It’s the Great Recession, Not the Great Vacation, That’s Responsible for High Unemployment

December 15, 2011 at 1:55 pm

Two competing narratives frame the debate about why unemployment remains so high even though the economy has been growing for more than two years.

The mainstream “Great Recession” narrative holds that the economy fell into a deep hole in 2008 and has been climbing out of it so slowly because demand has grown so slowly.  Jobs continue to be very hard to find, no matter how hard unemployed workers look for them; employers are reluctant to hire until they see stronger signs that their sales will pick up soon.

The “Great Vacation” narrative holds that unemployment insurance (UI) benefits — in particular, the added weeks of benefits for the long-term unemployed that Congress has funded in the past few years — have dissuaded millions of unemployed workers from taking a job.  If, then, jobless workers would get off their duff (or if we would give them a good swift kick there), unemployment would plummet.

That narrative seems to be motivating the latest House UI proposal, which curtails the number of weeks of UI benefits available, would allow states to alter the fundamental social insurance nature of the program, and includes a number of “reforms” that would make it more difficult for workers who lose their jobs through no fault of their own to have access to the program (see our critique).

Research strongly rejects the Great Vacation narrative, notwithstanding the efforts of some economists to misrepresent that research.  As Brad DeLong points out, for example, Casey Mulligan cites a study in arguing that UI benefits are a major cause of higher unemployment — but that study actually sums up the research (as of early 2010) as suggesting that only an eighth to a third of the rise in unemployment since the start of the recession resulted from the added weeks of benefits, with the true effect likely at the lower end of that range.

A more recent analysis from Berkeley economist Jesse Rothstein finds even smaller effects:

The estimates imply that UI benefit extensions raised the unemployment rate in early 2011 by only about 0.1-0.5 percentage points, much less than is implied by previous analyses.

Rothstein also found that more than half of this small increase in the unemployment rate occurred as workers receiving those added weeks of UI benefits stayed in the labor force looking for work, rather than drop out in discouragement.

When the unemployed stop looking for work, that reduces the unemployment rate (which only counts people actively looking for work), but it doesn’t help them or the economy or result in more workers having jobs.

To be sure, some UI recipients have slipped past state UI administrators’ efforts to ensure that they search for a new job and take a suitable one when it’s available.  It’s also true, as Casey Mulligan says, that “the recession and lack of recovery have more than one cause.”

But it would be a serious mistake to conclude that the truth lies somewhere in the middle between the Great Vacation and Great Recession explanations — like saying that Philadelphia lies somewhere in the middle between New York City and Los Angeles.  If you rely on the Great Vacation explanation, you’ve barely started your journey to understanding why unemployment is so high.

3.3 Million Things Wrong with the House Unemployment Insurance Bill

December 14, 2011 at 5:31 pm

We released an analysis today of what’s wrong with the unemployment insurance (UI) provisions of the bill that the House passed yesterday to extend the payroll tax cut and federal emergency UI through next year.  New numbers from the Department of Labor (DOL) put a human face on that analysis — actually 3.3 million faces, because that’s the number of people who would lose unemployment benefits under the House GOP plan compared with what would happen if Congress extended current law.  The table below provides DOL’s state-by-state figures.

The House bill would sharply reduce the number of weeks of UI benefits available to the long-term unemployed, even though jobs remain scarce and long-term unemployment remains at unprecedented levels.  The bill also would institute numerous permanent changes to the UI system  that would not only make it harder for workers who lose their jobs through no fault of their own to qualify for benefits, but also make the system more costly to administer.

Among other things, the bill would deny UI benefits to all workers who lack a high school diploma or GED certificate and are not enrolled in classes to get one — even though employers would still pay UI taxes on the wages paid to these workers and those taxes would effectively come out of the workers’ wages.  It also would allow states to drug-test all UI applicants and condition eligibility on the results — a standard not used for other federal programs ranging from farm price supports to tax subsidies.

And it would allow states to get waivers to institute policies that would use UI funds for purposes other than paying benefits, thereby undermining the fundamental purpose of UI since it was established in the 1930s:  providing financial assistance to workers who lose their jobs through no fault of their own while they look for a new job.
3.3 Million Jobless Workers Would Lose UI in 2012 Under House Bill

Taking Stock of the Safety Net, Part 1: Overview

December 14, 2011 at 5:16 pm

We will issue a series of posts in the coming days that will look back at some of the major programs that helped struggling families during the year — their goals, impact, and issues facing policymakers in 2012.  Today, we’ll begin by setting the context.

For America’s low- and moderate-income families, 2011 was another very bad year, as the Great Recession of 2007-2009 continued to have a large and lingering impact.  Unemployment and long-term unemployment remained very high, as did the percentage Americans without health insurance.

Yet things aren’t nearly as bad as they could have been.  The safety net is helping to hold the line against poverty and hardship, as the latest available figures in several areas show.

  • Without government assistance programs, the poverty rate would have been nearly twice as high in 2010:  an estimated 28.6 percent, compared with the actual figure of 15.5 percent, based on a measure of poverty that includes the impact of programs like food stamps and housing assistance and tax credits (including the Earned Income Tax Credit).   If the safety net hadn’t existed, another 40 million people would have been poor.
  • Just one part of the safety net — six temporary federal initiatives enacted in 2009 and 2010 to bolster the economy by lifting consumers’ incomes and purchases — kept an estimated 7 million people out of poverty in 2010.
  • The number of young adults with private health coverage has risen by roughly 2.5 million since an Affordable Care Act provision took effect last year requiring insurance companies to allow young adults to stay on their parents’ insurance plans through age 26.
  • Up to 2 million more people are employed in the fourth quarter of 2011 because of the 2009 Recovery Act, according to the Congressional Budget Office.  The law’s impact on employment peaked in the third quarter of 2010, when as many as 3.6 million people owed their jobs to the Recovery Act; large parts of that Act have since expired.

These silver linings come with a big cloud, however.  The temporary initiatives either have expired or are set to expire, and the Budget Control Act enacted in August calls for roughly $2 trillion in spending reductions; some in Congress want to cut even deeper.

All major deficit-reduction agreements of the past 25 years have reflected the principle that deficit reduction should not increase poverty or inequality.  Upholding that bipartisan principle should be a top New Year’s resolution for policymakers in 2012.

The next post in this series will look at Temporary Assistance for Needy Families (TANF).

House Payroll Tax Bill Would Hike Health Reform Subsidy Repayments

December 14, 2011 at 12:13 pm

The payroll tax-cut extension that the House passed yesterday includes a damaging change to the subsidies that health reform (that is, the Affordable Care Act or ACA) will give many families (starting in 2014) to help them afford health coverage.  The congressional Joint Tax Committee estimates that the provision would cause 170,000 people to go without subsidized health coverage because, otherwise, they might owe large repayments at tax time for subsidies they had received during the year.

Extending the payroll tax cut is essential, but, as our report explains, the House provision should not be part of the legislation.

Here’s the issue.  Under the ACA, people who aren’t eligible for Medicaid and lack access to affordable employer-sponsored coverage can get subsidies to help them buy private coverage if their income is below 400 percent of the poverty line.  But people whose income rises during the year (because they got a promotion, got married, etc.) must pay back some or all of the subsidy they received when they file their income taxes.  That’s true even if they received the correct subsidy amount based on their income in the months they got the subsidies.

To prevent this requirement from undermining the ACA’s goal of covering uninsured people while they are out of work or otherwise in need, the ACA capped the repayments at $400 per family ($250 per individual) unless the family’s income ends up over 400 percent of the poverty line.

Over the past year, however, Congress has raised the $400 cap twice to help pay for other legislation, tripling it for many families and increasing it for others by as much as six times.

The House payroll tax-cut bill would raise the cap further, with serious consequences for tens of thousands of families.

Consider a working mother with two children and income at 150 percent of the poverty line (a little under $28,000) who received subsidies for the first nine months of the year but married at the end of September, switched to her husband’s employer plan, and stopped receiving subsidies.  If this couple’s combined income for the year equaled a little over 350 percent of the poverty line, they would have to pay $3,200 to the IRS when they filed their tax return.

Facing such large potential repayments, many families would opt not to receive subsidies in the first place and remain uninsured instead.  The ACA imposes a penalty on people who fail to obtain coverage, but that penalty would often be much smaller than the repayment — the family above, for example, would owe only about $500 in 2014.

Moreover, the option to remain uninsured would be most appealing to relatively healthy people, so the pool of people seeking coverage through the health insurance exchanges would become sicker, on average.  That would drive up premiums for insurance bought through the exchanges and weaken their ability to function effectively.

Congress has already raised the repayment caps to a danger point; the Joint Tax Committee estimates that the most recent enacted increase will cause several hundred thousand people to forgo coverage.  Going further by raising the caps again would be extremely unwise.

Florida Proposes Small Step Out of Big Education Funding Hole

December 13, 2011 at 5:18 pm

The budget proposal that Florida Governor Rick Scott laid out last week — one of many governors’ proposals coming in the next few weeks — illustrates the enormous challenge that states face as they seek to restore funding for education and other services that they cut deeply in the wake of the recession.

Florida’s revenues plummeted in the downturn, and policymakers responded with several years of steep cuts in education and other public services.  Governor Scott’s budget contains a significant increase that makes up for some of that lost education funding.  But it would still leave the state in a deep education funding hole.

After adjusting for inflation, Governor Scott’s proposal translates into a $59 per-pupil increase in combined state and local education funding.  That’s far from enough to counteract the $823 per-pupil decline in funding that hit schools this year, and even further from restoring all the cuts that the state imposed since the recession started.  Under the governor’s proposal, per-pupil state and local funding for education would remain over $1,300 or 17 percent below the pre-recession level of five years ago (see chart).

Florida's Proposed Education Increase Would Leave Funding Well Below Pre-Recession LevelsOne reason that Governor Scott’s proposed increase would make up so little ground is that school districts’ local property tax revenues continue to decline as a result of the real estate crash; part of the governor’s proposed funding increase would simply make up for declines at the local level.  Another reason is that Florida’s school-age population continues to grow, so funding is spread over a larger number of students.

But perhaps the most important reason that Florida education funding would remain deeply depressed is that the state cut so deeply to begin with.

To make meaningful progress in climbing out of its education funding hole, Florida will need a bigger infusion of state funds.  Doing this without deep cuts to other public services means raising additional revenues.  Governor Scott’s proposal largely avoids revenue increases, instead opting for Medicaid cuts to finance the education increase.

Florida is hardly unique.  As our recent report shows, states across the country have made deep cuts to education funding as a result of the recession.  To train the highly skilled workforce they will need to thrive economically in the future, states will need to restore their investments in education.

It will take years before economic recovery leads to a full state revenue recovery, as my colleague Liz McNichol has pointed out.  So states are going to have to raise additional revenues if they’re going to restore the lost funding in education and other public services.