The Center's work on 'Recession and Recovery' Issues

The Center examines the impact of changes in the economy on federal and state budgets, as well as the likely effectiveness of economic stimulus proposals. We also examine trends in employment and promote reforms to strengthen the unemployment insurance system.

Tying Jobless Benefits to Corporate Tax Cuts Would Be Inappropriate

April 10, 2014 at 3:58 pm

Key House Republicans reportedly want to tie resuming federal unemployment insurance to extending various corporate tax cuts — including permanent extension of “bonus depreciation.”  Policymakers should reject any such effort, given that permanently extending bonus depreciation:

  • Entails huge cost.  Permanently extending the tax break, which allows businesses to take bigger upfront deductions for certain new investments, would cost $263 billion over the next decade, according to the Congressional Budget Office (CBO).
  • Has little bang for the buck.  Enacted in 2008, bonus depreciation was among the weakest federal measures to promote jobs and growth in the Great Recession.  Mark Zandi of Moody’s Analytics rated it near the bottom of a wide range of stimulus options, estimating that it delivered only 29 cents of additional gross domestic product (GDP) for each dollar of budgetary cost.  (Zandi rated unemployment benefits near the top, estimating that it delivered $1.55 of additional GDP per dollar of cost; see chart.)

    CBO has reached similar conclusions.  Also, the Congressional Research Service in 2013 cited studies by the Federal Reserve and others as providing “additional support for the view that temporary accelerated depreciation is largely ineffective as a policy tool for economic stimulus.”

    Most recently, Goldman Sachs noted “multiple indications that firms do not respond strongly” to bonus depreciation and concluded that its expiration “should have little effect” on the economy.

    It’s also worth noting that bonus depreciation only stimulates economic growth and job creation at all in a weak economy if businesses expect it to be temporary and thus accelerate their investments before it expires.  Permanently extending the tax break would eliminate even this weak effect.

  • Is at odds with recent tax reform efforts.  The recent plan from House Ways and Means Chairman Dave Camp (R-MI), like most other tax reform plans, moves in exactly the opposite direction, scaling back or eliminating various depreciation tax breaks.

Instead of using the plight of Americans who’ve been looking for work for at least six months as a bargaining tool to enact ill-advised corporate tax cuts, the House should quickly pass the Senate-approved bill to renew emergency unemployment insurance.

Summers: Lack of Demand Creates Lack of Supply

April 7, 2014 at 10:23 am

Former Treasury Secretary Larry Summers, speaking last week at the launch of CBPP’s and Senior Fellow Jared Bernstein’s year-long project on full employment, highlighted three economic ideas with important implications for the United States.  One is “inverse Say’s Law”:

Jean-Baptiste Say, the patron saint of Chicago economists, enunciated the doctrine in the 19th century that supply creates its own demand. That in a sense, unemployment or output gaps were an impossibility because, after all, if you produce things then you’d have to create income in the process of producing them and then the people who got the income would spend the income and so how could you really have a problem, argued Say.

It was [John Maynard] Keynes’ great contribution to explain that [Say’s Law] was wrong, that in a world where the demand could be for money and for financial assets, there could be a systematic shortfall in demand.

Here’s inverse Say’s Law: Lack of demand creates over time lack of supply….  Figure 1 of our paper… tells a remarkable story and a profoundly troubling story. We are now in the United States in round numbers 10 percent below what we thought the economy’s capacity would be today in 2007. Of that 10 percent, we regard approximately half as being a continuing shortfall relative to the economy’s potential and we regard half as being lost potential. These are the estimates of the Congressional Budget Office; you’d get very substantially similar numbers from the IMF, from the Fed, from the OECD, from almost anybody you asked.

I want to focus on that second half. We have lost 5 percent of capacity that we otherwise would have had. Let me describe that 5 percent in some other ways. It is $800 billion. It is more than $2,500 for every American, more than $10,000 for every family of four….

Study after study has confirmed what Jared highlighted in his remarks; a stronger, more high pressure economy disproportionately benefits those who are last to be hired. It has a disproportionate impact on the employment of disadvantaged groups. It has a disproportionate impact on the wages of disadvantaged workers. It has a disproportionate impact on the income of disadvantaged families.

So quite apart from the cyclical gap, quite apart from the cyclical gap, a soft economy casts a substantial shadow forward onto the economy’s future output and potential. This might have been a theoretical notion some years ago, it is an empirical fact today.

You can watch Summers’ keynote, as well as the panel discussion among Bernstein and other leading economists, below — and see all eight papers written for this project here:

States’ Sluggish Recovery Continues

April 4, 2014 at 3:06 pm

State tax collections have finally reached their pre-recession levels, according to new data from the Census Bureau.  Those collections are now 0.4 percent higher than six years ago, after adjusting for inflation.  This news is welcome, but not cause for celebration.

The recession of 2007-09 caused deep, sustained and unprecedented revenue losses. Revenue fell a record 12 percent in the average state, even deeper in states with the hardest-hit economy.  And the recovery has been the slowest in decades (see graph).

These drastic revenue losses have prompted many states to make serious cuts to K-12 education, public colleges and universities, libraries, human services, and other public services.  The sluggish recovery means that states are serving larger populations, including more school kids and more seniors, with the same amount of money as six years ago.

Today’s Jobs Report in Pictures

April 4, 2014 at 9:39 am

Today’s solid jobs report shows a labor market that continues to improve gradually, but that remains far from healed. With the share of the population with a job stuck at recession levels and long-term unemployment still very high, it’s too soon for the Federal Reserve to begin raising interest rates — and it’s well past time for lawmakers to restore emergency federal unemployment insurance benefits that expired in December.

Below are some charts to show how the new figures look in historical context.  Click here for my full statement with further analysis.

This Morning: CBPP Event on Full Employment

April 2, 2014 at 8:18 am

CBPP and our Senior Fellow Jared Bernstein will kick off our year-long project on making full employment a national priority with a keynote address from former Treasury Secretary Larry Summers and then a panel among Bernstein and other leading economists.  (Watch a live webcast.)  The project comprises eight papers released today by top economists on how to start the nation on a path back to full employment.

Bernstein’s overview piece makes three basic points:

First, the absence of full employment labor markets, where the vast majority of job-seekers can handily find work, has been one of the most damaging aspects of the US economy over many recent years.

Second, over the past four decades, full employment job markets have been the exception, not the norm.  This has caused many economic problems, from stagnant real earnings, to rising inequality, to slower macroeconomic growth.

Third, the generalized absence of full employment is not an act of nature.  It is the outcome of negligent public policy that can be corrected.  There are numerous steps policy makers can take to boost labor demand, create more and better jobs, and to get the US economy on a path towards full employment.

The other papers include:

  • Larry Summers, Brad DeLong, and Laurence Ball on why the conventional wisdom that fiscal policy should focus on controlling budget deficits rather than stabilizing the business cycle is wrong;
  • Susan Houseman on the real causes of the significant decline in manufacturing jobs;
  • Dean Baker on why the trade deficit is a notable obstacle to full employment;
  • Ross Eisenbrey on why improving job quality is integral to addressing income inequality;
  • Kevin Hassett and Michael Strain on how work-sharing programs can allow more people to keep their jobs in times of labor market slack;
  • Harry Holzer and Robert Lerman on the benefits of apprenticeships and other work-based learning; and
  • LaDonna Pavetti on the potential for the federal government to subsidize jobs during a downturn.