reports on a Nomura research note that details a new bias in the seasonal adjustment process, noting:

Up next, writes Nomura, you can expect exaggeratedly strong readings from the Chicago PMI later this month and the next ISM manufacturing survey at the start of January.

I imagine it is premature to call the readings “exaggerated,” but both did surprise on the upside, as much data has of late.  Read the whole piece – it is worth the time.

Indeed, flirtations with either excessive optimism or excessive pessimism were not richly rewarded last year, as on average the economy simply edged upward in pretty unremarkable fashion:

Potential
It seems reasonable to expect the same in 2012, at least as a baseline – a slow “recovery” that is really more of an adjustment to what appears to be the economy’s new equilibrium path, one that is decisively subpar to the pre-recession trend.  I don’t believe that such an adjustment is necessary, as in my view it simply reflects a shortfall of aggregate demand.  That said, the longer the cyclical downturn grinds on, the more likely it is that we will indeed see a new equilibrium path.  A greater percentage of the cyclical unemployment will become structural unemployment or permanent shifts in the labor force participation rate.  In addition, investments will go unmade as firms hoard cash.  And, increasingly, policymakers will manage policy along the new equilibrium path, forgetting entirely the pre-recession path.

The gap in the above graph, the gap between the green trend line of what we’re capable of doing and the blue-red trend from Jan 2009 onward of we’re actually doing is the challenge.  We are slowly becoming an economy that simply cut-off 7% or so of our economy in 2008 and we aren’t recovering it.  Instead it increasingly appears that the 90-93% of the economy that survived, those of us still with good jobs, are simply going on our way leaving behind those who lost out a few years ago.

There are over 13 million unemployed workers. Over 5.6 million of them have been searching fruitlessly for a new job for more than 6 months.  These are the people who got kicked off the American economy bus some time ago.  Unfortunately, even at the recently improved rate of 150-200,000 new jobs per month, there won’t be any room on the bus for them again.  Instead, the bus is moving on and they are left behind.

This is new. This is not the normal pattern. In past recessions, public policy, both fiscal and monetary, was managed to restore full employment rapidly after a recession.  It didn’t always succeed but the effort was made.  Now it is not. Now we focus more on long-term debt issues and spending concerns.  Politicians run on platforms of fear of some future default or financial crisis. This despite the fact that the government is able to borrow at record low rates of interest.

We are on path to a “new normal”, a “normal” that says it’s OK to have millions of long-term unemployed who have no hope.  I don’t think I like the “new normal”.

 

Setting the Bar Very Low: The Unemployment Report for December 2011

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Well I’m back.  Yes, it’s been a longer than expected break from blogging driven by work considerations, but contrary to the rumors, I have not been “doomed”.  So it’s on to a new semester and a new resolution to post frequently. I hope 3-5 times per week.

To start things off, yesterday was the first Friday of the month which means, of course, the monthly report on employment, jobs, and the unemployment rate.  I’ll let Calculated Risk report the news and graph first:

December Employment Report: 200,000 Jobs, 8.5% Unemployment Rate

There were 200,000 payroll jobs added in December. This included 212,000 private sector jobs added, and 12,000 government jobs lost.

The following graph shows the employment population ratio, the participation rate, and the unemployment rate.

Employment Pop Ratio, participation and unemployment ratesClick on graph for larger image.

The unemployment rate declined to 8.5% (red line).

The Labor Force Participation Rate was unchanged 64.0% in December (blue line). This is the percentage of the working age population in the labor force.

The Employment-Population ratio was unchanged at 58.5% in December (black line).

The good news then is that trend indicates we are creating net more jobs in the last few months than we have been doing for several years.  An unemployment rate of 8.5% is definitely a lot better than the 10% we had in 2009. And, the rate is coming down.  But we shouldn’t get too excited nor should politicians think  their work is done.  First off, although this is the strongest 3 month improvement in the rate we’ve seen since the start of the recession back in 2007, we have seen similar short trends of improvement that fizzle out. It’s always possible as some analysts have observed that the November-December numbers were driven by a surge in temporary hiring in the online retailing sector.  It’s possible that we’re only seeing  a temporary strengthening and that January and February will see a return to same stagnation we saw last summer.

Second, it’s always possible that Congress will do something incredibly stupid that dramatically cuts employment and aggregate demand immediately. A third, very serious risk is that Europe will continue to slide into government austerity-induced recession and possibly trigger a global financial crisis with the Euro.  A European slide will adversely affect our exports and depending on how severe it is, possibly reduce employment in U.S. exporting industries.  A Euro financial crisis would likely ripple back to big U.S. banks who could in turn cause problems here.

But the biggest reason that we shouldn’t be satisfied with these numbers is simple. This isn’t enough! An improvement of 200,000 net new jobs might be acceptable if we were already at full employment, but we’re not. We need to grow faster so we can put the millions of unemployed back to work.  Again back to Calculated Risk:

Percent Job Losses During RecessionsThis graph shows the job losses from the start of the employment recession, in percentage terms aligned at maximum job losses.

This is the worst post WWII employment recession. However, as bad as this is, the Great Depression would be way off the chart. At the worst, employment fell a little over 6% during the recent employment recession – although the data is a little uncertain – employment probably fell by around 22% during the Great Depression.

Calculated Risk makes the point that the past few years haven’t been as severe as the Great Depression.  That’s true in the sense of how deep or severe the crisis has been.  But in terms of length, how long we go without full employment, we are clearly on a path to making this on par with the Great Depression.  The Great Depression in employment was essentially 11 years long.  Unemployment started rising in late 1929. It never fully recovered until the war spending took off in a big way in 1940-41. That’s eleven years. The current recession/depression/inadequate recovery started in late 2007. It’s at least 4 years old already.  The current pace of jobs addition puts us another 3 or so years until we recover all the jobs we lost.   So that’s a total of 7 plus years.

But as Paul Krugman points out, the population and labor force has been growing during the last 4 years.  To really reach full employment we need even more.

Let me give two back-of-the-envelope ways to think about how inadequate 200,000 jobs a month is.

First, note that there are still about 6 million fewer jobs than there were at the end of 2007 — and that we would normally have expected to have added around 5 million jobs over a four-year period. So we’re 11 million jobs down — and we need at least 100,000 jobs a month just to keep up with working-age population growth. Do the math, and you’ll see that it would take 9 or 10 years of growth at this rate to restore full employment.

Alternatively, note that during the Clinton years — all 8 of them — the economy added around 230,000 jobs a month. As it did that, the unemployment rate fell about 3 1/2 percentage points — which is about what we’d need from here to get back to something that felt like full employment. Again, this suggests that we’re looking at something like a decade-long haul to have full recovery.

So yes, this is better news than we’ve been having. But it’s still vastly inadequate.

So, yes I’m encouraged by the recent employment reports, but not very much.  I still hold to my position that when all is done and we look back on this period we’ll be referring to it as some sort of depression, not a “Great” one, but some sort of depression.

Student Debt + Stagnant Real Wages = Colleges Need to Focus On Student Success

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Today’s post is an excerpt of something I wrote for another site.  This year, in addition to my teaching duties at the college, I’m leading a project to update our college strategic plan.  As part of that project I’m writing and editing a series of “briefing papers” (long blog posts, actually) about issues of strategic importance to the college’s future.  When those papers cover a topic that I think might be of interest to econproph readers I’ll cross-post them. Last week I wrote the following about the student debt explosion in the U.S., the stagnation in hourly wages for those for with less than college degrees/credentials, and the implications for those of us who work in higher education.  The full original post is here.

America has a student debt problem.

And it’s growing. According to the statistics assembled by the New York Federal Reserve Bank, theU.S. Dept. of Education, and other sources, total student loan debt outstanding is nearing $1 trillion, easily exceeding the $791 billion in total credit card debt.  As disturbing as the total might seem, the growth rate of student debt is even more distressing.  This graph, first published by The Atlantic last summer from NY Federal Reserve Bank statistics shows the relative growth  (not amounts) of outstanding student debt since 1999 compared to total household debt including mortgages. FromThe Atlantic:

The red line shows the cumulative growth in student loans since 1999. The blue line shows the growth of all other household debt except for student loans over the same period.

crazy student loans 2011-q2.png

This chart looks like a mistake, but it’s correct. Student loan debt has grown by 511% over this period. In the first quarter of 1999, just $90 billion in student loans were outstanding. As of the second quarter of 2011, that balance had ballooned to $550 billion.

The chart  is striking for another reason. See that blue line for all other debt but student loans? This wasn’t just any average period in history for household debt. This period included the inflation of a housing bubble so gigantic that it caused the financial sector to collapse and led to the worst recession since the Great Depression. But that other debt growth? It’s dwarfed by student loan growth.

Roots of the Problem

The student loan debt problem has many roots, most of which [colleges] cannot change or directly affect.  Causes of the explosion in student debt include:

  • A long-term shift in U.S. political opinion away from thinking of higher education as a public good with direct funding support from government toward thinking that students should pay for their own educations with loans guaranteed by the government.
  • Tuition and fee increases in higher education (particularly at 4 year schools and especially at private schools) have outpaced inflation for at least 3 decades, driven by cost increases, stagnant productivity, and reduced government direct funding.
  • Middle class real incomes have been largely stagnant or only modestly increasing for those same 3 decades, limiting the ability of families to pay dependent students’ tuitions.
  • The collapse of the housing price and mortgage bubble in 2006-07 which limited the ability of many middle- and working-class families to finance college education through home equity loans.
  • High unemployment rates since 2008 have limited the ability of students to work while in college and have also sent increased numbers of unemployed back to college.

… most community colleges can be a partial solution to the nation’s growing student loan burden.  After all, [community colleges are] one of the most cost-effective providers of the first 2 years of a college education.  Indeed, students can graduate with a bachelors’ degree with less total indebtedness if they take their first two years at community college and then transfer.

But the growing student loan problem when combined with another trend has even more significant implications the community college mission.

The Long Term Trend on Real Incomes – A Closing Middle Class

Long term trends in incomes in the U.S. including increasing income inequality have become a news headline topic in recent months.  …  Cumulative Growth in Hourly Wages, 1979-2009, by Level of EducationAs this graph from  the Congressional Budget Office (via Paul Krugman) shows, over the past 30 years the clear trend in hourly wages for workers with less than high school or only high school education has been negative. A high school graduate now earns 10% less per hour in inflation-adjusted dollars than they did 30 years ago.  Even workers who only have some college but haven’t completed a formal degree or credential are either negative or at best, even with 30 years ago.  The data in the graph is from 2009 and labor market conditions have not improved since then.  Indeed, most labor market economists, myself included, expect little to no improvement in wages or employment rates for many years to come.

So what does this mean?  It’s clear that for young and middle-aged people, the route to a rising income and participation in the middle class requires either a college credential or advanced degree.  Yes, anecdotal exceptions are always possible such as the stellar young person who becomes a big success in sports or entertainment. But the numbers are clear – for virtually all, membership in the middle class in the future requires succeeding at college not just attempting college.

Implications for LCC and It’s Mission

The mission of LCC and community colleges in general since they were created has been to provide access.  The great post-World War II expansion of community colleges in the U.S., of which LCC was a part, was based on the idea that broad, democratic access to higher education was important.  Community colleges provided access to college for millions who otherwise couldn’t attend, either because of costs, lack of family support, family/work obligations, location, lack of preparation, grades, or other circumstances.  Over time community colleges have expanded programs to help  increase access to even more individuals.  Indeed, this open-door, democratic access mission is a large part of the motivation for many who work at LCC.  Providing access is something we could feel good about.

But let’s consider how access has traditionally worked.  LCC, like most community colleges, has focused on providing the same basic instruction and learning that was available at 4 year institutions.  The difference was we had an open-door. We provided access.  We provided a chance at college and greater income and success in life. But it was always considered up to the student to succeed. The historical model is the college provides the student a chance at success. If they didn’t succeed that was their problem.  We measured our success by our enrolments as an indicator of the number of people to whom we had provided access.  Thirty years ago, if a student attempted college and didn’t succeed it didn’t carry the consequences it does today.  Thirty and forty years ago, a student who failed at college or simply didn’t complete could always get a job in a factory or a trade. They could still make a middle-class life despite not succeeding at college.

Now the trends tell a different outcome.  If a student doesn’t attempt college at all, they are likely not going to stay in the middle class at all and will likely experience declining real incomes.  The big change is if the student does attempt college but simply doesn’t succeed or complete, today their prospects for staying in the middle class are slim.  Successful completion of a college degree or credential has become a requirement now for a middle class future. It’s necessary for young people in particular to attempt and succeed at college now.

But now let’s add the student loan issue.  Suppose a person attempts college today but doesn’t succeed. Not only are they faced with the prospect of flat to declining real income, they have a significant burden – their student debt. Under current law there are really only two ways to discharge student debt – either pay it or die. Student loans cannot be discharged in bankruptcy. There’s no asset to sell or foreclose. So today’s student is facing a higher risk environment than their predecessors did in previous generations.  Instead of access to college being a chance at a better life, it’s now a high-risk necessity.  So it’s not just access; it’s success that matters.

…The governments, both state and federal, are paying increasing attention to success rates.  As mentioned in the first briefing paper, state governments, including Michigan, are increasingly looking at funding for higher education in terms of how many successful credentials or degrees does it produce, not just how many seats in classes were offered.

Beyond what the government is requiring, the success issues pose a challenge to our understanding of our core mission and how we measure our institutional success. In today’s environment, providing access to large numbers of students without regard for their success is playing a cruel joke on them.  It’s teasing them with dreams of a future many of them won’t achieve and then punishing them with a burden of debt.  For those of us in the institution, that’s not the motivator that the original access mission was. We need to adjust our sense of the mission.  Yes, access is important, but it needs to be successful access.  Successful access as a mission changes many things.

It changes our most basic metric of institutional success. Instead of simply enrollment growth showing institutional success at providing access, we now need to consider whether that access was successful. …But measuring success and access are one thing. Improving them is another. The shift to successful access calls for many changes in the organization, it’s processes, systems, the curriculum, teaching methods, support services, and attitudes. It is not easy or simple. It is very challenging.