Off the Charts Blog | Center on Budget and Policy Priorities

This week on Off the Charts, we discussed the economy, why President Bush’s tax cuts for high-income households should expire on schedule, the tough budget choices states are making, Social Security, and the health reform law.

• On the economy, Chad Stone explained why new GDP figures show the economic recovery is not yet on solid footing.  Stone also highlighted a new chartbook, The Legacy of the Great Recession.  Michael Leachman commented on a new Congressional Budget Office analysis finding that up to 3.3 million people owe their jobs to the federal Recovery Act.  Donna Pavetti highlighted an op-ed in the Wall Street Journal (“Our Blue-Collar Great Depression”), where Rockefeller Foundation executive Janice Nittoli made a compelling argument for extending the TANF Emergency Fund.

• On the tax cuts for high-income households, Chuck Marr explained how extending the tax cuts may exacerbate a stunning shift in income away from the middle class and towards the highest-income people in the country over the last three decades.  We also posted a joint op-ed from Robert Greenstein, the Center’s executive director, and John Podesta, president and CEO of the Center for American Progress, on why the tax cuts should expire on schedule.
• On the state level, Elizabeth McNichol explained why most states have rejected a cuts-only approach to addressing budget shortfalls.  McNichol also sat down with us to discuss why the state budget crisis continues even though some states are reporting year-end surpluses.
• On Social Security, we showcased a new report from our colleague Kathy Ruffing outlining the program’s outlook over the short and long term.
• Lastly, on health reform, we highlighted a recent opinion piece on an element of the Affordable Care Act: a new insurance program for long-term care.  Paul Van de Water is one of the authors.

In other news, the Center released a podcast on why the state budget crisis continues even though some states are reporting year-end surpluses.  Find it on iTunes here.

The bottom line from today’s Commerce Department report on gross domestic product (GDP) is that the economy is growing far too slowly to reduce unemployment and it is still too early to declare that the recovery is on solid footing.  The recovery could definitely use a boost from further stimulus.

The new report states that the economy expanded at just a 1.6 percent annual rate in the second quarter (April-June), less than the 2.4 percent rate the Commerce Department estimated for that quarter a month ago.

The downward revision to second-quarter growth largely reflects two facts:  businesses expanded inventories by a smaller amount than the Commerce Department originally estimated, and imports made up a larger share of total spending than originally estimated.  (Imports don’t count toward GDP, which measures the output of goods and services produced by labor and property located in the United States.)

As the chart below shows, the economy has been expanding for four consecutive quarters, but the growth rate has been slowing.  Growth has to be 2-2½ percent just to keep the unemployment rate from rising.  It has to be much faster than that to restore full employment.

In his Jackson Hole speech this morning, Federal Reserve Chairman Ben Bernanke acknowledged that “the pace of that growth recently appears somewhat less vigorous than we expected.” Bernanke pointed to actions the Fed has already taken to keep monetary policy highly supportive of an economic recovery and stated that the Fed stands ready to take further actions “as needed.”

Today’s GDP report suggests that the recovery needs a boost from further monetary — and fiscal — stimulus as soon as possible.

For this and other charts on the economy, see our new chart book.

To correct some recent stories suggesting that Social Security faces deep and immediate financial problems, a new report from our colleague Kathy Ruffing outlines the program’s outlook over the short and long term. Here’s the summary:

In recent months, a few commentators have sounded an alarm about the recession’s impact on Social Security’s near-term prospects, which may lead some people to think that the program faces financial problems in the next several years. Fortunately, that is not the case. Social Security continues to run annual surpluses and remains capable of paying scheduled benefits in full for nearly three decades.

The deep recession has indisputably affected the Social Security system’s finances, as is visible in the latest projections by the Social Security trustees and by the independent Congressional Budget Office. But both organizations estimate that, under current trends, the program can continue to pay full benefits from the trust funds until 2037. Thus, Social Security faces no immediate threat.

Nevertheless, Congress and the Administration should act sooner rather than later to restore Social Security’s long-run solvency. Prompt action would allow changes to be phased in gradually and afford people ample time to adjust their financial plans.

In an op-ed in today’s Wall Street Journal (“Our Blue-Collar Great Depression”), Rockefeller Foundation executive Janice Nittoli makes a compelling argument for extending the TANF Emergency Fund.  I’ve written several times (see here and here) that Congress should extend this Recovery Act-created fund — which states and localities are using to help create some 240,000 subsidized jobs in the private and public sectors — beyond its September 30 expiration.  As Nittoli explains:

• Job losses in this recession have been concentrated among workers who are under age 30 and less well-educated, with those in blue-collar industries suffering the most.  Employment among this group has plummeted by nearly one-fifth, comparable to the decline in employment in the nation as a whole during the Great Depression.

• Long-term unemployment not only causes loss of income but also destroys marriages, weakens families, and devastates communities — problems that are costly and difficult to solve.

• To help young blue-collar workers potentially facing years of unemployment, we need to create work opportunities using a mix of older and newer strategies that have proven successful, including subsidized jobs created through the TANF Emergency Fund.

“If we want to write a history of that future that leaves many fewer behind, we must start now,” Nittoli concludes.  Unfortunately, Congress’s failure to extend the fund before its summer recess has forced some states to begin shutting down their programs, despite growing concerns about unemployment.  Congress needs to rectify this — and fast — when it returns in September.

UPDATE, SEPTEMBER 30: We’ve revised some of the figures in this post. Click here for the updated numbers.

As I’ve said before, from the standpoint of economic efficiency there’s a clear-cut case for letting the Bush tax cuts for people over $250,000 expire on schedule in December. Sunsetting the high-income tax cuts makes just as much sense from the standpoint of equity. Recent data from the Congressional Budget Office (CBO) show a stunning shift in income away from the middle class and towards the highest-income people in the country over the last three decades:

• In 1979, the middle fifth of Americans took home 16.5 percent of the nation’s total after-tax income. By 2007, after several decades of stagnant incomes in the middle and surging incomes at the top, the middle fifth’s share had dropped to 14.1 percent. Over the same period, the top 1 percent’s share more than doubled, from 7.5 percent of total after-tax income to 17.1 percent (see graph below). So by 2007, the top 1 percent had a bigger slice of the national income pie than the middle 20 percent.

• If the distribution of after-tax incomes had remained unchanged between 1979 and 2007, the after-tax income of the average family in the middle would have been $9,000 (16 percent) higher in 2007 than it actually was. Instead of an income of $55,300, this typical family would have had $64,700 (see table below).

Here’s how that income shift looks in graph form:

Tax policy is one of the best tools we have to help offset the troubling trend of growing inequality. Unfortunately, the Bush tax cuts have had the opposite effect, providing much larger benefits — both in dollar terms and as a percentage of income — to people at the very top than to middle- and lower-income people. People making more than $1 million get an average of about $124,000 each year in tax cuts, according to the Urban-Brookings Tax Policy Center. The main reason, of course, is the large tax cuts targeted specifically at high-income households.

So this fall, when policymakers decide whether to extend the high-end tax cuts, they should keep in mind just how unequal incomes in the United States have become. As former Federal Reserve Vice Chairman Alan Blinder wrote recently in the Washington Post, is the rationale for extending these tax cuts “that America needs more income inequality? Seems to me we have enough.” To me, too.