You Ask, I (sort of) Answer

June 19th, 2011 at 8:13 am

From a post endorsing another round of a payroll tax cut:

Q: How do you hold the Social Security trust fund harmless without reimbursing it from the federal budget?

A: It’s a legitimate concern for at least two reasons.  First, as you suggest whatever Social Security revenue is diverted from current workers paying into the system to the tax cut must be replaced from general revenue in the rest of the budget.  That’s in the current legislation, and those transfers are actively being made.  So I’d worry less about this.

Second, the full payroll tax rate has to go back up after the tax cut “holiday” ends, which is not the end of this year but should be (and probably will be) the end of next year.  This is essential to avoid structural damage to Social Security.  And here you’re right to worry a bit more, since we’ve been terrible of late in letting temporary tax cuts sunset.  “It’s a tax increase!!  Run for the hills!!”

Q: I am very concerned about the diminishing labor share of earnings (or, why wages remain low even when corporate profits rise)…what else could be behind it?

A: That’s a big question (and for those who haven’t followed this, see here for a picture of it).  If you’re really interested, read the section on national income shares in Chapter 1 of any recent version of the book State of Working America, where we used to tackle it.

Certainly, as you suggest, inequality is a major factor as more growth ends up in profits rather than paychecks.  But there’s been significant inequality growth within labor’s share of national income as well.

What’s behind it?  Globalization, “labor-saving” technology, much diminished union power, declining minimum wages, “financialization” of growth, tax incentives favoring capital (though these numbers are all pretax, the incentives still play a role), and what Harold Meyerson the other day called shareholder vs. stakeholder capitalism.

Also, I think the graph in the link may significantly overstate this problem (I’ll try to look into this in coming weeks).  This table from EPI shows a less dramatic trend—look at the last row, for example (“addendum”)—with labor’s share down a couple of points over the long run.  That’s not nothing—these things tend to move pretty glacially–so even these smaller changes than in the graph are a signal that all those causes I just noted are in effect.


From the post that suggests the Greek debt problem is at its root insolvency not illiquidity.

Q: What actually leads you to believe they’ve misdiagnosed the issue?  Whether they’re right or not, isn’t the intent to buy time to give the Greek government a chance to sort out its finances?

A: It’s certainly possible that if external resources continue to bail out Greece, the country would eventually “sort it out” just as if you continually bailed out a ship with lots of holes in it you could theoretically buy yourself the time to fill the holes.  But as I watch this unfold month after month, I worry that think there are too many holes and the resources used to bail out the ship would be better put to use elsewhere.  The evidence is the way the ongoing liquidity-centered bailouts haven’t seemed to right the ship.

This is not a radical view, held by only a few.  Were it not for the fact that the banks of Europe have significant holding of Greek debt and would thus lose under the insolvency route, that route might already have been taken.

Q: I’m not sure I take as much comfort as you and Paul Krugman in those currently low bond rates.  Couldn’t they reverse course in a minute?

A: That’s a legitimate concern, although as I noted in the post on why the bond market is a bit of a phantom menace right now, it’s not the case that global bond market has forgotten how to react to stress—see Greece, Portugal, etc.  But you’re right—such things could turn quickly, which is another reason not to screw around with the debt ceiling.

Updates: Krugman agrees re the perils of misdiagnosing Greece; good WaPo piece on the increase in the inequality of earnings.


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8 comments in reply to "You Ask, I (sort of) Answer"

  1. Kevin Rica says:

    “What’s behind it? Globalization, “labor-saving” technology, much diminished union power, declining minimum wages, “financialization” of growth, tax incentives favoring capital (though these numbers are all pretax, the incentives still play a role), and what Harold Meyerson the other day called shareholder vs. stakeholder capitalism.”


    If you try to avoid the basic supply-demand model and immigration you won’t get a pass. Over the past 10 years, even ignoring illegal immigration, we’ve had more unskilled legal immigrants enter the country than we have created jobs. They come because the rest of the world needs to send them, not because we have jobs. And they depress wages.

    This isn’t Harry Truman’s Democratic Party anymore. They don’t care about the working man’s wages any more. They are on the same side as the Chamber of Commerce. They’d love to stick it to Archie Bunker.

    • Jared Bernstein says:

      OK, OK–I promise to post on this point later. I don’t agree and as soon as I get around to it, will help you see the light, Kevin.

      • Kevin Rica says:

        Great Jared!

        I’ll expect you to manfully stand fire. And expect me to give you hell — I’m a Truman Democrat: The last of the Light Brigade.

        And I’ll give you a taste — you have to defend this:

        Good luck taking the side of the Chamber of Commerce on that one!

  2. TC says:

    Hi Jared,

    Re: Social Security.

    As long as you operate out of the Intertemporal Government Budget Constraint math, the Social Security problem seems way bigger than it is.

    The ITGBC is not a constraint – or if it is, we cannot know it beyond what we see today.

    Real world economics gets much easier when it is based on what we can see, and not on austerian fantasies.

  3. Tyler Healey says:


    David Stockman went on GPS with Fareed Zakaria today and said we are broke. How does a nation with its own currency go broke?

  4. David Kaib says:

    I hope you’ll forgive me for repeating my question, but here it is:

    What can the administration do on its own to address the jobs crisis (i.e. that does not rely on additional legislation)?

    And assuming the answer is that there are things they can do that they aren’t doing, why is there so little discussion and pressure on this subject from those outside the White House?

    And while we’re at it, what can states do on their own (without the federal government acting)?

  5. David R says:

    The temporary payroll tax reduction has to be classified as one of the weakest of any economic policy designed to stimulate improvement in the economy.

    Increases in government spending are better than tax cuts, and as the post shows, some tax cuts are not even all that effective. If politics is going to drive economics, other than the other way then economic policy is likely to fail.

    • TC says:

      I totally agree. Cutting the employeer side does not make any sense at all unless it is used as a bargining chip to get the repubs to sign on.

      Employee side tax cuts are much more stimulative.