Why is our macroeconomy doing so much better than Europe’s?

December 1st, 2014 at 12:29 pm

Over at PostEverything.

Bonus for OTE’ers: here’s an update of a figure I made awhile ago tracking Eurozone GDP, government spending (both in real terms), and unemployment. What I find revealing here is the fairly clear–for this sort of thing–initial increase in public spending to offset the downturn and the subsequent stabilization of GDP and unemployment. Then, spending prematurely flattens and both real GDP and unemployment reverse course.

Obviously, many more moving parts here, some of which I discuss in this chapter for a volume edited by Tom Palley where this figure first appeared (see chapter 7). Also, in the US case, at this point you’d see declining gov’t spending and pretty sharply declining unemployment, but that’s partly a result of diminished automatic stabilizers as the recovery takes hold.

Finally, as I stress in the WaPo, growth is necessary, not sufficient. I yield to no one in my emphasis of that point in the context of the US recovery, which for many people still doesn’t feel like much of a recovery at all.

aust_ezone2

Source: Eurostat.

The tax extender package: a lame duck turkey

November 26th, 2014 at 10:16 am

On the assumption that, like me, you’re either running to get somewhere for Thanksgiving or preparing for the arrival of a bunch of peeps running towards you, I apologize for breaking in with a weedy tax discussion. But break in I must, as while you’re innocently stuffing a bird, candying the yams, and burning the rolls, there’s an effort afoot to jam some nasty tax policy through the system.

I’m talking about the so-called “tax extenders” package, a dog’s breakfast of permanent tax breaks mostly for businesses that would add over $400 billion to the ten-year budget deficit without doing anything for low-income, working families. In a particularly nefarious twist, the package would increase pressure to further cut domestic programs far below the already unsustainable level imposed by sequestration.

As my CBPP colleagues point out:

Two-thirds of its more than $400 billion in tax benefits would go to businesses, and it doesn’t continue the two temporary tax provisions most important for reducing poverty and increasing opportunity among low-income working families with children.  Those provisions, improvements in the Earned Income Tax Credit (EITC) and the low-income component of the Child Tax Credit (CTC), lift more than 16 million people out of poverty or closer to the poverty line each year, including nearly 8 million children.  By making a slew of the tax extenders permanent while excluding the CTC and EITC provisions, the package risks stranding those provisions and making it less likely they will continue beyond 2017.

Tax extenders are a series of allegedly temporary tax breaks that are conventionally extended, unpaid for, year after year. These include tax credits for research and development, expensing deductions for small businesses, deductions for state and local sales taxes, and more. To put them in the annual budgets that Congress and the President construct each year would mean they’d either have to be paid for with higher taxes or spending cuts elsewhere or added to the deficit. So the usual practice is to just extend them by stealth every year and hope nobody notices.

To their credit, the White House has called attention to them this year for a number of reasons. First, to reveal the hypocrisy of the deficit chicken hawks for whom fiscal rectitude is a tactic to be invoked when it’s politically expedient. If you thought House Republicans were genuinely concerned about long-term deficits, this episode should disabuse you of that quaint notion. To be clear, however, there’s bipartisan support for this extenders package.

Second, it’s revealing of both Congressional priorities and the influence of corporate money in politics that the EITC and CTC provisions are left out of the package.

Finally, by making the extenders permanent and unpaid for, the revenue baseline would be permanently lowered (i.e., revenues that were expected in the future would no longer be so). Therefore, since the cost of the extenders would no longer have to be offset, revenue-neutral tax reform will have to cross a much lower bar in terms of the amount of revenue needed to be collected.

As the CBPP report points out, “instead, [tax reformers] would get a windfall of more than $400 billion they could use to cut the top tax rate more deeply, curb fewer unproductive or low-priority tax breaks, or both. And as noted, one likely result would be to place greater pressure on key programs — both those already squeezed by sequestration, such as education and basic research, and programs ranging from Medicaid to veterans’ programs.”

It is probably not realistic to fail to extend any of these tax measures at all. Many businesses have been operating this tax year under the reasonable assumption that these measures would be retroactively applied. So, a short extension, say for a year, during which Congress either figures out how to pay for them or phases them out would be a fiscally responsible course of action.

A deeper dive into the weeds of the CBO household income data

November 25th, 2014 at 6:57 am

Yesterday, I published a report by myself and Ben Spielberg analyzing the Congressional Budget Office’s comprehensive data series on household income. Here we dive a bit deeper into some of the weeds, expanding on some of our findings.

One motivation for our report was to correct the record of those who claim that the trend of increasing income inequality is significantly reduced when accounting for government taxes and transfers. In fact, as we show, between 1979 and 2011, inequality measured by the Gini coefficient rose 24% based solely on market outcomes and by 22% based on CBO’s comprehensive, post-tax and transfer income data.

Here we show that changes in pre- and post-tax income shares* – the percentage of total U.S. income held by different income groups – reveals a similar trend:

Change in CBO Income Shares

The “low” category in this figure represents the lowest before-tax income quintile, the “middle” category represents households between the 40th and 60th income percentiles, and the “high” category represents the top quintile. As with the Gini, the change in pre- and post-tax income shares are similar. The share of total income held by the poorest households fell by 1 percentage point on a pre-tax basis, and by 1.2 points on a post-tax basis. The share of income held by middle-class households fell by almost two percentage points on a pretax basis and by 1.4 percentage points post-tax.

Only within the top fifth of households do we see relative gains, and in fact, most of the increase in top quintile income shares has accrued to the richest subset of this group: the top 1%.

A second motivation of our report was to document the stagnation of middle-class earnings to households with children and the increased importance of transfer income to these families. We note, for example, that the increase in earnings to middle-income households with children was actually less than the increase in the dollar value of transfers.

To illustrate these points further, the graph below plots earnings (left axis) and transfer income (right axis) as a share of total after-tax income for middle quintile households with children.

Earnings and Transfer Share

Back in 1979, transfer income constituted only 5% of overall after-tax income for these families, and that share hardly grew in the deep recession of the early 1980s. By 2011, after climbing steeply in the recent downturn and continuing into the recovery (with Medicaid contributing the most in dollar terms), transfers constituted 13% of their overall income.

Earnings, on the other hand, used to account for almost all of the income for this group, but by 2011 accounted for barely three-fourths of their after-tax income. Our report shows that, depending on the method used to adjust earnings for the impact of inflation, they grew either 13% or 3% over this 32 year period. Either way, that’s stagnant growth in real earnings for middle-income families with kids.

To be clear, there’s nothing wrong and a lot right with transfers replacing lost earnings, especially in downturns. Tax cuts also helped offset middle quintile income losses. But this is not a reliable strategy by which to raise middle-class living standards for working families. For that, we must reconnect overall economic growth to paychecks, an effort that requires better policies, like those that comprise our full employment agenda. The CBO data highlight the nature of this problem and the urgency with which we must pursue the right solutions.

*CBO does not include households with negative income in their income quintile data, but CBO does include these households in their totals when calculating income shares. As a result, their official income share figures do not sum to 100%. CBO’s official figures tell the same story about post-tax inequality as our calculations, which force income shares to sum to 1 by excluding households with negative income from the total.

Hey, What’d I Miss? OTE 11/12 — 11/24

November 24th, 2014 at 12:34 pm
  • Looking at the economics of falling oil prices and the Keystone XL pipeline.
  • Explaining the bubble, bust, repeat cycle and its relationship our high levels of inequality.
  • Questioning our ability to accurately assess the natural rate of employment.
  • Debunking a common mistake — overestimating the contribution of immigration to the increase in poverty.
  • Describing why (in weak economies) monetary and fiscal policy are complements, not substitutes.
  • Pointing out that when Minsky raises an eyebrow, I pay attention and so should you.
  • Analyzing the economics and politics of the President’s immigration action.
  • Examining CBO’s recently updated comprehensive income series with my CBPP colleague Ben Spielberg.

 

Higher inequality any way you cut it: a review of CBOs updated comprehensive income series.

November 24th, 2014 at 8:40 am

My CBPP colleague Ben Spielberg and I poured through the update of the CBO’s invaluable comprehensive income series. Here’s are the key findings but please be sure to see our full report here.

The Congressional Budget Office (CBO) recently updated their series on the distribution of household income and federal taxes, providing important new information about the evolution of income inequality, comprehensively measured. We find:

–The increase in income inequality since the late 1970s has occurred both before and after taxes and transfers. Thus, according to these data, claims that adding taxes and transfers erase the trend toward higher inequality are incorrect.

–The income of the poorest fifth of households grows much more quickly in the CBO data than in other data sets but this is largely due to assigning the market value of health benefits to their income. We argue that based on unique inefficiencies that raise costs in the US health care system in ways that do not increase the living standards of the poor, this method creates an upward bias. A more realistic valuation of health benefits, one that still captures their important value to recipient households, cuts the income growth of the bottom fifth by half.

–The CBO data now run through 2011 and thus provide two years of comprehensive income data over the recovery that began in 2009. These data show just how unequal the recovery has been, with income gains even after taxes and transfers largely eluding the poor and middle class, while disproportionately accruing to the top 1%.

–Since the late 1970s, earnings growth has been slow and unequal. Remarkably, for middle-income households with children, the increase in transfer income has been larger than the increase in earnings.