In Case You Missed It…

January 27, 2012 at 5:21 pm

This week on Off the Charts, we focused on the federal budget, federal taxes, the economy, and state budgets.

  • On the federal budget, Paul Van de Water explained that Mitt Romney’s budget proposals would cut Medicare and Medicaid by one-quarter or more, and cut non-defense discretionary programs to a percent of the economy not seen for at least 80 years.

    We also highlighted and updated our analyses of several harmful proposed changes to the congressional budget process, and we pointed to a statement from Robert Reischauer, former director of the Congressional Budget Office and one of our board members, opposing one of the bills.

  • On federal taxes, Chuck Marr explained why people at the top of the income scale should pay more in taxes, and Chye-Ching Huang discussed why the preferential tax treatment for capital gains makes no sense.

    Chuck Marr also urged Congress to consider the interests of U.S. workers in deciding whether to eliminate taxes on corporate foreign profits.

    And we highlighted some facts on the Earned Income Tax Credit (EITC) in honor of the sixth annual EITC Awareness Day.

  • On the economy, Chad Stone outlined why the Federal Reserve’s decision to keep interest rates low is good news given current economic and political conditions.

    He also noted that, while economic growth picked up in the fourth quarter of 2011, serious concerns about the recovery remain.Nick Johnson pointed out that steep cuts in state and local spending are slowing the economy.

  • On state budgets, Nick Johnson explained why Kansas Governor Sam Brownback’s proposal to abolish the income tax on “pass-through” business income would be costly and poorly targeted.

In other news, we released reports on Mitt Romney’s budget proposals, the proposed Kansas tax break for “pass-through” business profits, and three proposed changes in congressional budget procedures: (1) requiring official budget “baselines” to assume that future appropriations will remain frozen indefinitely, (2) changing the accounting of federal credit programs in ways that would overstate their costs, and (3) barring Congress from considering any legislation that would affect the budget until it and the President have agreed on a joint budget resolution for the fiscal year.

New GDP Numbers Show Historic Drop in State and Local Spending

January 27, 2012 at 5:11 pm

State and local government spending on goods and services fell at a faster rate — and hence had a bigger negative impact on economic growth — in 2011 than in any year in the last six decades,  Commerce Department data released today show (see graph).

When states and localities cut spending, they lay off employees (656,000 jobs lost since state and local employment peaked in August 2008), cancel contracts with vendors, eliminate or cut payments to businesses and nonprofits that provide services, and slash benefit payments to individuals.  In all of these circumstances, the companies and organizations that would have received government payments have less money to spend on salaries and supplies, and individuals who would have received salaries or benefits have less money to buy things.  This directly removes demand from the economy.

In 2011, Steepest Decline in State and Local Spending Since 1944

State and local governments have cut deeply their spending on schools and other public services for three straight years.  In fact, economic output from state and local governments fell by 2.3 percent in 2011 — marking the steepest drop since the wartime economy of 1944.  By reducing economic activity, these cuts have slowed the economic recovery.  (The tally includes state and local spending on education, transportation, public safety, and human services, among other areas.  It doesn’t include government benefits such as cash assistance and Medicaid, whose costs grew as the number of eligible beneficiaries rose after the recession hit.)

Three major factors contributed to the steep 2011 decline:  depressed revenues (which are still about 6 percent below pre-recession levels), the depletion of states’ reserve funds, and the end of emergency federal aid in June 2011.

Many states now writing their budgets for next year are again finding that they lack the revenue to pay for fundamental state services, despite the major cuts of previous years.  Unless states raise new revenue, the spending cuts will likely continue.

Happy EITC Day!

January 27, 2012 at 1:22 pm

Today’s the sixth annual Earned Income Tax Credit (EITC) Awareness Day, an event organized by the Internal Revenue Service (IRS) and its partners to raise public awareness of the EITC.

Designed to encourage and reward work as well as offset federal payroll and income taxes, the EITC helps millions of low- and moderate-income working families to make ends meet.  In 2010, it lifted about 6 million people out of poverty, including about 3 million children. The EITC lifts more children out of poverty than any other program.

Yet according to the IRS, each year millions of eligible workers do not claim their credits, missing out on millions of dollars they earned.

To learn more about the EITC, click on the links below:

 

Economy Growing—But Much Too Slowly

January 27, 2012 at 11:38 am

Today’s initial Commerce Department estimate of economic growth in the fourth quarter of 2011 looks good at first:  the economy expanded at an annual rate of 2.8 percent, up from 1.8 percent in the third quarter.  That’s the tenth straight quarter of growth.  But a closer look at the numbers shows much that should concern us.

Economic Growth Picks up in Fourth QuarterCritically, the jump during the third quarter in final sales of goods and services— a better measure of underlying demand than GDP —didn’t continue in the fourth quarter (see first chart).  More than half of the growth in GDP in the fourth quarter came from inventory accumulation — that is, unsold goods piling up on the shelves.

Also, the fourth quarter’s 2.8 percent growth was a bit slower than analysts were forecasting and the economy continues to operate well below full capacity.  Actual GDP is a gaping 6.7 percent less than potential GDP, or what the economy is capable of producing with full utilization of workers and business capacity (see second chart).

Economy Operating Well Below Capacity

While inventory accumulation and consumer spending sustained growth in the fourth quarter, business investment in factories, offices, machines, and software slowed sharply.   A rise in the consumption of imports relative to exports and a drop in government spending were both drags on growth.

The main piece of good news in the report is that inflation remained tame in the fourth quarter.  The Federal Reserve, pointing to sluggish growth, substantial excess capacity, and low inflation, announced this week that it intends to keep interest rates very low through late 2014.  As I said yesterday, with Congress unlikely to do anything to help the economy beyond extending the payroll tax cut and emergency unemployment insurance (and even these steps aren’t assured), any hope for nurturing the expansion is in the Fed’s hands.

For a look at the economic legacy of the Great Recession, see our chart book.

At Least We Have the Fed

January 26, 2012 at 4:59 pm

The Federal Reserve signaled this week that it still has the weak economy on its radar screen and sees no imminent threat of inflation.  That’s welcome news, because an accommodative, low-interest-rate monetary policy is the only game in town right now for nurturing the struggling economic recovery.

As I posted yesterday on U.S. News and World Report’s new “Economics Intelligence” website, economic and budget policy will likely run on autopilot this year in the run-up to the November elections.  We can’t realistically expect any bold policies to bring down the jobs deficit; this Congress will have a hard enough time doing the bare minimum, namely, extending the payroll tax cut and extra weeks of unemployment insurance through the end of this year.  (Both are due to expire at the end of February.)

Fiscal and budget policy gridlock may be our friend at a time when there are worse alternatives, such as actually enacting the misguided “reforms” to the budget process now working their way through the House or pursuing the discredited idea that sharp, immediate spending cuts are the best way to boost the recovery.

That leaves it up to the Fed.  Though still subject to sniping from those who believe inflation is a more serious threat than continued sluggish economic growth, the Federal Open Market Committee stated yesterday that it will keep short-term interest rates near zero through late 2014, arguing that “economic conditions — including low rates of resource utilization and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate.”  The Fed may even be prepared to take further action, as the economist Tim Duy observes.

With Congress largely on the sidelines for now, we should be thankful the Fed is not listening to the inflation hawks.  And let’s hope that additional steps are indeed in the cards.