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Jared Bernstein
Senior Fellow, Center on Budget and Policy Priorities

Here are the facts of the economic case as I see them today:

- Much of Europe is in recession and the downturn is in no small part a function of austerity measures that, like bloodletting, are making things worse, not better. While the new French president is certainly making the right sounds, it’s awfully hard to point to the actual implementation of helpful policy anywhere.

- The U.S. is doing better but we too are failing to enact measures that would finally release the economy from the residual gravitational pull of the Great Recession.

- The latter point is showing up in lots of worrisome places: the economy is slogging along at too slow a growth rate (around 2%); the job market may be decelerating from an okay pace to a sub-par pace; real paychecks are falling behind inflation.

All of which begs the question, why are advanced economies so seemingly immune to correct diagnosis and prescription? Why are we applying leeches instead of the contemporary medicine of combined monetary and fiscal stimulus in order to once and for all hit the escape velocity that’s eluded us thus far?

Here are some answers off the top of my head:

- U.S. Politics: There are those who so badly want to hammer the incumbent president that they’re willing to throw the economy under the bus to do so. A potentially interesting wrinkle from Europe is, what if the electorate turns on the austerians?

- Stimulus Doesn’t Work: There are also those who know two things: we implemented aggressive measures by the government and the Federal Reserve starting in 2009 and here we are, still hurting, in 2012. Ergo, stimulus doesn’t work. (more…)

Jared Bernstein
Senior Fellow, Center on Budget and Policy Priorities

If the economy were a person, here’s how I’d describe his travails in recent years.

For far too long, he binged on junk food, with no regard for the impact of such dietary habits on his system. He gorged on sub-prime cuts of real estate and paid for it with cheap credit whose price failed to reflect the damage he was doing to his internal organs.

He visited his doctor, a guy named Greenspan who’d studied medicine with Ayn Rand herself, but the doctor just slapped him on the back and told him he must be fine because he wasn’t sick… yet.

Then, on September 15, 2008, he collapsed. He was rushed into intensive care, where eventually, his case was taken over by the medical teams of Obama and Bernanke. Dr. Obama, a cardiologist, applied stimulus to get his heart beating again, while Dr. Bernanke used angioplasty to clear the junk out of his veins so the credit blood could start circulating again.

His recovery was slow — he’d really messed up his insides. But he was getting better. Then, in the 2010 midterms, the hospital elected a new board that was strongly against such medical interventions as those benefiting our client. They yanked out the stimulus tubes and discharged him.

He was out of the woods, but he wasn’t better. His blood is circulating, but not that smoothly, and his heart beat is still below normal. If you watch him even today you see the symptoms of his incomplete treatment: every time he starts to climb the stairs or break into a run, he has to pull himself back and rest for awhile. (more…)

Jared Bernstein
Senior Fellow, Center on Budget and Policy Priorities

Allow me to point and link you to two pieces in Sunday’s NYT. I don’t have time to give them the treatment they deserve — off to CA for the Milken Institute Global Conference where I’ll be debating tax reform and the role of budget deficits so more to come on those issues.

The first article is about all the machinations Apple goes through to cut its tax bill (their effective rate is under 10 percent, according to the piece). This is a well-known story — journalists Jesse Drucker and David Cay Johnston have also done yeomen’s work in this space as well. But the NYT piece added an important dimension by discussing some of the granular costs of the revenue losses to localities in Apple’s backyard.

A mile and a half from Apple’s Cupertino headquarters is De Anza College, a community college that Steve Wozniak, one of Apple’s founders, attended from 1969 to 1974. Because of California’s state budget crisis, De Anza has cut more than a thousand courses and 8 percent of its faculty since 2008.

Now, De Anza faces a budget gap so large that it is confronting a “death spiral,” the school’s president, Brian Murphy, wrote to the faculty in January. Apple, of course, is not responsible for the state’s financial shortfall, which has numerous causes. But the company’s tax policies are seen by officials like Mr. Murphy as symptomatic of why the crisis exists.

“I just don’t understand it,” he said in an interview. “I’ll bet every person at Apple has a connection to De Anza. Their kids swim in our pool. Their cousins take classes here. They drive past it every day, for Pete’s sake.

“But then they do everything they can to pay as few taxes as possible.”

Something very absurd — though not illegal — is going on here but we knew that already. The fact that U.S. foreign profits held in Bermuda and the Cayman Islands amount to between 550 and 650 percent of those countries GDP is a pretty strong hint that something’s awry, as is the “double Irish with a Dutch sandwich” move decribed in the piece (it’s just a very effective way to shelter profits earned in higher tax countries by assigning them to low-tax havens). (more…)

Jared Bernstein
Senior Fellow, Center on Budget and Policy Priorities

I’ve been waiting for this.

It’s the long-awaited, reader-friendly review by Chye-Ching Huang of the economic theory, evidence, and literature on the relationships — or lack thereof — between taxes on high-income households and their impact on growth, jobs, investment, and entrepreneurship.

CCH takes you — pretty gently, I’d say — through the facts of the case in some detail, but I’ve pasted in the key bullets below (see text for endnotes). A lot of this reminded me of this post on small vs. large responder theories of how people respond to tax changes (hint: “small” usually wins).

A lot if it also reminded me of this: you know all those arguments we’re always having about supply-side, trickle-down economics? Like every day in the Congress, on the campaign trail, and on cable TV? Well, scholars have actually looked at this stuff and come up with consistent and compelling answers. So, if we can just find our way back to The-Land-Where-Facts-Matter, we might be able to make some smart choices around tax policies.

Taxable income and revenue. Opponents of raising the taxes that high-income households face often point to findings that high-income taxpayers respond to tax-rate increases by reporting less income to the Internal Revenue Service (IRS) as evidence that high marginal tax rates impose significant costs on the economy. However, an important study by tax economists Joel Slemrod and Alan Auerbach found that such reductions in reported income largely reflect timing and other tax avoidance strategies that taxpayers adopt to minimize their taxable income, not changes in real work, savings, and investment behavior. While such strategies entail some economic costs, these costs are relatively modest. Moreover, policymakers can limit high-income taxpayers’ ability to respond to increases in tax rates by engaging in tax avoidance activity — and also enhance the efficiency of the tax code — by broadening the tax base, as discussed below.

Work and labor supply. The evidence shows that changes in tax rates that fall within the ranges that policymakers are debating have little impact on high-income individuals’ decisions regarding how much to work. As Leonard Burman, former head of the Urban-Brookings Tax Policy Center (TPC), recently testified, “Overall, evidence suggests [high-income Americans'] labor supply is insensitive to tax rates.”[2]

A marginal rate increase may encourage some taxpayers to work less because the after-tax return to work declines, but some will choose to work more, to maintain a level of after-tax income similar to what they had before the tax increase. The evidence suggests that these two opposing responses largely cancel each other out. (more…)

Jared Bernstein
Senior Fellow, Center on Budget and Policy Priorities

Suppose you are going to repair your damaged home and your only tool on hand is a roll of duct tape. Your resourceful neighbor points out that you could probably also use a hammer, a drill, and a saw.

If you’re the FHFA, you tell him, “I can do a better job with just my duct tape, so thanks but no thanks.”

That, in a nutshell, is the problem with the most recent analysis by this key regulator of the mortgage giants Fannie Mae and Freddie Mac when it comes to adding the tool of principal reduction to their anti-foreclosure toolkit. They’ve made progress in their evaluation of the costs and benefits of loan forbearance and loan forgiveness, but, somewhat bewilderingly, they appear to be comparing the two as if they were mutually exclusive. An optimal program of course will employ both, as some homeowners will benefit more from one than the other, and vice versa.

Some loans will fare better (have a higher net present value, or NPV) for Fannie and Freddie under forbearance, others under principal reduction, and many will fare better if they don’t get either type of loan modification — some folks simply need to get out from under the weight of their unsustainable home loans. The problem is that FHFA director Ed DeMarco is resisting the realization that all three of these options maximizes the interests of the GSEs and thus the U.S. taxpayer.

A bit of background:

Fannie and Freddie a) are currently 80 percent owned by taxpayers and b) hold or insure millions of mortgages, many of which are underwater. The last time I visited this issue, I pointed out that FHFA’s analysis of how much taxpayers would save under these two options was flawed in various ways.

They’ve now improved that analysis, as presented in a speech by Director DeMarco a few weeks ago, a talk tellingly sub-titled “Is Principal Reduction the Answer?” (vs. is it one of the answers?). And when they improved their methods, they found that PR produces slightly more savings than PF (principal forbearance). (more…)

Jared Bernstein
Senior Fellow, Center on Budget and Policy Priorities

When the trustees of the Social Security and Medicare programs release their annual reports, one of the first thing folks look for is whether the life of the trust funds that finance these retirement security programs have been extended or reduced.

Well, in Monday’s release, the life of the Social Security trust fund was reduced by three years, from 2036 to 2033 (without changes to inflows or outflows, at that point Social Security would be able to pay about 75% of scheduled benefits). The date for the Medicare Hospital Insurance fund was unchanged.

My CBPP colleagues take you through the relevant conclusions here and here. The key takeaway from where I sit is that these remain critically important programs whose future can and should be ensured by policy actions designed to enable both programs to continue to provide retirement security for generations to come. Such actions should be careful not to hurt the security of middle and lower income retirees.

My point here, however, is a simple one regarding the exhaustion of the trust funds. The figures below show the exhaustion dates projected by the trustees over the last few decades. Note that they move around — a lot. The Medicare hospital insurance trust fund has generally increased since the 1990s, as a function of legislative measures, like the Affordable Care Act, that extended its life (ACA added eight years to the HI fund). (more…)

Jared Bernstein
Senior Fellow, Center on Budget and Policy Priorities

I was struck by the juxtaposition of this unfortunate analysis of Rep. Paul Ryan’s budget by New York Times columnist James Stewart and Paul Krugman’s op-ed today.

The Stewart column begins by assuming that since both the president and the most strident right wingers are going after the Ryan budget, it must be carving out the reasonable center. Paul points out that a) this betrays a lack of understanding of what’s in the budget, and b) it’s precisely the way the center drifts to the right.

Essentially, the president carves out the center-left; Rep. Ryan, Romney, and the Republicans carve out the far right, and the middle becomes the slightly-not-so-far right.

Just look at Stewart’s summary of the Ryan budget:

The plan stands on two pillars: tax reform and reducing the long-term deficit by reining in entitlement spending.

Are you kidding? Those are some awfully shaky pillars. Without the assumed loophole closers that Ryan asserts but does not name, this plan adds almost $10 trillion to the deficit (that combines the Bush tax cuts that he makes permanent and his $4.6 trillion of new cuts on top of that). Since when did “assume loophole closures” become tax reform? (more…)

Jared Bernstein
Senior Fellow, Center on Budget and Policy Priorities

I’ve written that Rep Paul Ryan did the world a favor by not trying to hide the ball with his budget — now adopted by House Republicans and endorsed by Gov. Romney. Their vision for America is clear, a vision that we at CBPP have been elaborating through a set of publications in recent days (see here, here, here, and here).

President Obama made a similar point Tuesday in a speech here in DC:

“I can’t remember a time when the choice between two competing visions of our future has been so unambiguously clear.”

So what’s the best way to most succinctly describe these visions? At On The Economy, I’ve tried to do so by examining the role of government. We should do our best to understand what the private market does best and what it does least well. The latter should be considered as a role for government.

The president made a similar point citing another president, and a Republican at that. Abraham Lincoln believed that “through government, we should do together what we cannot do as well for ourselves.”

This is, of course, an ancient argument, dating back to Hamilton and Jefferson, but it is crystallized in the House budget in a way that one might view as the logical realization of the 2010 midterms, where a bunch of members were sent to DC to vastly shrink the role of government.

I’ll speak to that role in a minute, but there’s another dimension to this — it’s not simply a debate on what “we cannot do as well for ourselves.” It’s also about further enriching the wealthiest households. The Ryan budget solves the problem that the poor have too much and the rich have too little… that is, if you think that’s the problem.

That aside, here’s one economist’s list of the functions better accomplished at least in part by government than wholly left to markets. I tried to keep this list quite spare, listing only those functions agreed upon by most folks who think about this pragmatically, as opposed to ideologically:

-Social insurance for retirees: Health and income security for those past their working years cannot efficiently and universally be offered at affordable rates and are therefore at least partially provided by governments in every advanced economy.

-Public infrastructure: Private commerce depends on the provision of public goods including roads, bridges, rail to move goods and people. Households and businesses depend on public infrastructure to accommodate the provision of safe water, energy, communications, air travel — much of which is privately provided but could not exist without pubic coordination and support. (more…)

Jared Bernstein
Senior Fellow, Center on Budget and Policy Priorities

Been meaning to get back to gas prices a bit, just based on a few recent articles and adventures in cable land.

First, there’s this Adam Davidson piece in the NYT magazine this weekend on how high prices at the pump don’t seem to be changing people’s behavior much, because, he suspects, the average household spends only 5% of its income on gas.

I’m not so sure. First, that’s an average. Low-income families spend twice that share (see figure here). Second, while economists have always suspected a pretty inelastic response to gas prices, in this downturn, there’s certainly been a lot less driving going on–see the remarkable break in trend at the end of the series in the last figure here (this started before the recent spike and is thus more a response to the recession and income loss than higher gas prices). There’s also been a shift to higher mileage vehicles.

Finally, any article about family budgets and gas prices right now should not omit the ongoing payroll tax holiday. As I’ve written before, that’s really the only thing politicians can do in this case–i.e., they can’t affect the price, but they can give a temporary boost to after-tax income to offset it.

There’s only one thing a president and Congress can do to offset this price spike and they’ve already done it: raise people’s after-tax income. The payroll tax holiday that the President pushed for and Congress recently extended should put about $120 billion extra in paychecks this year. Every penny increase at the pump translates into about a $1 billion expense for consumers. Since its most recent low, the national average is up about 55 cents, or about half the aggregate of the payroll cut (annualized) so far.So, if these rules of thumb are about right, the government is actually in the process of doing about the only thing it can to help people cope with the current price spike. Everything else is just noise.

Speaking of noise, the blame-the-President-for-high-gas-prices nonsense seems to have died down a bit, except for on cable TV (more on that in a moment). I saw a poll–and I’ve seen this result a number of times–that had a majority of respondents answering “no” to “do you think the president controls the price of gas?” and yet also had a majority answering “yes” to “do you blame him for high gas prices?” So, we suffer some cognitive dissonance of the issue.

Re public opinion, I found this interesting: I was driving around with a bunch of kids this weekend and they noticed that gas here in northern VA just broke $4 a gallon. I mentioned that some people blame the President for the price spike. The younger kids–around 10–just couldn’t make any sense out of that. I tried to explain but they just didn’t get it. To them it was like accusing the President of not being able to fly; like good economists they essentially argued that he can no more set the price of gas than the price of the movie we just saw (Mirror-Mirror with Julia Roberts–she’s great in it, the kids loved the movie–I thought it dragged). (more…)

Jared Bernstein
Senior Fellow, Center on Budget and Policy Priorities

A number of commenters make good points regarding spending cuts in the federal budget.

I often argue that we can’t achieve budget sustainability on spending cuts alone. That’s passes for a bold argument these days, because pretty much everyone agrees that government spends too much, right? So the only point of contention is whether budget sustainability should involve tax increases as well.

But what, specifically, does government spend “too much” on? Defense? Some say so, and there are clear inefficiencies there, but as a share of the economy, it’s not historically high. What about agriculture subsidies; industry subsidies; all those tax expenditures (spending through the tax code) for kids, research, investment, health care, housing, education?

The historical record, shown below, shows spending by the federal government as a share of GDP wiggling around a pretty narrow range until the Great Recession, where it shoots up, by necessity. But it’s already coming down… too soon, in my view, given the ongoing weakness. But the point is if you adjust for the business cycle and the important countercyclical function of government spending in recession, it’s not jump-out-at-you obvious that there’s a spending problem. (There’s very clearly a revenue shortfall problem.) (more…)