The Center's work on 'Economic Recovery Watch' Issues

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:

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.

Greenstein: We Need a Stronger EITC and Minimum Wage

March 5, 2014 at 12:19 pm

On last night’s PBS “NewsHour,” CBPP President Robert Greenstein discussed the President’s new budget and issues that both sides of the aisle might agree on.  In this exchange with host Judy Woodruff and James Capretta from the Ethics and Public Policy Center, Greenstein explained why we should strengthen both the Earned Income Tax Credit (which the President proposes expanding for childless workers) and the minimum wage:

JUDY WOODRUFF: [W]hat do you see in here, Jim Capretta, where you see the two parties could work together?

JAMES CAPRETTA: Well, there’s one possibility. I don’t know how much of a chance, but around the Earned Income Tax Credit, there’s more bipartisan support for that kind of an approach to wage supplements than it is for just redistributing through taxing and spending.

[The] Earned Income Tax Credit is a program that Bob knows well that provides additional support directly through the federal tax system to people that are actually working, have a job, and it boosts their income directly to the proportion of earned wages. It’s the kind of thing that could be built on.

It’s better than doing, frankly, a minimum wage increase, certainly of the size the president has pushed….

ROBERT GREENSTEIN: I think we need to do both the minimum wage increase and the Earned Income Credit.

You can’t do the whole thing through the Earned Income Credit. It puts too much strain on government finances. You can’t do the whole thing through the minimum wage. That puts too much strain on employers.

But I think Jim is right that there is a potential here, for even another reason. The president is proposing to increase the Earned Income Credit for workers not living with minor children. We already have a sizable Earned Income Credit for families with kids.

When you look at these young workers or middle-aged workers who are single individuals, if they’re paid low wages, they’re the one group whom the federal government today literally taxes into poverty or deeper into poverty. That should be something that both parties can say, that’s not a good idea. And both parties want to encourage these people to work more, and the Earned Income Credit does that.

We’ve documented the importance of extending the EITC to childless workers and why we need a stronger minimum wage.

Watch the interview below:

With Federal Funds Gone, States Take the Lead on Subsidized Jobs

January 30, 2014 at 3:09 pm

I highlighted yesterday the success of a 2009 Recovery Act program through which 39 states and the District of Columbia placed 260,000 low-income parents and young people in subsidized jobs, mostly in the private sector.  The federal funding for that program dried up a few years ago.  But several states — recognizing that these programs hold huge promise for the long-term unemployed and others who often have great difficulty getting hired — have decided to use their own funds to create or expand subsidized jobs programs.  Here are some examples:

  • Connecticut Governor Dannel Malloy this week proposed a $3.6 million initiative, targeted to the long-term unemployed, that will combine a job-readiness program, supportive services, financial coaching, and an eight-week paid work program.  He also proposed expanding a program that offers two incentives to employers to hire additional employees:  a six-month wage subsidy and grants to small manufacturers to train new workers.
  • Colorado is implementing a two-year, $2.4 million subsidized jobs program targeted to non-custodial parents, veterans, and displaced workers aged 50 years or older who are below 150 percent of the poverty line.
  • Nebraska, Minnesota, and California are starting or expanding subsidized programs for recipients of Temporary Assistance for Needy Families (TANF).  Nebraska plans to spend $1.1 million per year to operate a two-year pilot program.  Minnesota plans to spend $2.2 million each year over the next two years on a new program to encourage employers to hire long-term TANF recipients.  And California’s Governor Jerry Brown has proposed boosting funding for subsidized jobs by almost $100 million this year, to $134 million.

As their budgets rebound, states will have resources to make new investments.  More states should follow the lead of these states and some other local communities that have decided that providing subsidized jobs is a winning proposition for the unemployed, employers, and local communities.