The Case for Fiscal Stimulus

September 15, 2011 at 3:03 pm

Testifying before the Senate Budget Committee today on policy prescriptions for the economy, Center Chief Economist Chad Stone outlined the importance of increasing overall demand:

Economy Operating Well Below Full CapacityA host of developments precipitated by the bursting of the housing bubble threw the U.S. economy into a deep hole in 2008 and the first half of 2009, with the output of goods and services (actual GDP) falling well below what the economy was capable of supplying with high employment, normal labor force participation, and full utilization of existing capacity (potential GDP).  Extraordinary monetary and fiscal policy measures undertaken by the Federal Reserve, Congress and two administrations arrested the fall and kept the hole from getting deeper, but we are still trying to dig out of that hole and we’ve had limited success so far (see graph).

There is tremendous economic waste and human hardship in an economy that is operating well below full capacity.  The goods and services that are not produced, the wages and business income that is not earned, and the revenues not received are lost forever.  Potential GDP is effectively a ceiling on sustainable production, so periods of severe economic slack such as we are currently experiencing are not offset in the future by periods when actual GDP exceeds potential by a comparable amount.

CBO estimates that the recession and subsequent economic slump have already cost the economy $2½ trillion in lost output (the cumulative gap between actual and potential GDP since late 2007) and that without a pickup in the expected pace of recovery, we will lose another $2½ trillion before getting back to full employment.  Moreover, as CBO notes, “Not only are the costs associated with the output gap immense, but they are also borne unevenly, falling disproportionately on people who lose their jobs, who are displaced from their homes, or who own businesses that fail.”

Policies that reduce the size of the output gap along the way to restoring full employment reduce the economic costs and human hardship of an economic slump.  Long-term unemployment is at unprecedented levels, and as Tuesday’s grim report from the Census Bureau on income, poverty, and health insurance in 2010 shows, the recovery is proceeding too slowly to reduce that hardship substantially anytime soon.

A large output gap stems mainly from inadequate aggregate demand for goods and services, and policies that increase aggregate demand are likely to be more successful at closing the output gap than policies that give businesses tax incentives to expand production.  The problem for most businesses in an economic slump is not that they don’t have enough capacity to meet existing demand but that they don’t have enough demand to fully utilize their existing capacity.  Thus policies that put more customers in the stores with more money to spend are likely to be more successful at closing the output gap and creating jobs than giving businesses tax breaks.  Policies that focus on raising the purchasing power of unemployed workers and middle- and low-income households are likely to be more successful per dollar of budget costs at increasing spending and creating jobs than policies cutting tax rates for high income taxpayers who are likely to save a significant portion of any tax cut they receive.

Click here for the full testimony.  Click here for more charts on the impact of the recession.

Robin Hood in Reverse…Reversed

September 15, 2011 at 10:52 am

The Missouri Senate took a big step Tuesday toward protecting the well-being of over 100,000 low income elderly and disabled residents by voting to preserve an important property tax credit.

As I explained last week, a proposal before the Senate would have eliminated renters’ eligibility for the state’s property tax “circuitbreaker” credit and used the savings to help finance new tax credits for businesses.

Like most of the states with circuitbreaker credits, Missouri makes the credit available to low-income elderly and disabled renters (as well as to homeowners), in order to help offset the property taxes that landlords pass along in the form of higher rent.  Eliminating renters’ eligibility for the credit would make it more difficult for some of the state’s most vulnerable residents to make ends meet.  It would also damage the Missouri economy, because low-income people are among those most likely to spend every dollar they have.

Whether the cut to the circuitbreaker credit stays off the table is now up to the Missouri House.  It should go along with the Senate and keep the circuitbreaker, and the crucial assistance it provides, alive for Missouri’s renters.

A Close Look at the New Census Numbers

September 14, 2011 at 5:16 pm

We’ve just issued our detailed analysis of the 2010 data on poverty, incomes, and health coverage.  It begins:

Driven by the persistent weakness in the economy, the poverty rate in 2010 reached its second-highest point since 1965, median income declined, and the number and percentage of Americans without health insurance stood at record highs, the Census Bureau said yesterday.  The share of Americans in “deep poverty” — with incomes below half of the poverty line — also hit the highest level on record, with data going back to 1975.

Contributing to the high percentage of Americans who have no health insurance was the decline in the percentage of Americans with employer-provided health coverage.  The new data also highlight the importance of implementing health care reform, slated to take full effect in 2014.

The new Census figures also show that millions more Americans would have fallen into poverty or become uninsured if not for programs like unemployment insurance, food stamps, the Earned Income Tax Credit (EITC), and Medicaid, which face major decisions by federal and state policymakers — and could face substantial cuts.

The 2010 figures were the worst in many years, if not decades, by several measures, as the table shows.

Click here for the full report.

A Lost Decade in the Fight Against Poverty

September 14, 2011 at 3:20 pm

The poverty rate rose by a statistically significant amount in 32 states over the past decade and didn’t fall by such an amount in any state, according to preliminary state figures the Census Bureau released yesterday (see map).

In some states, the poverty rate rose at an especially rapid pace.

In Indiana, poverty rose nearly 9 percentage points to reach 16.2 percent.  The other three states with the biggest percentage-point increases in poverty — Arizona, Georgia, and Mississippi — ended the decade with poverty rates of 19.9 percent, 18.5 percent, and 22.9 percent, respectively.

Higher poverty rates were driven largely by the economy.  The Great Recession that began in 2007 and a milder recession in 2001 were bookends to the only economic recovery on record in which the national poverty rate was higher at the end than at the beginning.

The rise in poverty between 2001 and 2007, along with the rise in income inequality and the decline in real median incomes of non-elderly households, were among the signs that the benefits of economic growth did not filter down to many in the middle and the bottom of the income ladder.

The economic hard times that began in 2007 have hit some states much harder than others, which partly accounts for the differences among states in how much poverty has grown over the past decade.

Some states on their own have worsened hardships among vulnerable families through unnecessarily harsh cuts to programs that help them.  This year, a number of states continued this disturbing trend by deeply reducing cash assistance or ending it entirely for families living well below the poverty line.  Ten states have taken steps to cut regular unemployment benefits.

That’s not the path to a stronger future. As we’ve detailed, poverty among young children slows them in school and appears to diminish their earnings later in life. And that means a weaker economy for all of us.

Government Programs Kept Millions Out of Poverty in 2010

September 13, 2011 at 4:08 pm

Though grim in many respects, the Census data released this morning show that poverty and hardship would have been far worse in 2010 if not for key programs such as unemployment insurance, the Earned Income Tax Credit (EITC), food stamps, and Medicaid.  The new figures send a powerful message to policymakers as they consider major changes in these programs this fall.

Government Programs Kept Millions Out of Poverty in 2010Unemployment insurance kept 3.2 million people above the poverty line in 2010.  The official poverty measure doesn’t count the EITC or SNAP (food stamp) benefits as income, but the Census Bureau reported that if they were counted, as many analysts favor, they would be shown to lift out of poverty 5.4 million and 3.9 million people, respectively (see graph).

Congress will have to decide soon whether to continue unemployment benefits for the long-term unemployed, as well as other temporary initiatives designed to promote growth and ease hardship during the economic downturn.  Also, Congress’ special deficit-reduction committee could consider deep cuts in basic low-income assistance.

The committee, and Congress as a whole, should adhere to a core principle that the Bowles-Simpson commission set forth in its report and the Senate’s “Gang of Six” sought to honor in its plan — deficit reduction should be designed so that it does not increase poverty — and therefore shield low-income assistance programs from cuts. Leaders of prominent religious, civil rights, charitable, and other organizations have urged policymakers to follow that key principle.

History shows that deficit reduction can go hand-in-hand with protecting those on the lower rungs of the income scale and even with stronger policies for low-income families.  The three major federal deficit-reduction packages of the last two decades — those in 1990, 1993, and 1997 — actually reduced poverty and inequality, even as they shrank deficits substantially, by shielding core low-income assistance programs as well as through such measures as expanding the EITC.

If policymakers instead impose significant cuts in programs for those at the bottom of the income ladder, it will have a strong and negative effect on the extent and depth of poverty in coming years and decades.