Bernstein on Strengthening the Middle Class

February 1, 2012 at 5:24 pm

Testifying before a House Education and Workforce Committee hearing today on “Expanding Opportunities for Job Creation,” CBPP Senior Fellow Jared Bernstein outlined policies to strengthen the middle class.  Here’s an excerpt:

While the economy is improving and unemployment is slowly coming down, at current growth rates, it will take many years to reach full employment.  The following measures can help build on the momentum we have and accelerate the recovery:

  • Extend the payroll tax holiday and unemployment insurance. Policy makers of both parties have widely agreed on the need to extend payroll relief through the end of the year; failure to do so would add to the underlying fragility of the nascent expansion.
  • Invest in infrastructure investment. As part of the American Jobs Act, the President proposed a national program to repair and modernize the nation’s public schools and community colleges.  This plan is now a legislative initiative called FAST — Fix America’s Schools Today — soon to be introduced in both chambers.  FAST addresses three big problems: 1) the backlog of maintenance repairs in strapped school districts across the nation, 2) the high unemployment among construction workers and other laborers who do this type of work, and 3) the energy inefficiency in many public schools where billions of taxpayer dollars are wasted through bad roofing, aging boilers, and poorly insulated windows.  I urge legislators to give this idea a close look.
  • Manufacturing policy. In his State of the Union address, the President presented some ideas, including tax incentives and trade enforcement measures, to help incentivize the insourcing of manufacturing work in America.  In fact, manufacturers have added over 300,000 jobs over the past 21 months, and anecdotally, some producers say that perhaps they have overplayed the outsourcing idea and are interested in producing closer to where they sell (rising transportation costs and narrower international wage differentials may also be in play here).

    In this regard, policy makers could help tap this development by closing international tax loopholes that incentivize multinationals to build factories abroad.  The President’s most recent budget, recommended to the so-called super committee in September, proposes $110 billion in loophole closures that would both level the playing field for domestic manufacturers and help relieve our fiscal situation.

    Trade enforcement, including actions against countries that manage their currencies to artificially support their exports and block our imports, is another essential piece of this puzzle.

    Note that these measures simply level the playing field and are in no sense protectionist — they do not provide unfair advantages to American firms nor do they block imports.

  • Skills enhancement. This committee has a long history of interest in policies to ensure that the skills of American workers match those demanded by today’s employers.  Ranking Member Miller’s Pathways Back to Work bill supports a subsidized employment program targeted at unemployed adults, modeled on a successful Recovery Act program that employed over 250,000 workers in 2009-10 (TANF Emergency Fund).  This bill also provides work-based job-training for the long-term unemployed and summer jobs for younger workers.

    President Obama also stressed the importance of workforce investment through what is typically called “sectoral employment strategies.”  As opposed to generalized training that too often leaves participants unprepared for actual jobs, sectoral strategies link trainers, often through partnerships with community colleges, with local employers who provide granular information about future demand needs.  Research by Georgetown University professor Harry Holzer shows these programs to be far more effective than traditional training programs that are too often detached from what’s happening in local labor markets.

  • Improving workers’ bargaining power. As with international trade and taxation, the union organizing playing field is badly tilted against those who would like to exercise their right to collectively bargain.  A recent rule change by the National Labor Relations Board will help workers who’ve petitioned to form a union to have a more timely election.  In a climate where some employers who oppose unions can and do block elections with impunity, this new rule removes some of the above-noted tilt.

Click here for the full testimony.

Video: Jared Bernstein Answers Questions from His Readers

January 31, 2012 at 4:20 pm

Jared responds to questions from readers including:

  • “To what extent is inflation being driven by US policy as opposed to things beyond our control?”
  • “How will we know when we have a full self-sustaining recovery?”
  • “How and if do private equity firms contribute to the economy in terms of creating jobs and fostering economic growth?”

Rankings Say Little About States’ Real Business Climate

January 31, 2012 at 3:48 pm

If someone told you a city’s average temperature but not how much it rains there, how would you know whether you liked its climate?  The Tax Foundation’s annual ranking of states’ “business tax climate” is similarly lacking.

In the Tax Foundation’s scale, how a state compares to other states starts and ends with its taxes — generally, the lower the better.  But tax levels don’t tell you if the schools are good, the transportation system is state of the art, or communities are safe.  All of those, not just taxes, determine a state’s economic fortunes — as this study from the Federal Reserve Bank of Cleveland on the importance of education shows.

And since schools, roads, and other necessities cost money, the ranking actually rewards states that don’t invest in what makes them attractive places to live and work.  The Tax Foundation this year gave its top ranking to Wyoming, a state with not a single Fortune 500 company.  If the rankings were meaningful, the streets of Cheyenne should be crawling with CEOs.

Peter Fisher of the Iowa Policy Project, whose book “Grading Places” shows why rankings like these are suspect, points out that the Tax Foundation study doesn’t even accurately report the actual amount of taxes that businesses pay in a state:

Rather than measuring what businesses actually pay, [it] instead focuses on selected characteristics of the tax code while ignoring significant features.  Results differ wildly from a ranking based on what businesses pay in many cases.

As a result, “In some cases, lower taxes actually produce a worse score” in the Tax Foundation rankings.

Fisher concludes, “What this annual release offers is, at its core, an indefensible mish-mash of ‘Stuff the Tax Foundation Doesn’t Like,’ which should be the title.”  He’s right.

Video: Jared Bernstein and Chye-Ching Huang Discuss Capital Gains Taxes

January 31, 2012 at 11:22 am

“There are lots of good reasons to get rid of” the preferential tax treatment of capital gains,
Chye-Ching Huang tells Jared Bernstein in this video.

She notes, for instance, that “at the same time that capital gains income has been growing really rapidly, and growing at the very top of the income distribution, we have been cutting the rates. That is one of the major reasons why the tax system hasn’t been doing as much to push against income inequality as it used to.”

Chye-Ching and Jared discuss what capital gains are and the tax advantages they receive compared to ordinary income.

Bill for Inadequate Unemployment Insurance Taxes Now Coming Due in Many States

January 30, 2012 at 5:29 pm

Businesses in 20 states must make the first payment tomorrow on about $35 billion that these states have borrowed from the federal government in recent years to help pay unemployment insurance (UI) benefits.

18 of 20 States Starting UI Loan Repayments Had Inadequate Reserves When Recession Hit

Most of this borrowing happened because many states kept the business taxes that fund UI benefits too low before the recession, leaving their UI reserves ill prepared for an economic slump.

The U.S. Labor Department recommends that states have enough reserves to cover a year’s worth of UI benefits in a typical recession.  When the recession hit in December 2007, 18 of the 20 states whose first loan repayments are due tomorrow didn’t meet that standard.  Most weren’t even close:  13 of these states had less than half the needed reserves (see graph).

The only states among these 20 that had adequate reserves but still had to borrow from the federal government were Florida and Nevada, both of which were hit exceptionally hard by the bursting of the housing bubble and subsequent economic fallout.

After two years, states that have borrowed to pay UI benefits must start repaying the principal through higher federal UI taxes on their employers.  (Employers ultimately pass on the cost of UI taxes to workers through lower wages.) The taxes keep going up each year until the loan is repaid.

In addition to the 20 states that start repayments tomorrow, Indiana, Michigan, and South Carolina started repayments in 2010 or 2011, while Arizona, Delaware, Kansas, and Vermont will need to make their first payments next year unless they repay their loans in full by November.  Fifteen states didn’t take out any federal loans. (The state loans have nothing to do with the fully federally funded program providing UI benefits for workers whose state UI benefits expire, a program slated to expire at the end of February.)

States whose UI reserves proved inadequate in the last recession need to revisit their UI tax policies to ensure that they are better prepared for the next one.  UI has played an important role in creating jobs and reducing poverty in the last few years; diminishing its power in future recessions would be a step in the wrong direction.