The Center's work on 'Deficits and Projections' Issues


A Dangerous Way to “Fix” American Government

October 21, 2014 at 4:21 pm

“A dangerous proposal is circulating in states across the country that could widen political divisions and jeopardize cherished rights and freedoms,” CBPP President Robert Greenstein explains today in the Washington Post’s PostEverything blog.  He continues:

The push is coming primarily from well-organized, arch-conservative groups seeking to capitalize on the decline in public trust in government to limit the federal government’s role and spending powers.  And the method they prefer is a constitutional convention — the first since the 1787 conclave that produced the U.S. Constitution.

Under the Constitution, if two-thirds of state legislatures call for a convention to amend it, one must be convened.  Some of those pushing for a convention say that 24 of the needed 34 legislatures have approved such resolutions.  Advocates of a convention have targeted more than a dozen other states and are developing lobbying campaigns to push for such resolutions there.

The implications are enormous.  At stake, potentially, are the freedoms we take for granted under the Bill of Rights; the powers of the president, Congress and the courts; and the policies the government can or cannot pursue.  Conventioneers could alter absolutely anything about the way the United States is governed.  Some say they want to terminate all federal taxes and to require super-majorities in the House and the Senate to put any new taxes in their place.  Others want to bar the government from carrying out a number of its functions, for example by constraining its ability to regulate interstate commerce.  Whatever changes a convention approved would be enshrined in the Constitution if three-fourths of the states ratified them.

Yet the processes for impaneling the convention, selecting the delegates, setting the convention’s voting rules, and determining what issues the convention would consider and how much of the Constitution it would seek to rewrite are a mystery.  That means that under a convention, anything goes.  There are no rules, guideposts or procedures in any of these areas. . . .

Click here for the full post.

Health Reform Reduces the Deficit, Contrary to Senate GOP Analysis

October 21, 2014 at 5:00 am

A recent analysis by Senate Budget Committee Republican staff that claims health reform will increase the deficit rests on two dubious propositions.  Under more reasonable assumptions, health reform will reduce the deficit, as the Congressional Budget Office (CBO) and Joint Committee on Taxation have consistently estimated.  Just a few months ago, CBO Director Douglas Elmendorf wrote, “the agencies have no reason to think that their initial assessment that [health reform] would reduce budget deficits was incorrect.”

How did the Senate Budget Committee’s Republican staff reach such a different conclusion?

First, they produced an estimate of savings from the health reform provisions that reduce Medicare and other program costs that’s significantly lower than CBO’s.  They did so by assuming that health reform had nothing whatsoever to do with the substantial slowdown in health care cost growth in the past few years.  That slowdown has led CBO since 2010 to lower its projections of Medicare and Medicaid spending by $1.1 trillion over this decade (see graph).

The decline in projected Medicare spending means that health reform provisions that cut Medicare costs directly will save less than previously thought.  (A provision that reduces Medicare costs by a certain percentage will save fewer dollars if that percentage cut is applied to a smaller base of costs.)  But the Senate Republican analysis lowers CBO’s estimate of health reform’s Medicare savings to reflect that effect alone, as though not one dollar of the savings from the slowdown in health costs were due to health reform’s focus on reducing cost growth in the U.S. health care system.

As Kaiser Family Foundation President Drew Altman has written, “Even though its direct effects on system-wide costs may be limited so far, I believe Obamacare is having a significant indirect effect, although cause and effect and the magnitude are hard to prove. . . . [It] is entirely likely that Obamacare has played and will continue to play a role in the slowdown in health-care cost growth and accelerating market change.”

Even under the conservative assumption that health reform accounts for only a small part of the slowdown in health care costs, it would more than offset the Senate Republicans’ reduction in health reform’s estimated Medicare savings

Second, the Senate Republican analysis overstates the budgetary impact of changes in labor supply (that is, the total hours of work that workers choose to supply) under health reform.  CBO estimates that health reform will cause a small reduction in the labor supply, in significant part because some people who now work mainly to obtain health insurance — a situation known as “job lock” — will choose to retire earlier or work somewhat less; that reduction will shrink total labor compensation by roughly 1 percent from 2017 through 2024, according to CBO.  The Senate Republican analysis assumes that the overall amount of income subject to tax will drop by the same percentage.

But wages and salaries, in fact, represent only about 70 percent of adjusted gross income, which also includes interest, dividends, rental income, capital gains, and some retirement distributions.  Thus, a 1-percent cut in labor compensation would shrink tax revenues by much less than 1 percent.

Correcting the Senate Republican staff analysis for these two factors shows that health reform will still reduce the deficit, as CBO has estimated — not increase it.  Those who seek the best assessment of the fiscal impacts of health reform should stick with CBO’s.

Ryan’s Call for “Dynamic Scoring” in Tax Reform Would Invite More Mischief

October 3, 2014 at 2:18 pm

“The reality of tax reform . . . is that any politically feasible plan to scale back tax benefits doesn’t generate enough money to significantly cut tax rates without increasing the deficit,” my latest post for U.S. News’ Economic Intelligence notes.  “Rather than grapple with this reality, . . . House Budget Committee Chairman Paul Ryan invoked the last refuge of supply-side tax cutters in recent comments about how to proceed with tax reform.”  Specifically:

Ryan wants to change long-established methods for estimating the revenue effects of proposed tax changes that the Congressional Budget Office and Joint Committee on Taxation use to “score” the budgetary effects of such legislation.  Ryan . . . badly mischaracterizes existing revenue estimation methods while ignoring the fatal flaws in requiring budget crunchers to use so-called dynamic scoring.

Contrary to Ryan’s claim, current revenue estimates reflect many kinds of changes in households’ and business’ behavior resulting from proposed policy changes.  But they don’t reflect possible changes in the overall level of economic activity that might result from proposed legislation — and with good reason:

First, estimates of the macroeconomic effects of tax changes are highly uncertain.  Second, the most credible estimates usually show changes that are quite small.  Finally, and quite importantly, dynamic scoring would impair the credibility of the budget process because the resulting budget estimates will inevitably be controversial and subject to political manipulation.

Adopting dynamic scoring for tax reform, my post concludes, is a gimmick that would only invite more mischief.

Reassessing a View on Federal Accounting

September 26, 2014 at 1:55 pm

So-called “fair-value accounting” is misguided because it would make federal loan and loan guarantee programs look more expensive than they really are, as my colleague Richard Kogan and I have explained.  Jason Delisle and Jason Richwine, writing in the latest issue of National Affairs, correctly note that the logic of our argument is inconsistent with a 2005 CBPP analysis of proposals to invest part of the Social Security trust funds in stocks instead of Treasury bonds.  We concur.  We have re-analyzed our assessment of investing a portion of the Social Security trust fund in equities and now come to a different conclusion than we did in 2005.

The current method of accounting for federal credit programs fully records — on a present-value basis — all the cash flowing into and out of the Treasury.  In contrast, fair-value accounting would add an extra amount to the budgetary cost, based on the fact that loan assets are somewhat less valuable to the private sector than to the government for several reasons: businesses must make a profit; they can’t put themselves at the head of the line when collecting a debt; they borrow at higher interest rates; and private-sector investors are risk-averse — they dislike losses (in this case, higher-than-expected loan defaults) more than they like equal, and equally likely, gains (lower defaults).  None of these factors represents an actual cost that the government incurs when it makes loans.

Including in the budget a cost that the government does not actually pay would overstate spending, deficits, and debt, making the federal budget a less accurate depiction of the nation’s fiscal position.  It would also treat different federal programs inconsistently, because it would not make a similar adjustment for non-credit programs whose costs are also uncertain and variable.  In a recent article, New York University law professor David Kamin thoroughly explains why “including the cost of risk would skew budget estimates.”

Proposals to invest the Social Security trust funds in the stock market raise similar issues.  Stocks produce higher returns than Treasury bonds on average over the years, but they also entail a greater risk of losing money.  That risk is an important consideration in assessing the pros and cons of a proposal, but it’s not an actual cost to the government and therefore doesn’t belong in the budget.  This conclusion differs from the one CBPP reached in 2005, which, upon further consideration, we now believe was mistaken.

(Proposals to replace Social Security with private accounts are very different, since individuals, rather than the government, would bear the risk of holding their retirement savings in stocks.  Individuals are rightly risk-averse.  As a result, any analysis of their well-being — as distinguished from analysis of the impact on government finances — should account for the variability of the stock market.)

IRS Commissioner Confirms House-Passed Cuts to IRS Budget Could Be “Catastrophic”

August 25, 2014 at 3:48 pm

IRS Commissioner John Koskinen said, according to Tax Notes, that the effects of House-passed IRS budget cuts would be “very serious if not catastrophic” to the agency’s ability to collect revenue and provide taxpayer services, adding: “I no longer want people to think that if we get less money it doesn’t make any difference.  It makes a big difference on taxpayers, on tax preparers, on tax compliance, on tax enforcement.”

As we have written, the House bill would cut IRS funding by $1.5 billion in 2015, including a $1.2 billion reduction in the agency’s enforcement budget, relative to 2014 funding.  The enforcement budget is crucial to the IRS’ ability to collect revenue and pursue tax cheats.  As Commissioner Koskinen affirms, reducing the IRS enforcement budget actually increases the deficit because it prevents the agency from thwarting tax fraud, evasion, and other illegal behavior, thus reducing federal revenue:

Congress is starving our revenue-generating operation. If voluntary compliance with the tax code drops by 1 percent, it costs the U.S. government $30 billion per year.  The IRS annual budget is only $11 billion per year.

And the House cuts would come on top of years of IRS budget cuts that have already weakened enforcement and harmed taxpayer services.  Funding for the IRS fell by 14 percent (after accounting for inflation) between 2010 and 2014 (see chart).  These cuts forced the agency to reduce its workforce by over 10,000 employees and have led directly to a significant decline in the quality of taxpayer services.

For example, millions of taxpayers depend on IRS assistance over the telephone, yet in 2013, a typical caller to the IRS waited on hold for about 18 minutes for an IRS representative, and about 40 percent of calls were never answered.  This is a sharp decline from 2010, when the IRS answered three-quarters of calls and had an average wait time of just under 11 minutes.

Commissioner Koskinen was frank about the impact of continued cuts:

You cannot continue to reduce our resources and ask us to do more things.  The blind belief in Congress that they can continue to cut funding and we will just become more efficient is not the case.  We are becoming more efficient but there is a limit.  Eventually the effects will show up.  We are no longer going to pretend that cutting funding makes no difference.

Policymakers must give the IRS the resources it needs to fulfill its tax-collecting mission and provide the services taxpayers depend on.  The first step is for the Senate and the President to reject the reckless House cuts.

“Generational Accounting” Spreads Confusion

August 1, 2014 at 1:05 pm

“Generational accounting” purports to compare the effects of federal budget policies on people born in different years.  But, contrary to economist Lawrence Kotlikoff’s New York Times op-ed promoting a bill requiring federal agencies to adopt the practice, generational accounting is far more likely to obscure than illuminate the budget picture.

Kotlikoff helped develop generational accounting over 20 years ago.  It was supposed to provide useful information missing from standard budget presentations.  It doesn’t do that, however, and few budget analysts use the approach.

Generational accounting rests on several highly unrealistic assumptions, as our detailed analysis explains.  It doesn’t account for the benefits that government spending can have for future generations (for example, education and infrastructure spending that raises living standards).  It also ignores the fact that our children and grandchildren will be richer than we are and have more disposable income, even if they pay somewhat higher taxes.

Generational accounting’s most serious flaw may be that it requires projecting such key variables as population growth, labor force participation, earnings, health care costs, and interest rates through infinity.  Budget experts recognize that projections grow very iffy beyond a few decades — and spinning them out to infinity makes them much more so.  The American Academy of Actuaries describes projections into the infinite future as “of limited value to policymakers.”

The Congressional Budget Office, the Center on Budget and Policy Priorities, and other leading budget analysts focus instead on the next 25 years or so, which amply documents future fiscal pressures and presents a reasonable horizon for policymakers.  These organizations produce simple, straightforward long-run projections that show the path of federal revenues, spending, and debt under current budget policies.  In that way, they show clearly what’s driving fiscal pressures, and when (see chart).

Policymakers should certainly look beyond the standard ten-year horizon of most budget estimates, but they already have the tools to do that.  Generational accounting is hard to interpret and easily misunderstood, and including it in the federal government’s regular budget reports and cost estimates would be a mistake.

Social Security’s #1 Priority: Raise Share of Payroll Tax Going to Disability Insurance

July 29, 2014 at 4:49 pm

The Social Security trustees’ new report shows why the program’s immediate priority should be to raise the share of payroll taxes allocated to Disability Insurance (DI) and lower the share allocated to Old-Age and Survivors Insurance to keep the DI trust fund from running out in 2016.  Nine million disabled workers face a 20 percent across-the-board cut in DI benefits if the trust fund is depleted.

Social Security’s disability and retirement programs are closely linked, so ideally Congress would address DI’s finances as part of a long-term solvency package for Social Security as a whole — one that extends the solvency of both trust funds well beyond 2033, when the combined trust funds face exhaustion.  Enacting a balanced solvency package before late 2016, however, is highly unlikely.

Surveys find that Americans are willing to pay higher Social Security taxes to preserve and strengthen Social Security for future generations.  Yet some politicians argue for preserving solvency solely through benefit cuts.  Bridging such sharp divisions will be difficult, and holding DI beneficiaries hostage by refusing to reallocate payroll taxes wouldn’t make the task any easier — or success more likely.

Reallocation is unavoidable.  Even if policymakers miraculously agreed on a balanced solvency package by 2016, any changes in DI benefits or eligibility would phase in gradually and hence do little to replenish the DI trust fund by 2016.

Reallocation is a historically noncontroversial action that policymakers have often taken to shift resources between the two trust funds, in either direction.  Both the Bush and Clinton Administrations endorsed it in the early 1990s, and Congress enacted it in 1994 without a single dissenting voice.

Reallocation isn’t a “patch” or “kicking the can down the road,” as some contend — descriptions appropriate for the recent House-approved bill to extend the Highway Trust Fund by ten months, or Congress’ repeated one-year delays in implementing scheduled cuts in Medicare payments to doctors.  A payroll tax reallocation will keep Social Security’s disability and retirement programs solvent for another 15 to 20 years.

And reallocation doesn’t preclude additional actions to strengthen Disability Insurance.  Reversing the recent decline in Social Security’s administrative funding would allow the Social Security Administration to process claims more quickly and ensure that recipients remain on the rolls only as long as they are eligible.  Changes in the process for approving or denying claims might improve the accuracy and consistency of those disability determinations.  We could also test new strategies to help people with disabilities remain in the workforce, as the President’s 2015 budget proposed.

Our Take on Today’s Trustees’ Reports

July 28, 2014 at 4:34 pm

We just issued statements on the trustees’ 2014 reports on Social Security and Medicare.  Here are the openings:

  • CBPP President Robert Greenstein on Social Security:

    “Social Security can pay full benefits for close to two decades, the new trustees’ report shows, but will then face a significant, though manageable, funding shortfall that the President and Congress should address in the near future.

    “Specifically, the trustees estimate that Social Security can pay full benefits until 2033, at which point its combined trust funds will be exhausted.  After 2033, even if policymakers failed to act, Social Security would pay about 75 percent of scheduled benefits, relying on Social Security taxes as they are collected.  The exhaustion date is unchanged from last year’s report and is within the range that the trustees have projected for some time.  In the late 1990s, they projected the exhaustion date as early as 2029; at one point in the last decade, they projected an exhaustion date as late as 2042.

    “The trustees caution that their projections are uncertain.  For example, they estimate an 80 percent probability that trust fund exhaustion would occur between 2029 and 2038 — and a 95 percent chance that it would happen between 2028 and 2041.  The Congressional Budget Office (CBO) recently estimated that exhaustion would occur in 2030, largely because CBO expects somewhat faster improvements in mortality.  Fluctuations of a year or two in either direction are no cause for either alarm or celebration.  The key point is that all reasonable estimates show a manageable long-run challenge that policymakers must address, the sooner the better, but not an immediate crisis. . . .”

  • Senior Fellow Paul Van de Water on Medicare:

    “Medicare has grown somewhat stronger financially in both the short and long term since last year but continues to face long-term financing challenges, today’s report from its trustees shows.  The projected date of insolvency for Medicare’s Hospital Insurance (HI) trust fund is 2030 — four years later than projected last year.

    “Health reform, along with other factors, has significantly improved Medicare’s financial outlook, boosting revenues and making the program more efficient.  The HI trust fund’s projected exhaustion date of 2030 is 13 years later than the trustees projected before the Affordable Care Act.  And the HI program’s projected 75-year shortfall of 0.87 percent of taxable payroll is down from last year’s estimate of 1.11 percent and much less than the 3.88 percent that the trustees estimated before health reform. . . .”

A Constitutional Convention Poses Grave Risks

July 16, 2014 at 4:33 pm

The idea of convening a constitutional convention to propose a balanced budget amendment or similar amendments raises grave problems, as we explain in a new paper.  A number of states have passed resolutions calling for such a convention, and proponents of a constitutional convention are targeting more states in an effort to obtain the 34 states needed to call one (see map).

A balanced budget amendment poses serious risks in and of itself.  But, as a number of legal experts across the political spectrum have warned, a convention could open up the Constitution to broader radical and harmful changes.  Such serious concerns are justified, for several reasons:

  • A convention could write its own rules.  No constitutional convention has been called since the 1787 meeting that wrote the Constitution, and the Constitution provides no guidance whatsoever on what a convention’s ground rules would be.  This leaves wide open to political considerations and pressures such fundamental questions as how delegates would be chosen, how many delegates each state would have, and whether a supermajority vote would be required to approve amendments.  To show the importance of these issues, consider that if every state had one vote in a convention and the convention could approve amendments with a simple majority vote, the 26 least populous states, with less than 18 percent of the nation’s people, could approve constitutional amendments for ratification. 
  • A convention could set its own agenda, possibly influenced by powerful interest groups.  The 1787 meeting went far beyond its mandate.  Charged with amending the Articles of Confederation to promote trade among the states, the convention instead wrote an entirely new governing document.  A convention held today could set its own agenda, too.  There is no guarantee that a convention could be limited to a given set of issues, such as balancing the budget.  
  • A convention could choose a new ratification process.  The 1787 convention ignored the ratification process under which it was established and created a new process, reducing the number of states needed to approve the new Constitution and removing Congress from the approval process.  The country then ignored the pre-existing ratification procedures and adopted the Constitution under the new ratification procedures that the convention proposed.  Given these facts, it would be unwise to assume that ratification of the convention’s proposals would require the subsequent approval of 38 states, as the Constitution specifies.  For example, a convention might remove the states from the approval process and propose a national referendum instead, or approval by a simple majority of states. 
  • No other body, including the courts, has clear authority over a convention.  The Constitution provides for no authority above a constitutional convention, so it isn’t clear that the courts, Congress, state legislatures, or a President could intervene if a convention went beyond the language of the state resolutions calling for a convention or the congressional resolution establishing it.  Likewise, there may be no recourse if the convention altered the process for ratifying its own proposed amendments.  The Constitution has virtually no restrictions on the operations of a constitutional convention or the scope of the amendments that it could produce, and the courts would likely regard legal challenges to a convention as “political questions” that the judiciary does not wade into. 

States should avoid these risks and reject resolutions calling for a constitutional convention, and those that have already approved such resolutions should rescind them.

Click here to read the full paper.

Balanced Budget Amendment Likely to Harm the Economy

July 16, 2014 at 4:21 pm

A number of states may soon call for a convention to amend the U.S. Constitution to require that the federal budget be balanced every year.  But a convention would pose serious risks, and a balanced budget requirement would be a highly ill-advised way to address the nation’s long-term fiscal problems.  It would threaten significant economic harm while raising a host of problems for the operation of Social Security and other vital federal functions, as we explain in a new paper.

By requiring a balanced budget every year, no matter the state of the economy, such an amendment would risk tipping weak economies into recession and making recessions longer and deeper, causing very large job losses.  Rather than allowing the “automatic stabilizers” of lower tax collections and higher unemployment and other benefits to cushion a weak economy, as they now do automatically, it would force policymakers to cut spending, raise taxes, or both when the economy turns down — the exact opposite of what sound economic policy would advise.  Such actions would launch a vicious spiral:  budget cuts or tax increases in a recession would cause the economy to contract further, triggering still higher deficits and thereby forcing policymakers to institute additional austerity measures, which in turn, would cause still-greater economic contraction.

For example, in 2011 one of the nation’s preeminent private economic forecasting firms concluded that if a constitutional balanced budget amendment had been ratified and were being enforced for fiscal year 2012, “[t]he effect on the economy would be catastrophic.”  If the 2012 budget were balanced through spending cuts, the firm found, those cuts would throw about 15 million more people out of work, double the unemployment rate from 9 percent to about 18 percent, and cause the economy to shrink by about 17 percent instead of growing by an expected 2 percent.

The fact that states must balance their budgets every year — no matter how the economy is performing — makes it even more imperative that the federal government not also face such a requirement and thus further impair a faltering economy.

Such a constitutional requirement — which would be notably more restrictive than the behavior of the most prudent states or families — would also cause a host of other problems.  Requiring that federal spending in any year be offset by revenues collected in that same year would undercut the design of Social Security, deposit insurance, and all other government guarantees.  And it would raise troubling questions about enforcement, including the risk that the courts or the President might be empowered to make major, unilateral budget decisions, undermining the checks and balances that have been a hallmark of our nation since its founding.  It is not a course that the nation should follow.

Click here to read the full paper.

House GOP’s IRS Budget Cuts: A Field Day for Tax Cheats

July 15, 2014 at 4:40 pm

The IRS has absorbed big cuts in recent years that have weakened enforcement and damaged taxpayer service.  The House Appropriations Committee passed a 2015 IRS budget that would cut the IRS even deeper.  But that wasn’t good enough for the full House, based on the cutting frenzy on the House floor over the last day.

The House approved a series of Republican amendments that, taken together with the cuts in the underlying bill, would shrink the IRS’s enforcement budget in 2015 by more than $1.2 billion relative to 2014 funding.  Under the House bill as it now stands, one-quarter of the IRS’s enforcement budget from this year would be gone.

The IRS’ core function is to collect revenue.  But these amendments would further stifle its ability to do that.  In its current form, the theme of the IRS funding bill seems to be:  If you’re an honest taxpayer, don’t call us because we won’t have the resources to answer the phone.  And if you’re a tax cheat, don’t worry because we won’t have the resources to call you.  As Rep. Jose Serrano (D-NY), the ranking member of the House Appropriations subcommittee that oversees the IRS, put it, “this will prevent the IRS from going after tax cheats… and from helping those who are attempting to obey the law.”

Rep. Paul Gosar (R-AZ), who advanced a House-passed amendment to cut $353 million from IRS enforcement, said, “I am ecstatic that the House of Representatives supported my efforts today to pass a vitally important amendment which will save hundreds of millions of taxpayer dollars…”

Actually, his amendment will do exactly the opposite.  When tax cheats get a pass, the deficit rises.  When, instead, Congress provides more money for enforcement, revenues rise and the deficit falls.

The House also approved an amendment by Rep. Bill Huizenga (R-MI) to cut enforcement another $788 million.

In total, the House Appropriations bill when combined with the Gosar, Huizenga, and other amendments cuts IRS enforcement more than $1.2 billion below this year’s $5 billion level — and cuts the total IRS budget by $1.5 billion, on top of deep cuts that Congress has enacted to the IRS budget since 2010.  Under the House bill as amended, total IRS funding in 2015 would be $9.8 billion, which is 19 percent below the 2010 level or 27 percent lower when adjusted for inflation (see chart below).

The cuts of earlier years have already wreaked serious damage on the IRS, as we recently explained:

  • ​The IRS has about 10,400 (11 percent) fewer employees than in 2010, even as its workload has grown.  For instance, the number of individual income tax returns has grown by an average of 1.5 million each year over the past decade.
  • ​The number of IRS staff devoted to enforcing tax laws has dropped by 15 percent since 2010.  As a result, the IRS is conducting fewer audits.  The annual audit rate for individual taxpayers is now below 1 percent, the lowest since 2006, and revenue collected through IRS enforcement actions has fallen by more than $4 billion over the past four years.  Weakening IRS enforcement ultimately hurts the entire budget:  every additional dollar invested in IRS tax enforcement activities from current levels yields $6 in increased revenue, the Treasury Department reports.
  • Taxpayer services have worsened.  For example, in 2013, a typical caller to the IRS waited about 18 minutes for an IRS representative to get on the line, and about 40 percent of calls were never answered.

The Administration was right to threaten to veto the House bill even before these irresponsible amendments.  When it considers IRS funding, the Senate should take a stronger stand for honest taxpayers by rejecting all cuts and giving the IRS the resources it needs to do its job.  The President should accept no less.

Bernstein on Five Years of Economic Recovery

July 15, 2014 at 3:22 pm

CBPP Senior Fellow Jared Bernstein testified today before the Joint Economic Committee on the progress that has been made in repairing the U.S. economy over the first five years of the recovery from the Great Recession.

Bernstein explained:

When markets fail as massively as they did in the late 2000s, quick and forceful action clearly helps offset the damage.  But to stop at stabilization, instead of rebuilding jobs and incomes that were lost over the downturn is a serious policy mistake, one that has proven to be extremely costly to working families. . . . [T]here is time to build on the recent momentum we’ve seen, particularly in the job market.

Bernstein pointed out that while there are many positive attributes to the current recovery, especially in relation to the depth of the previous recession, it is clearly not yet reaching everyone:

  • Thanks in part to countercyclical policies legislated by Congress in 2009, along with aggressive monetary policy by the Federal Reserve, significant progress has been made in repairing the damage done by the uniquely deep recession that began in late 2007.
  • These gains, while incomplete, are evident in the job market, particularly in the recent acceleration in job growth and decline in unemployment.  After 52 consecutive months of net private sector job growth, non-government employment is up 9.7 million jobs since early 2010.
  • Moreover, employment growth has accelerated in recent months.  Payrolls added 1.4 million jobs in the first half of this year, their strongest six-month growth period since late 1999.

  • Un- and underemployment are both down significantly over the recovery, as are other slack metrics that rose sharply in the downturn, including long-term unemployment and involuntary part-time work.  While part of the decline in unemployment was due to labor force exits, this negative trend has also stabilized in recent months.
  • Private payrolls grew about 3 percent faster over the first five years of this recovery compared to the prior recovery, despite the fact that the recession that preceded this expansion was much deeper in terms of lost output and much longer lasting than the downturn that preceded the 2000s expansion.  The private sector added 3.4 million more jobs in the first five years of this recovery than were added in the last one.
  • Yet, slack remains in the job market and wage growth has generally not yet accelerated; real median household income, after falling sharply by around 10 percent in the downturn, is up about 3 percent over the past few years, largely due to more work at flat real earnings.  Corporate profitability and financial market returns, on the other hand, have more than recovered their losses.

Bernstein warned that policymakers cannot stop at stabilization. To prolong and strengthen the recovery, he recommended investing in infrastructure and increasing the federal minimum wage.

Click here for Bernstein’s full testimony.