The Fed lowered its long-term unemployment rate…and a salient point re the R’s budgets

March 19th, 2015 at 8:22 am

Details at PostEverything.

Everyone’s wound up about precisely when liftoff will occur (when the Fed will first raise interest rates after about six years at about zero) but I think the big story is that the Fed lowered their “natural rate,” the unemployment rate consistent with stable inflation.

It’s a confusing time for Fed macromanagement for sure. They want to give accurate forward guidance, but they’re (admirably) data driven and don’t know the future, so they can’t telegraph precisely what they’ll do since they don’t know yet. To signal that they’re getting closer to liftoff, they took the word “patient” out of their post-meeting statement, but then Chair Yellen was compelled to point out, oracle-like, that just because they’re no longer patient doesn’t mean they’re impatient. So this part is getting a little silly.

But my CBPP colleague Isaac Shapiro made an important and interesting connection. While the Fed lowered their full-employment-unemployment-rate, an important move in favor of monetary accommodation on behalf of working people, Republicans in both the Senate and House released deeply austere budgets “which cut growth in short term and ignore addressing continued labor market slack and priorities such as full employment” as Isaac put it.

According to House R’s, “The growing probability of a debt crisis is the most urgent challenge the United States faces today.”  In fact, our fiscal outlook has improved considerably in recent years and the biggest threats it faces at this point are a) reckless budgets like the plans put forth by House and Senate R’s, both of which are virtually sure to add massively to deficits and debt, and b) their proclivity to play politics with the debt ceiling.

Meanwhile the actual challenge we face right now is getting to and staying at full employment. In this regard, while no one’s saying the Fed is perfect, they are far and away the most–I’d say the only–functional institution working on behalf of working people, yet another reminder of of the critical importance of their political independence.

One of the more outrageous things ever said re fiscal policy…and that’s a high bar.

March 17th, 2015 at 4:41 pm

House Republicans released their budget today, and I found it to be…um…how can I put this nicely?…orthogonal to reality. As I wrote earlier:

The policies put forth in this document suggest that America’s main problem is that the poor have too much and the wealthy, too little. The budget plan “corrects” this perceived imbalance by deeply cutting programs that help low- and middle-income people, and cutting taxes on those with high incomes, capital gains, multinational corporations and “pass through” business income.

Programs that provide affordable health coverage for the middle class (Obamacare, which they repeal) and the poor (Medicaid, which is “block granted”) face large spending cuts. Future elderly persons do not escape unscathed, either, as Medicare is “voucherized” beginning in 2024. The budget includes more than $1 trillion in unspecified cuts that would appear to fall on nutritional support for the poor and tax credits for low-income, working families.

While the budget’s authors claim it balances out revenues and spending within the ten year budget window, to get there it uses the same massive magic asterisk as did the Ryan budgets upon which this one is based. They write down revenue targets and, in Ryan’s case, profess to have ways to get there. In this case, however, they simply invoke “faith.”

When a reporter asked Budget Committee chair Tom Price how his budget makes up the lost revenue from all the tax cut implicit in their  budget, he replied, “We believe in the American people and we believe in growth.”

He goes on to invoke supply-side fairy dust on how tax cuts would create more growth and thus more revenues, but they’ve got an interesting problem here. They got the CBO to score their budget, and the budget office did, in fact, say it would raise GDP per person (really GNP, but no matter…this is all just fun with numbers) by 1.5% by 2025.

But you’ve got to appreciate the pretzel logic here. You only get the boost in growth because CBO must do what you tell them. If you say, as Price and co. did, that you’ll cut taxes by trillions and yet somehow (I guess because of your belief in the American people and growth) balance the budget, then and only then do you get CBO to credit you with lower deficits, lower debt, lower interest rates, more growth and thus higher per capita income.

But if your plan fails because no matter how much you believe in the American people and growth, tax cuts of the magnitude you’re contemplating sharply increase deficits and debt, even with all your spending cuts, then you don’t get the lower interest rates, growth, etc.

I too believe in the American people and growth but I don’t believe in magic asterisks or tax cuts that pay for themselves. It’s great to have faith, but math is good too.

This is your safety net on block grants

March 16th, 2015 at 4:51 pm

Good old Ez Klein provides a highly efficient and important summary of what can happen when the federal government turns the administration of a program over to the states in the form of a block grant:

A block grant takes money the federal government is already spending on a program and gives it to the states to administer — usually with fewer rules and conditions. That’s it. The hope is that states will use the money more efficiently. But block grants can cost more, cost the same, or cost less than the funding mechanisms they replace. Block grants change how money is spent, not necessarily how much money is spent.

We’re talking about block grants because the Republican budget resolutions are coming out this week and as Ezra emphasizes, recent such budgets have used this mechanism to propose deep cuts in Medicaid and SNAP (food stamps). That is, they don’t just turn the programs over to the states with the same principle that funding will go up and down with need. They set the funding to some fixed formula, like population growth plus inflation, or, even worse, as was the case with TANF (Temporary Assistance to Needy Families), a fixed, nominal amount–it’s been $16.5 billion since 1996!

Clearly, this completely strips the critical counter-cyclical function from the safety net.

But while Klein said a lot about what could happen, Bernstein will show you what did happen. The first figure below, from this earlier analysis, shows how as unemployment rose in the Great Recession, SNAP rose with need while TANF’s fixed block grant prevented it from responding in the same way.


The next figure, from my CBPP colleague Donna Pavetti, shows how much more AFDC (TANF’s non-block-granted predecessor) rose with unemployment in the relatively mild early 1990s recession compared to how it hardly rose at all in the far deeper recent recession.


The final figure, also from Pavetti, switches from an unemployment metric to a poverty metric, showing how block granting led to a marked decrease in TANF’s response to need.


I’ve got a longer piece I’ve been working on which I hope to post shortly pointing out that this budget tactic by the R’s is completely predictable. They won’t raise tax revenue (though tax cuts are OK), they want to boost defense spending, they want to balance the budget in 10 years, and they won’t go after near-term entitlements (Soc Sec, Mcare), except the ones that help the poor. So that means cuts to SNAP and Medicaid, delivered through block grants.

That’s some deeply cynical and just downright mean-spirited budgeting.