Off the Charts Blog | Center on Budget and Policy Priorities

CORRECTED December 10th, 2010:  The Figures for 2012 payroll employment and unemployment rate in table 2 have been corrected. In the previous version the figures shown were for 2013 instead of 2012.

We’ve received some eye-popping policy simulations from Mark Zandi, chief economist at Moody’s Analytics, that flesh out an important point that the Congressional Budget Office, Zandi, and many others have made before: unemployment insurance (UI) and tax cuts focused on low- and moderate-income households have a much larger economic impact than income tax cuts for high-income individuals. I’ll be writing a more detailed report later, but here they are in a nutshell:

• Short-term scenarios: Zandi found that extending federal UI for one year and some of the Obama tax cuts (expansion of the child tax credit, improvements to the earned income tax credit, and the higher education tax credit) for two years would generate more economic activity — including creating 500,000 more jobs next year — than would a two-year extension of the Bush high-income tax cuts. It would also add $30 billion less to deficits over the 2010-2015 period than extending the high-income tax cuts would.
• Longer-term scenarios: Zandi found that extending federal UI for a year, making the Obama tax cuts described above permanent, extending Obama’s Making Work Pay tax cut for another year, and creating a two-year tax credit to promote additional hiring would generate substantially more economic activity — including creating 1.2 million more jobs next year — than would a permanent extension of the high-income tax cuts. It would also add $441 billion less to deficits over the 2010-2020 period than extending the high-income tax cuts.

Friday’s jobs report reminds us that the economy still needs a job-creating boost. As Federal Reserve Chairman Ben Bernanke said in a recent speech, “a fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits would be an important complement to the policies of the Federal Reserve.” These results show that, compared with a policy of extending the high-income tax cuts, a policy emphasizing unemployment insurance and refundable tax credits is far better for enhancing growth in the near term without undermining deficit reduction efforts in the longer term.

Judy Solomon, co-director of health policy, weighed in on the New York Times’ “Room for Debate” forum, which features commentary from policy experts on a variety of pressing issues.  The topic was “How to Save Medicaid.” Solomon explained that Medicaid costs have risen no faster than private insurance and that capping federal funding is the wrong approach to slowing future cost growth.

The Workhorse of Health Care

Medicaid is the workhorse of the nation’s health care system. It provides health coverage to about 58 million low-income Americans, covers almost half of the costs of long-term care for seniors and people with disabilities, and pays for 40 percent of all births. It provides critical services that people with disabilities and children with special health care needs require but that private insurance generally doesn’t cover.

Yet Medicaid’s average cost per beneficiary has grown no faster than the cost of private insurance over the last 30 years. In fact, Medicaid actually costs less per individual than private insurance, when you adjust for Medicaid beneficiaries’ poorer average health.

Capping federal funding would cripple Medicaid and significantly shift costs to states, families, and doctors and hospitals. Facing inadequate federal funding, states would have to contribute more of their own funds or cut back eligibility, benefits and payments to health care providers. States would also be unable to cover the many families that lose their jobs and health coverage during a future downturn. (During the recent downturn, states struggled with the greater caseloads under the current financing structure and required even greater federal help.) And states would be unable to address large, unanticipated medical costs like those resulting from the H.I.V./AIDS epidemic they faced in the 1980s.

While slowing Medicaid costs and improving efficiency are essential, the solution is not to cap federal funding. The health reform law takes a sounder approach, giving states new tools to take steps such as moving away from costly nursing home care to care in the community, and delivering health care to beneficiaries with chronic conditions in better and less costly ways. The health reform legislation also takes a number of other steps that hold considerable potential for slowing the long-term growth in health care costs system-wide.

This week on Off the Charts, we discussed the deficit, the economy, state budgets, housing, and health reform.

• On the deficit, we highlighted the Center’s statement on the new plan from the co-chairs of the President’s fiscal commission and Jim Horney’s analysis of it.  We also featured Chad Stone’s discussion of the relationship between deficit reduction and income inequality from the New York Times’ “Room for Debate” forum, and Chuck Marr outlined the main reasons for allowing the high-income tax cuts to expire. Chuck also pointed out that millions of middle-class and low-income working families would lose tax cuts under the current major Republican tax proposals.
• On the economy, Michael Leachman highlighted the 2009 Recovery Act’s role in saving jobs during the recession. Chad Stone answered questions about the expiration of the federal emergency unemployment insurance program and explained what the expiration means going forward. Chad also pointed to charts showing the most recent jobs report in historical context.
• On state budgets, Nicholas Johnson clarified what a new report on state revenues means for states as they draft next year’s budgets.
• On housing, Douglas Rice emphasized the threat that proposed cuts to overall discretionary domestic funding pose to housing assistance.
• On health reform, Shannon Spillane noted that the erosion of employer-based coverage makes implementation of the Affordable Care Act especially important.

In other news, the Center’s top charts are now on Flickr; you can browse them here. We also published statements on the November jobs report and the new Bowles-Simpson plan, as well as reports on the Rivlin-Domenici deficit reduction plan, jobs and the Recovery Act, housing assistance, andthe decline in employer-based health coverage. Additionally, the Center released a podcast on the expiration of UI benefits.

Senate Republicans vowed this week to block all legislation until the Senate “prevented the tax increase that is currently awaiting all American taxpayers.” But despite all the public attention to the ongoing tax debate, few seem to recognize that the major GOP tax proposals that have been put forward — such as those from Senate Minority Leader Mitch McConnell and from Congressman Mike Pence and Senator Jim DeMint — wouldn’t extend President Obama’s expiring tax cuts, only President Bush’s.

This means that under these proposals, millions of middle- and low-income working families would each lose tax cuts worth hundreds of dollars or more starting in January.

Letting Obama’s tax cuts for low- and middle-income families expire also would weaken the economy by reducing consumer spending. People living paycheck to paycheck spend most of what they have to feed their families, pay the mortgage or rent, and cover other expenses; when their taxes go up, their spending goes down significantly. High-income people don’t reduce their spending as much in response to a tax increase because they save rather
than spend a larger share of their income than less-affluent people do. That’s why the Congressional Budget Office found that, on a dollar-for-dollar basis, extending the Obama tax cuts would have more than double the positive impact on a weak economy than extending the high-end Bush tax cuts would.

Below are the tax cuts that the Republican plans omit. They’ll all expire at the end of December unless Congress extends them.

• Child Tax Credit expansion. The 2009 Recovery Act allowed low-income working families to count more of their earnings in calculating the value of their Child Tax Credit. If Congress doesn’t extend this provision, 10.7 million families will lose part or all of their child credit. For example, a single mother with two children who works full time, year round at the minimum wage and earns around $14,000 — someone who is trying to support her family through work rather than welfare — would see her child credit plummet by nearly $1,500, from $1,725 to $263 (see graph).
• EITC improvements for married couples and larger families. Some low-income working couples receive a smaller Earned Income Tax Credit if they marry than if they had remained single. The Recovery Act included marriage penalty relief that reduced this financial penalty by allowing married couples to receive somewhat larger EITC benefits. Families with nearly 5 million adults and more than 8 million children will be affected if this change expires.The Recovery Act also expanded EITC benefits for families with three or more children. Prior to 2009, these families — which make up a disproportionate share of all low-income working families — received the same EITC benefits as families with two children. The Recovery Act, by boosting EITC benefits for larger families, strengthened work incentives for more than 3 million low-income working families with children.
• Making Work Pay. Created in the Recovery Act, this tax credit reduces the amount the federal government withholds from the paychecks of more than 90 percent of working Americans; it’s worth up to $800 per couple. If Congress doesn’t extend it, working families would see their paychecks go down starting on January 1. For example, a nurse and a machinist who have two children and earn a combined $65,000 would have an extra $800 withheld from their paychecks over the course of 2011. (The tax bill that the House passed yesterday didn’t extend Making Work Pay, but it did extend the child credit and EITC improvements.)

Given that tax cuts aimed at low- and middle-income families have much more bang for the buck in boosting the economy than costly high-end tax cuts, it’s hard to see why we should let the former expire and extend the latter. Which President signed the tax cut shouldn’t be the deciding factor.

Today’s disappointing employment report shows that the economy is continuing to create jobs, but job growth is far too slow to bring down the unemployment rate. Below are some charts to show how the new figures look in historical context; later this morning we will issue a statement with analysis.

See our chart book for more charts.