Helping Workers Adjust to Permanent Job Losses

March 1, 2012 at 3:42 pm

In my U.S. News & World Report blog post this morning, I explain why U.S. policies are inadequate to help workers adjust to losing jobs that will never return and why addressing that inadequacy is critical to enable us to compete in a fast-changing global economy and achieve broad-based prosperity.  As I note, the case for such policies reflects the fact that even generally beneficial economic change generates winners and losers

Globalization and technological change remain important contributors to long-run increases in U.S. living standards.  But what’s good for the average American is not necessarily good for every American.  In fact, the gains from trade and technology tend to be quite diffuse.  The losses, in contrast — while usually smaller than the gains in aggregate — tend to concentrate among particular workers, firms, and communities.

I cite a new study on the economic impact of rising imports from China on local U.S. labor markets, which finds that real world adjustments to economic change can be much slower and more painful than textbook economic models assume.  The study also finds that while most of the government transfer payments triggered by these developments cushion the blow of job loss, they are not designed to help the affected workers find new jobs.

The case for better programs to help workers who lose jobs that will never return does not reflect a criticism of unemployment insurance (UI), and policies to help those workers transition to new jobs should not come at UI’s expense. Adjustment assistance and training are, however, valuable complements to UI — and we are not doing enough in that area.

The Myth of the Out-of-Control Federal Government

February 29, 2012 at 3:28 pm

Are the size and reach of the federal government exploding, as some have suggested?  While overall federal spending is well above its historical average as a share of the Gross Domestic Product (GDP) and is expected to remain so even after the economy recovers, our new examination of the latest Congressional Budget Office (CBO) data belies claims of a large and permanent expansion of the federal government.

Non-Interest Spending Outside Medicare and Social Security Set to Fall in Coming Decade

Here’s what we found:

  • If we continue current policies, federal expenditures outside of interest payments on the debt are projected to decline in the decade ahead as the economy recovers. In fact, these expenditures (which analysts call “primary outlays”) have already fallen from 23.9 percent of GDP in 2009 — at the bottom of the recession — to a projected 22.0 percent of GDP in the current year, 2012.  They are projected to fall further, to 20 percent of GDP or lower in the latter part of this decade.
  • Total non-interest spending outside of Social Security and Medicaretwo programs whose costs are being driven up by the aging of the population and the rise in health care costs throughout the U.S. health care system — will fall well below its 50-year historical average in the decade ahead (see graph).  By 2022 it will fall to 10.8 percent of GDP, compared to an average over the 1962-2011 period of 13.0 percent (see table).

As we conclude:

To be sure, in subsequent decades, as the population continues to age and health care costs continue to rise, federal non-interest spending will climb significantly higher.  One key factor is that average health care costs are considerably greater for people in their 80s and 90s than for people in their late 60s and early 70s, and the baby boomers will become very old in future decades.  In addition, if the debt continues to rise faster than GDP, interest costs will continue to swell.  We will have to tackle these issues.

Program Spending as a Share of GDP Under Continuation of Current Policies
Avg 1962-2011 2012 2017 2022
Primary outlays 18.5% 22.0% 20.0% 20.0%
Less Social Security 14.5% 17.1% 14.9% 14.5%
Less Social Security and Medicare 13.0% 13.8% 11.6% 10.8%
Note: program spending includes all federal expenditures other than net interest on the debt. Sources: OMB through 2011; CBPP analysis of CBO data thereafter.

But when Americans hear talk of the government exploding in size and reach, they don’t usually think this means that more people will receive Social Security and Medicare because the population is growing older or that Medicare will cost more because of factors like the aging of the baby boomers and advances in medical technology that improve health and prolong life but at significant cost.

Outside of those demographic and health cost factors, the portrait of a rapidly growing federal behemoth is simply at odds with reality, since costs are shrinking to levels well below their historical averages.

Wait-and-See Approach to Health Exchanges May Haunt States

February 28, 2012 at 5:31 pm

A central component of the Affordable Care Act (ACA) is the creation in each state of a health insurance “exchange” — a competitive marketplace in which individuals and small businesses can choose among an array of affordable, comprehensive private insurance plans.  In states that don’t develop an exchange, the federal government will do it for them.

As the New York Times noted recently, state-level exchange implementation has stalled in some states with Republican governors and/or legislatures that remain opposed to the health reform law.  CBPP estimates that at least a dozen states (see map) are taking a wait-and-see approach as to whether or not they will establish an exchange, citing uncertainty until the Supreme Court rules on the ACA’s constitutionality this summer.  Yet many policymakers in these states have also said that if the Supreme Court deems health reform constitutional, they would much rather have a state-run exchange than a federal one.

States Delay Exchange Implementation Until Supreme Court ACA Decision

However, delaying a decision on whether to establish a state exchange until the summer could effectively be a decision to let the federal government set up the exchange.

The federal government will have to determine by January 2013 that each state will have its exchange up and running on time; as part of that process, states will likely have to submit plans for their exchanges later this year.  Then states will have to test their eligibility, enrollment, and management systems in the spring and summer of next year, commence an open-enrollment period for consumers to shop for coverage starting in October 2013, and go live with exchange coverage on January 1, 2014.

It’s hard to imagine how a state could take all the necessary legislative, policy, operational, and IT system development steps needed to meet this compressed timeline if it doesn’t start work until the summer.

A number of other states have forged ahead with development of their exchanges, and it’s fortunate that the ACA ensures that residents of all states will have access to affordable, decent-quality coverage options through an exchange, whether or not their state establishes one.  But it would be unfortunate if some states lose the ability to set up their own exchange when their leaders decide to “wait and see.”

Note: map was updated March 1, 2012 to include Alaska

Corporate Tax Reform Must Be Gimmick-Free

February 28, 2012 at 1:15 pm

The President’s framework for corporate tax reform affirms an extremely important principle: reform must not rely on budget gimmicks to hide its true long-term cost:

While a number of the measures that raise revenue in corporate reform . . . raise more revenue in earlier years than they do in later years, the President is committed to corporate tax reform that does not add a dime to the deficit, over the next decade or thereafter [emphasis added].

Any corporate reform should adhere to this principle.  Otherwise, policymakers could adopt a plan that doesn’t add to deficits over the official ten-year budget window yet worsens the nation’s long-term deficit problem.

Estimates by the Joint Committee on Taxation (JCT) show why the principle is so important.  JCT found that if we eliminated nearly all major corporate tax expenditures (credits, deductions, and other tax preferences) and dedicated the resulting revenues to lowering the corporate rate, we could drop the rate from 35 percent to 28 percent.  That wouldn’t add to deficits over the next decade.  But, as JCT noted, it would add to deficits in the long run because much of the savings from eliminating corporate tax expenditures wouldn’t continue outside the ten-year budget window.

Most notably, the savings from eliminating “accelerated depreciation” (a set of rules that allow firms to deduct the cost of new investments at an accelerated rate) would peak at $67.3 billion in 2017 but fall sharply thereafter, to $44.5 billion by 2021, and likely continue to fall in later years.

Given the nation’s long-term budget problems, a well-designed corporate tax reform proposal should help rein in deficits; the fact that the President’s framework aims only at revenue neutrality is a major weakness.  Still, the Administration gets it exactly right when it makes clear that reform must be fiscally responsible not just in the early years, but over the long term as well.

The Latest on State Budgets

February 27, 2012 at 1:38 pm

Our newly updated survey of state budget shortfalls suggests that states continue to face a long and uncertain recovery:
29 States Have Projected or Have Addressed Shortfalls for Next Year

  • States’ budget challenges remain considerable. Twenty-nine states have projected or addressed budget gaps totaling $47 billion for fiscal year 2013, which begins July 1 in most states.  (See map.)  States that haven’t already done so will have to close these gaps before the fiscal year begins, since nearly every state is required to balance its budget.  (These 29 states include some states with two-year budget cycles ending in fiscal year 2013, most of which have already closed their projected 2013 shortfalls through spending cuts and other measures scheduled to take effect next year.)
  • State finances are recovering, but slowly. Shortfalls are generally smaller than in previous years.  But they remain large by historical standards — the largest in at least two decades for the fourth state fiscal year after the end of a recession — as the economy continues to be weak and unemployment is still high.

Shortfalls persist because state revenues are coming out of a very deep hole caused by the recession.  While revenues grew by 8.3 percent between July 2010 and June 2011 (the 2011 fiscal year for most states), they would have to continue growing at that pace for seven more years to get them back on a normal track, as the graph shows.

States have already made deep cuts to services that are critical to their economic fortunes, like education.  (As this study from the Federal Reserve Bank of Cleveland shows, education plays a large role in determining a state’s income growth over the long term.)  Such cuts will likely grow if states do not raise additional revenue.

Continured Revenue Growth of 8.3% per Year Would Not Restore Losses from Recession Until Fiscal Year 2019

As my colleagues Nicholas Johnson and Erica Williams have noted, policymakers can prevent further cuts to services and reverse some of the cuts that they have made since the start of the recession by boosting revenues, such as by raising taxes on high-income taxpayers and profitable corporations.  That’s a sound way for states to lay the foundation for a strong economic future.