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September Jobs Report: Neither a Conspiracy nor a Game-Changer

The September Jobs Report came out last Friday, arguably the most important economic data being released between now and the November election, and the unemployment rate has finally fallen below the much-discussed 8% threshold, falling from 8.1 to 7.8 percent, coincidentally the same rate as the day Obama was sworn in.

This is undoubtedly good news for an Obama administration that has been looking to recover from the first debate, which a vast majority of viewers believed Romney won. This takes away one of Romney’s go-to planks while on the campaign trail, that unemployment has been above 8% for X consecutive months, and allows Obama to claim that the economy is finally showing signs of recovery.
Some conservatives have even gone so far as to cry foul at the convenient timing of this unexpectedly positive jobs report:

On his Facebook page, Rep Allen West wrote:

Chicago style politics is at work here. Somehow by manipulation of data, we are all of a sudden below 8 percent unemployment, a month from the presidential election. This is Orwellian to say the least

One-time candidate for the Republican nomination and long-time sideshow attraction Donal Trump said on ‘Fox and Friends’:

I don’t believe the number and neither do any of the other people that have intelligence. Because that number came out of nowhere.

While it is true that these numbers help Obama, reverting to conspiracy theories and charges levelled at the non-partisan and fairly transparent Bureau of Labor Statistics unnecessarily clouds the issue, and in many ways shifts the focus to these unfounded, in many ways bizarre claims. There are many things to find fault with in the current employment environment without having to resort to these tactics, and furthermore, many of these ‘theories’ look like a case of sour grapes, where these people are actually upset to see the economy finally show at least some signs of recovering almost four years out from the crisis. This adds fuel to the narrative that ‘Republicans would rather see Obama fail than fix the economy’ and makes the conspiracy theorists seem out of touch.

There are many more factors to the unemployment picture than the headline rate of 7.8%, for instance the civilian employment-population ratio, or the proportion of  the country in the labor force, has fallen sharply since 2008 and has remained at this lower level, although part of this may be due to demographic changes as the older baby boomers near retirement age. This lower ratio would lead to decreases in the headline unemployment rate because it serves as the denominator.

As James Pethokoukis at AEI notes, “The shrunken workforce remains shrunken. If the labor force participation rate was the same as when President Obama took office, the unemployment rate would be 10.7%. If the participation rate had just stayed steady since the start of the year, the unemployment rate would be 8.4% vs. 8.3%”

Also significant in the report was the large jump in the number of people working part-time due to economic reasons, which rose from 8.0 million in August to 8.6 million in September,. These are people working part-time because their hours had been cut back or because they were unable to find a full-time job. While these jobs are without question better than being fully unemployed, they do not constitute a full, sustainable economic and employment recovery, and the fact that they constitute such a large portion of the drop in the headline unemployment rate (these new part-time jobs accounted for 600,000 out of roughly 870,000 new jobs)  mitigates, to some degree, the extent to which this is a ‘surprisingly good’ jobs report.

Caveats aside, and whether you agree with Obama’s policies or not, crafting conspiracy theories directed at a non-partisan agency like the BLS, that shows no real signs of being under political sway, and has one month aberrations similar to this somewhat regularly due to the complexity and uncertainty surrounding their estimates, does little other than distract from the real issue of economic policy and performance.


The Kids Aren’t Alright


The debate season is upon us, and the Presidential election is fast approaching ; pundits, journalists and pollsters are all girding themselves for the month-long gauntlet of unending coverage, spin and speculation.  Amidst all this frenzy, one group remains unmoved. Regardless of who wins, many Millenials will be underwhelmed by the outcome, and their prospects are unlikely to improve.

Millenials have grown up in the midst of the worst economic crisis since the Great Depression;  unemployment was surging to double digits and economic growth ground to a halt just as they were graduating and looking for their first jobs. Fed up with a Bush Administration that had overseen the onset of the crisis, and ballooned the federal debt, Millenials were pivotal in sweeping Barack Obama to victory, breaking his way 52 to 44 percent. He campaigned on a message of change, making it one of the cornerstones of his campaign. He spoke to the youth who felt that politics were dysfunctional, and a new way of doing things was needed. In a 2008 speech, he effectively spoke to this dissatisfaction with politics, saying:  Washington is broken. My whole campaign has been premised from the start on the idea that we have to fundamentally change how Washington works

Scenes of euphoria abounded when he won the election in November, and young people fostered hope that they had helped usher in a new era of politics, and that the recession would soon be a distant memory.

Almost four years later, the day after the first Presidential debate, the picture looks just as bleak for Millenials; disillusionment and  weary resignation have replaced hope and change.In 2009 just before he took office, Obama, correctly, knocked the Bush Administration for ballooning the debt and deficit, and promised to:

 cut the deficit we inherited in half by the end of my first term in office.  This will not be easy.  It will require us to make difficult decisions and face challenges we’ve long neglected.  But I refuse to leave our children with a debt that they cannot repay — and that means taking responsibility right now, in this administration, for getting our spending under control.

We have just finished the fourth consecutive fiscal year of budget deficits in excess of $1 trillion. As this chart from the Federal Reserve shows, debt per capita has  continued to surge under the Obama Administraton  at an even faster pace than under profligate President Bush. Debt per person is now almost $50,000 per person, dashing Millenials’ hopes that he would make good on his campaign promise reduce the future debt burdens on young people

Screen Shot 2012-10-01 at 11.34.53 PM.pngThe exorbitant debt hanging over the economic future of young people would be bad enough on its own, but more bad economic news pours in both domestically and from abroad. The European countries that were pointed to so often as a model by the Obama administration are suffering through an even more serious economic crisis. Elevated levels of government spending and extensive social safety nets, both pursued by the Obama Adminstration in its first four years, have done little to alleviate the burden on European youth, in Spain and Greece, youth unemployment has skyrocketed to over 50% at the same time that those countries are being forced to  cut spending and raise taxes to return to a fiscally sustainable path .

While much lower than Europe, youth unemployment in the US remains stubbornly high, meaning many young people struggle to even find a job and attain financial independence, much less build up the wealth that will eventually be required to pay the ever-increasing public debt.

In search of  increasingly elusive jobs, more and more Millenials are returning to higher education to boost their credentials or wait out the depressed job market. As a result, student loan debt has skyrocketed since the onset of the recession; total student loan debt recently eclipsed the $1 trillion mark, causing many economist and policy experts to view it as the next bubble set to burst. The Obama administration’s  increased focus on making higher education ‘more accessible’ through increased federal aid and grants has coincided with a surge in tuition, but to this point, it not done anything to significantly lower the youth unemployment rate. The result is that  many young people saddled with debt and unable to find a job.

All of this would seem to suggest that young people, disappointed with the economic performance under the Obama Administration and struggling to find work to pay of their high debts, would flock to Mitt Romney and the Republican party in the hopes that they could do a marginally better job at turning the economy around. But due to the nature of our political system, Millenials are forced to take the whole package that comes with each candidate; even if they believe Romney could do a better job of handling the economy, many are turned off by the Republican Party’s increasingly out-of-touch stance on social issues.

While he hasn’t come out in favor of drug legalization and an end to the drug war that places millions of non-violent offenders in prison and costs billions of dollars a year, Obama is certainly more open to a detente in the drug war, of leaving legalization or decriminalization to the states and focusing more on treatment rather than harsh jail sentences. This is in keeping with trends in public opinion. As the table to the left shows, Republicans are far out of step with 18 to 29 year olds on the issue of marijuana legalization: 61 % of this age group think it should be legalized, while only 29% of Republicans feel the same way.

Even more striking is the breakdown of views on gay marriage by age. ‘Defense of marriage’ has been one of the main planks of the Republican platform in terms of social issues, but just as with marijuana legalization and the drug war, Republicans find themselves on the wrong side of  a sea change in public opinion, led by Millenials, 63% of whom favor legalizing some form of same-sex marriage. As the Millenials age, and future generations more supportive of same-sex marriage replace the older generations, Republicans will find themselves on the wrong side of the issue, as they will with many of the social policy issues.

So where is a Millenial to turn? They have to choose between their dissatisfaction with Obama’s economic record and Romney’s unpalatable stance on so many social issues. In an age where they have been given increased access to customization and choice in so many aspects of their lives, like the things they watch through services like Netflix and Hulu as opposed to basic cable, their choices in politics are depressingly inflexible and one-size-fits-all.  Who is there to be excited about? Hope and change has been tried already with disappointing results, and Mitt Romney is certainly not going to inspire any kind of explosion of youthful fervor and hope. Perhaps this is why youth engagement s down so sharply since the last election. Millenials are dissatisfied, or at the least, uninspired by the two candidates that were on the debate stage last night. Young people are much less likely than previous generations to identify as belonging to either party, preferring to self-identify as independent; at least in part because the vast majority of them find areas where they disagree with the major parties’ stances. Political leanings or views aside, Millenials want more choices, more ability to selectively choose a candidate whose views actually align with theirs, instead of just choosing the lesser of two evils between the two major parties as has been done for so long.


Broken Healthcare Promises

The major provisions of the Affordable Care Act, the individual and employer mandates and the Medicaid expansion, are still more than a year away, and their fate hinges in large part on the outcome of the Presidential election a little more than a month away. By design, only a few, mostly popular, provisions have been enacted so far: children are now able to remain on their parents’ insurance plan until their 26th birthday, insurers are prohibited from imposing lifetime dollar limits on essential benefits, and people with pre-existing conditions are made eligible for high-risk insurance. These provisions have indeed proved popular, so much so that Republican nominee Mitt Romney has said he will look into keeping some of these provisions intact should he win.

The uncertainty surrounding the law due to the elections is exacerbated by the fact that no one knows, assuming Obama wins, which states will implement which insurance provisions. States have the option to opt out of setting up a health insurance exchange, and after the Supreme Court Ruling, the option to opt out of the Medicaid expansion as well. A smattering of states have signaled that they will fully implement both provisions, others remain adamantly opposed, while the majority are delaying a decision until after the election in November. To show how muddled the tea leaves are for anyone trying to project the outcomes of these provisions, here is a map of where each state stands on the health insurance exchange

These pervasive uncertainties on different levels make projecting the outcome of the law to 2014, when these major provisions would be implemented, effectively pointless.

This does not mean that some aspects of the Affordable Care Act, or the promises made about it, cannot be judged now.

One of the most divisive issues surrounding the law as it was being crafted was that the significant increase in the government’s role in health care would crowd out private insurance, who would either not be able to compete, or would not be able to feasibly comply with the myriad of new regulations and restrictions. This crowding out would then eventually pave the way for a single-payer, universal health insurance system akin to the ones in Canada or the U.K.

Obama took great pains to allay these concerns, at a town hall meeting in New Hampshire on Aug. 11, 2009, Obama said, “If you like your health care plan, you can keep your health care plan.” After the constitutionality of the law was upheld by the Supreme Court, he again emphasized this point, saying “If you’re one of the more than 250 million Americans who already have health insurance, you will keep your health insurance. This law will only make it more secure and more affordable.”

His reasoning behind this claim was that the law allowed insurers and employees with plans that existed on March 23, 2010 to be “grandfathered” in, meaning they would be exempt from the requirements to offer the new provisions in the laws ‘essential benefits package’.  The problem that arises for these plans is that the insurers are unable to make needed changes to their plans to control increasing costs, lest they lose their grandfathered status and be forced to add a raft of new benefits; on the other hand,  if they keep grandfathered status by not making changes, the costs of these plans will balloon, quickly becoming unaffordable and forcing those consumers to look elsewhere for health insurance.
The effects of this bind can already be see more than a year before the major coverage provisions of the law come into effect. Insurers are recognizing that these plans will not be sustainable in the long term, so they are cutting their losses and not offering them anymore. According to Kaiser’s 2012 Employer Health Benefits Survey, the proportion of insurers that offered at least one of these grandfathered plans dwindled from 72 percent in 2011 to 58% in 2012,while the percent of workers enrolled in grandfathered plans plunged from 56% to 48%. A significant amount of people are not able to keep their previous insurance even before the law is fully implemented, either due to increasing costs of their grandfathered plans or their insurers discontinuing the plan.

The other main objective of the Affordable Care Act, besides expanding insurance coverage, was to slow the growth of its cost and make it more affordable. In a 2008 Town Hall, Obama claimed that under his administration:

we’ll lower premiums by up to $2,500 for a typical family per year… And we won’t do all this twenty years from now, or ten years from now. We’ll do it by the end of my first term as President of the United States.

Unfortunately for Americans, this promise was not kept either.

Instead of decreasing by $2,500, family premiums have actually grown by almost $3,100 under Obama’s administration.

Granted, premium prices are subject to a multitude of factors outside of the President, or government’s control; but Obama made a direct and specific promise,  and this ‘cost containment’ was one of the main talking points pushed by proponents of the law as they ushered it through Congress, that somehow the smattering of provisions implemented before 2014 would reverse the seemingly inexorable trend of premium cost growth.

While it is certainly too early to know how the major provisions of the law will play out, or even if they will ever be implemented, it is clear that to this point, the Administration’s promises about the Affordable Care Act have not been kept, and that the law is far from a panacea that will cure what ills our health care system.

47 Percent

Mitt Romney’s remarks on the 47 percent of American who of the country “who believe that they are victims” has dominated the news cycle since the video leaked, with some  pundits are claiming that the leaked comments are the death knell of the Romney campaign. Many on the left are quick to point out that many people receiving some form of government aid are retirees, students trying to pursue higher education, or veterans on disability, these people hardly resembling the less-than-charitable light Romney was trying to cast them in. But both Romney and his detractors miss the main point of the recent surge in government dependency.


It is certainly true that, as Romney claimed, 47 people paid no federal income tax, and equally troubling, 49 percent of Americans live in a household where somebody is dependent on federal assistance.

Romney claims these people  “are dependent upon government . . . believe the government has a responsibility to care for them . . . that they are entitled to health care, to food, to housing, to you-name-it.” He views these ‘takers’ as a monolith, alike in their dependency and belief in the power of big government, but it does not necessarily follow that a retiree receiving Social Security benefits would believe in a bigger government role in promoting affordable housing, or that a veteran receiving disability payments would support a further surge in farming subsidies. It is not the case that should fifty percent plus one Americans receive some form of government aid, they will quickly move to take everything that in the makers vs. takers conflict he portrays. The danger is that on each of these myriad of policy issues, be it Social Security, student loans, agricultural subsidies, that the recent explosion in benefit amounts and number of recipients will tilt the balance in that particular policy, a result of the diffuse costs and concentrated benefits in each of these programs. A young farmer cares exponentially more about farm subsidies than he does about urban housing, he might not even support it. When Romney throws together everyone that receives government assistance into one block, he fails to recognize where the actual danger the recent surge in these government programs represents.


For each of these programs, as the concentrated benefits become greater, and the benefit rolls swell, the tipping point will be reached on a myriad of front. The interest, power and influence of these benefit groups will continue to increase in proportion to their ranks and the amount money at stake. Take the increase in spending and enrollment in SNAP, or food stamps. There remains a disagreement as to whether the effects of the recession are the primary driver of the growth of SNAP, or whether a loosening of eligibility requirements and increase in benefit generosity explain the surge in food stamp rolls over recent years; regardless of the cause, the swelling of the number of beneficiaries and the amount of money the program commands, mean that any attempts to change the program in the future to rein in costs will be met with entrenched resistance. This resistance will only grow stiffer as more beneficiaries are added to the rolls.

The fiscal health of America, already on life support due to the new normal of trillion dollar deficits and the mounting debt, will face death by a thousand cuts, as each of these interest groups passes a tipping point and becomes entrenched enough to resist any reasonable or necessary calls for reform. Demonizing aid recipients, or reducing them to some other, serves merely as an unnecessary and dangerous distraction from the real problem; whether its inevitable demographic changes as in Social Security, effects of the recession and increased benefit amounts like in SNAP, or whatever the cause, the problem is that fiscally responsible taxpayers will soon be overwhelmed on a multitude of fronts by disparate interest groups benefiting from different government programs just as their need to cut spending is the most dire. Rather than denigrate these people who receive government aid, Romney must make the case that specific programs must be reformed before their individual tipping points are reached, before the benefiting group in that policy issue is so numerous, and the benefits so generous, that they will overwhelm any attempt to make any changes. Romney, however inarticulately, may have stumbled onto something that can resonate.

Scylla and Charybdis: The Greek Choice

In the Odyssey, the eponymous hero faces a choice between two threats when navigating the Strait of Messina. The six headed monster Scylla and the deadly whirlpool Charybdis were located close enough to each other that evading one meant facing the other.  Passing too close to Charybdis meant the entire ship would likely be sunk, while some men would certainly be lost on the path through Scylla. The uninviting choice facing Greek voters going into the election this past weekend reflect the situation Odysseus faced; attempting to navigate the least harmful path forward with unavoidable danger looming. The two leading parties embody this uninviting choice for the Greeks; fear of a messy exit from the Euro against a desire relief from the harsh, prolonged austerity that has been taking its toll on the Greek people since the onset of the crisis. Radical anti-bailout party Syriza had vowed to tear up the previously agreed upon austerity package required by the troika, an action that would almost certainly lead to a rapid exit from the Euro, setting off a new crisis that could have wide-ranging and devastating consequences. A New-Democracy victory offers no similar threat of catalyzing the next crisis to ensnare Europe, they have stressed that a vote for them is a vote to stay in the Euro and not turn their back on the agreement with the troika.


Six weeks after a previous election failed to produce a governing coalition, worries among European leaders simmered that upstart party Syriza would ride the momentum from their unexpectedly strong showing in the previous round to snatch victory from the pro-bailout establishment. Center–right party New Democracy and their leader Mr. Samaras emerged victorious with 29.7% of the vote, about 3 percent more than Syriza and enough to attempt to form a coalition government. European leaders and Euro supporters hailed the results as a triumph. Mr. Samaras touted the win as a ‘victory for all Europe’ and President Obama hailed the results as a ‘positive prospect’ for Greece.

The celebration was short-lived, as the temporary exultation at narrowly avoiding a new catastrophe quickly gave way to sober realization. With the New-Democracy victory, Greece has managed to evade the Charybdis of a Syriza win, but while Greece avoided causing a new crisis, the election did nothing to solve the pervasive problems they have been struggling with since they were first locked out of capital markets in 2008. The day after the election, financial markets initially rallied on the news of the election results, but within hours, Spanish borrowing costs reached new euro-era highs and Italian bond yields were driven above levels considered sustainable. This continues the trend from the Spanish bank bailout, where the announcement of a $125 billion injection into troubled Spanish banks only calmed the markets for less than five hours before the upward pressure on the borrowing costs of Spain and Italy continued inexorably. While n the past, bailout announcements or positive election results would placate the market until the next crisis flared up, now the market panic returns the same day, as investors recognize that neither election results nor the next in a seemingly endless line of bailout announcements will solve the deep structural problems plaguing the Euro, only comprehensive reform could. Regardless of who won this past Sunday, Greece still faces a rigid labor market with high levels of unemployment, unsustainable levels of national debt and a crippling recession with no clear path back to prosperity.


In the more immediate sense, New-Democracy and the governing coalition that it looks likely to form with Pasok and Democratic Left faces the problem of securing the rest of the previously promised bailout funds the country needs to function while simultaneously trying to renegotiate the conditions to soften some of the austerity measures required to receive the funds. They will be hindered in their efforts by Syriza’s refusal to join the coalition, as the Syriza-led opposition will fiercely oppose continuing the bailout deal as it is, and will put increasing amounts of pressure on the governing coalition to renegotiate the deal. The list of measures that Greece needs to comply with under previous bailout agreements is long and substantial. According to the much discussed IMF Memorandum of Understanding “prior to the first disbursement of the new programme, the Government adopts the following measures, through a supplementary budget.” These measures amount to about €3bn, or 1.5% of GDP and almost 7% of GDP in additional measures will be needed to attain the 2014 fiscal target. Some EU officials had indicated that it might be possible to relax some of the deadlines, or soften some of the requirements, but German Chancellor Angela Merkel recently told reporters at the G-20 summit: “The important thing is that the new government sticks with the commitments that have been made, there can be no loosening on the reform steps.” It remains to be seen who will wield more leverage in the forthcoming negotiations between the newly formed government and the European powers that be, but significant changes to the agreed upon measures are far from a certainty.


The Greeks have managed to avoid plunging into a new crisis, evading the Charybdis of a euro exit, but there is still much pain an uncertainty ahead. Odysseus said that what he witnessed following his choice between Scylla and Charybdis was ‘the most pitiable sight’ he saw in his entire journey home. Hopefully with their version of Scylla and Charybdis, inescapable choice between the certain pains of austerity and the catastrophe of a likely Euro exit, the Greek people can avoid such a harrowing outcome.

We Can’t Wait (unless its politically convenient)

There is no doubt that President Obama has been forced to deal with intense political gridlock in the Congress, and at some points it has seemed that the country would be better served if Republicans would not be so stridently obstructionist, and more willing to compromise. This is not to leave Obama and the Democratic free from blame, often their strategy has seemed to be to propose things that are designed to score political points with their base and have no chance of passing, content in the knowledge that they can blame gridlock and Republican obstruction for a lack of tangible results. It is in this state of affairs that President Obama’s American Jobs Act has been mired in the divided Congress. The Act has not been passed, and none of the substantial portions that have been broken off have had any more success, save for a small provision promoting the hiring of veterans. In light of the bleak prospect of having any legislative victories, and feeling increasing pressure in the ramp up to 2012, Obama has been touting a series of unilateral actions that his administration says will help the middle class and the American economy. 

These executive initiatives have ranged from mortgage refinancing, to curbing drug shortages, to slashing funding for federal travel, government-issued cell phones and excessive document printing and putting  limits on purchases of “swag” – the clothing, mugs, plaques and other promotional items that agencies acquire with taxpayer money.

 The steady drumbeat coming from the Administration during this time has been “We Can’t Wait”

The catchphrase of this recent initiative implies that the President can no longer wait for a divided Congress to act, and that he will do everything in his power to address the struggling economy and the serious problems Americans are facing.

While Obama uses sweeping rhetoric in carefully crafted public appearances to promote the benefits of his urgent plans, close inspection of the proposals reveals that they will have limited effect in ameliorating widespread socioeconomic woes without Congress’ help.

The new White House order to the FDA addressing drug shortage, for example,

simply “enhances” and “amplifies” steps that are already being taken, officials said.  The agency will hire five new staffers to work on drug shortage issues. It sent a letter to drug companies reminding them to report the discontinuation of drugs

Another initiative dealing with the increasingly important student loan bubble would allow some student borrowers to cap their monthly loan repayments at 10 percent of their discretionary income starting next year, two years earlier than previously expected. It will also forgive remaining debt on federal loans after 20 years. The plan would also help students with multiple federal student loans consolidate their debt at a lower interest rate. The administration says the repayment cap will help 1.6 million students lower their monthly payments, and 6 million students consolidate their lowers under a lower rate

This initiative would seem to be an effective way of circumventing a slow Congress to provide real relief to young Americans, and to begin to address the next looming crisis, mounting student debt. However, like the other initiatives, the practical benefits of the student loan order wilt under closer inspection. As David Indiviglio at The Atlantic observes

the program would save the average eligible student less than $10 per month. Furthermore, the new loan repayment cap only applies to current students who have taken out loans in 2012 and beyond. As a stimulus measure hoping to help the broader economic recovery, this program’s impact will be extremely small in 2012.

This raises questions as to the true intent of these new initiatives, whether the true aim of the new ‘We Can’t Wait’ initiative is to bolster flagging public opinion of his job performance and policy agenda while contrasting it with political gridlock in Congress. All of this takes place in the run-up to the 2012 elections, and it would appear the impending campaign is creeping more and more into the consciousness of the Administration.

Obama’s decision to punt on the controversial XL pipeline until after the elections is the most telling  indication that these initiatives are made motivated by political considerations rather than an actual desire to help the struggling economy finally recover.

While many of the estimates of the economic impact of the XL pipeline are sponsored by the industry and are thus likely to overestimate the amount of jobs the pipeline would generate, there is no doubt that the pipeline would have a greater economic impact than any of the initiatives in the ‘We Cant’ Wait’ narrative. There are some valid environmental objections to the pipeline, and if the President had decided to deny the permit outright in light of these concerns, he could have made a coherent case that the benefits to the economy were outweighed by negative environmental effects, and whispers that everything is decided with an eye towards 2012 would have abated. But to punt the issue and delay a decision until after the election, when the permit has been pending for years, smacks of a President more concerned about potentially alienating environmentalist votes than with doing anything he can to help the economy recover. It seems that a more truthful, if less inspiring, slogan for the recent initiative is  ‘We Can’t Wait, Unless it is Politically Convenient’.

The Quagmire of Temporary Payroll Tax Cuts

Lost in the shuffle this weekend was a moment in the XXX Republican debate where none of the candidates expressed any willingness to even consider letting the two percent temporary payroll tax cut expire. The tax cut was approved as a temporary measure last fall. The law cut the tax paid by employees, which supports the Social Security program, to 4.2% of the first $106,800 of a worker’s income from 6.2%.

 Each candidate in turn claimed that they would not even think of raising taxes in the middle of a recession, which is what they would consider allowing the payroll tax cuts to expire. The cuts to the payroll tax rates were designed to allow struggling individuals keep more of their income in a flagging economy, and intended to boost consumer spending and bolster the countries attempts to drag itself out of the recessionary doldrums.

            The logic of the payroll tax cuts seemed straightforward; lowering the payroll tax would likely provide a small boost to growth by increasing the amount of cash workers have to spend, putting an extra $1,000 in the average worker’s pocket this year. The resulting extra spending would then prompt more hiring to meet the extra demand for goods and services, so in this line of argument, the payroll tax cuts would combat stubborn unemployment and boost growth.

            As many proponents of Keynes know, the most effective stimulus is temporary, timely and targeted. The payroll tax cuts were enacted towards the end of 2010, months and months after the initial shock of the recession, so they were not timely by any stretch. Nor are they targeted, everyone, even the very wealthy, benefits from a payroll tax cut; the only groups not benefiting from the cut are the unemployed and the retired. By their nature, temporary tax cuts would appear to be temporary, and at least fulfill the first criteria of effective stimulus, but the reticence demonstrated by the Republican candidates to even consider reverting the rates to their previous levels, and  President Obama’s proposal to cut the rate by and additional one percent, these payroll tax cuts are not really temporary either. 

As the figure shows, personal income expenditures got no real significant stimulative effects from the payroll tax cut, which was originally implemented in December 2010. Consumption of durable goods spiked to some degree in January and February, perhaps in response to the payroll tax cut, but then consumption of durable goods flatlined, so total consumption has not increased.

This graph shows a similar story, personal consumption expenditures were increasing steadily until 2011, and the introduction of the payroll tax cuts did not result in a spike in consumer spending.

On the opposite end of the ideological spectrum, Milton Friedman won his Nobel Prize in Economics in large part for his work on the permanent income hypothesis, which stated in a much simplified form, that consumption choices made by  individuals are determined not by current income but by their longer-term income expectations. The key conclusion of this theory is that transitory, short-term changes in income have little effect on consumer spending. Friedman concluded that there was no correlation between transitory effects in income and consumption and their permanent counterparts. In order to be a factor in consumption decisions these previously transitory effects would have to be translated into effects lasting beyond the immediate horizon, and he determined this threshold to be three years. If the effect was extended out this far, and there was no uncertainty, then the effect would become part of  permanent income. While in some ways it now seems like an inevitability that no one will seriously attempt to revert payroll tax rates to their previous levels, there is still far too much uncertainty, especially over a longer time horizon, for these effects to register in the permanent income component in Friedman’s system. As a result, Friedman would conclude that people would not adjust their consumption in response to the temporary payroll tax cuts, and as a result, there would no significant stimulative effect

The payroll tax cuts are now in the nebulous realm, a no man’s land where neither Keynes nor Friedman would consider them to be effective. The cuts are no longer temporary as most economists and politicians expect that they will be extended, but neither are they permanent or certain; as the disappointing supercommittee and the debt ceiling situations showed, partisanship and gridlock can prevent expectations from becoming a reality. In the end it is a situation pervaded by uncertainty and achieving almost none of the intended results while posing a serious negative externality to the largest government program in the world.

Payroll taxes finance almost the entirety of Social Security, and the payroll tax cuts accelerate the insolvency of Social Security. The two percent payroll tax cut has already caused Social Security to take in $120 billion less in revenue, which is especially troubling given that Social Security is now, six years ahead of projections, running an annual cash flow deficit. President Obama has promised that Social Security as a program will not see revenues decline as a result of the payroll tax cuts, meaning that funds will be shifted from general revenues to Social Security, to the tune of $120 billion this year. This is not a tenable situation, because the government already spends much more than it takes in, it has to borrow this money to fund Social Security, contributing to the ever-expanding debt and annual deficits.

This is in addition to the already projected cash flow deficit that Social Security is running, and although in the abstract that portion of the shortfall is paid out of the Trust Fund, in reality the government has to pay the Trust Fund back that money that has already been spent by further borrowing. If the cost of redeeming the money in the Trust Fund is included, Social Security could add more than $300 billion to the annual deficit.

The financial outlook for Social Security would be even worse of Obama’s proposal to further slash payroll taxes is passed. This further one percent reduction, with another measure that would lower the payroll tax rates businesses pay if they met certain criteria, would lead to a $289 billion revenue shortfall for Social Security from 2012-2013.

The payroll tax cuts undoubtedly put more money into the pockets of working individuals, and it did result in some job creation, to a degree. However, further analysis shows that ultimately it is a stimulus of dubious effect, and it makes the Social Security problem much worse, and as the Republican debate showed, once these cuts are enacted, it is exceedingly difficult to let them expire.

Issues not Accusations

         Washington has never been the picture of harmony, but even by its own standards, the level of animosity between Democrats and Republicans has reached a fever pitch in recent years. Each side routinely vilifies the other. Accusations abound that the other side is putting party before country, that they do not have America’s best interest at hear, and that they are instead driven by motives of a more selfish and sinister nature. The vitriol found on Capitol Hill is far more abundant than jobs, providing cold comfort to the American people who just want to see solutions. Both parties have been quick to decry the other for these attacks, but neither side has any qualms about leveling such accusations when they decide the occasion calls for it.
      All of this only serves to shift the conversation away from the issues and working towards potential solutions, placing the focus instead on finger pointing and shouting across the aisle. These lines of attack aim to demonize the other party in the eyes of the American public, but they result in neither party being able to recognize any potential legitimate concerns and critiques raised by the opposition; in this atmosphere, anyone who disagrees must simply not have the
right motives and merits no response. At its core, these vituperative attacks are a tactic to avoid addressing substantive critiques to their ideas.

      Once Republicans have established that Democrats are driven only by their insatiable desire to expand the scope and size of government and not by concern for the welfare of the American people, they no longer have to explain the reasons they disagree with the initiatives of the Democrats based on the merits of those policies alone. After Democrats
determine that Republicans are consumed only with the aim of beating Barack Obama and retaking the White House in 2012, they do not have to deal with any serious concerns raised regarding their policies. By dismissing the other party, each side avoids having to engage in serious debate, both sides are talking to an empty room. The result is little substance and few results.


      At the end of the day, both parties come off as hypocritical and petty; leading many Americans to conclude that neither party is really serving their best interests. The constant drumbeat of vilification and accusation inspires little confidence in Washington, and could explain some of why Congress’ approval rating is mired near historically low levels. Ordinary Americans are tired of the back and forth, they want to see Congress focus on the issues and finding solutions.

      A good rule of thumb for these wayward politicians would be to never assume that anyone is motivated by hidden, malicious motives; thatthey instead pursue their agenda because they really believe it is in the best interest of Americans. To continuously suggest otherwise is an insult to this country and to the Americans who elected them.
      All of this does not mean that there will suddenly cease to be bitter divides on the Hill, but it could mean that the focus would at least remain on the issues, and trying to find solutions.

Tax Reform Proposals Distract from the Real Issue: Reining in Government Spending

Historical government spending in the United S...

This past Tuesday, Rick Perry unveiled his tax reform proposal in an effort to regain some of the momentum his campaign has lost in recent weeks. It is the second such plan to come from a Republican candidate, joining Herman Cain‘s much discussed 9-9-9 plan.

Perry’s flat tax proposal would drastically change the current tax system, with the main component being the choice between a flat tax rate of 20% or their  rate in the current system. The new flat tax  would preserve mortgage interest, charitable and state and local tax exemptions for families earning less than $500,000 annually, and it increase the standard deduction to $12,500 for individuals and dependents.

So far, reactions have been mixed. Grover Norquist and the Wall Street Journal reacted favorably to the proposal, while the National Review was less enthused.

There are aspects of the plan that are appealing: there is a pretty wide consensus that the current tax code is overly complex, and has too many loopholes and exemptions that distort economic decisions.

Like Cain’s plan, Perry’s loses some of its seductive simplicity upon closer scrutiny.

One thing that is certain, the plan has reinvigorated a fading Perry, unleashing a deluge of much-needed media exposure, and doing something to address the oft-heard critique that he was light on policy specifics.

The most troubling aspect of this tax reform is not even directly related to the proposed changes to the tax code. It is the same specter that haunts Herman Cain’s 9-9-9 plan. Both candidates, in introducing their dramatic proposals that would overhaul the much-maligned tax code, have shied away from making any serious or specific proposals to rein in government spending.

Over the past 50 years, the marginal tax rates have fluctuated, from a top marginal tax rate of 91% as late as 1963, to the current top rate of 35%. In all that time, current recession excluded, tax revenues have fluctuated around 18% of GDP, showing little responsiveness in changes to the tax rates.

While both of these proposals would throw out the tax rate, and conceivably raise higher revenues, most analyses of the two proposals show them raising significantly less, raising questions as to how the two candidates would carry out their proposals without raising the already burdensome annual budget deficit.

All of this serves only to distract from the real issue, which is not the tax system, inefficient as it might be. but spending. Federal spending in 2011 will be around 24% of GDP, and the Congressional Budget Office generously projects that it will stay in this 23-24% of GDP range for the next decade, although the recent trend in government spending since Clinton suggest it is far more likely that the percentage will continue its steady march upwards unless serious steps are taken to rein it in.

It remains unclear what steps the any of the aspiring candidates would take to address this monumental gap between the historic 18% revenue and current 24% spending, and it is not hard to see that a recurring annual deficit of 6% is in no way sustainable, especially with the high level of debt the US is already facing.

Perry at least acknowledges the issue of runaway government spending, albeit he does not propose anything definitive or specific, saying only that his plan will seek:

a clear goal of balancing the budget by 2020. But that growth is what will get us to balance, if we are willing to make the hard decisions of cutting… We should start moving toward fiscal responsibility by capping federal spending at 18% of our gross domestic product, banning earmarks and future bailouts, and passing a Balanced Budget Amendment to the Constitution

While it is a positive sign that he seems to recognize that controlling government spending, and that there will be hard decisions in terms of cuts, but he unsurprisingly demurs from making any of these hard decisions in his plan.

Milton Friedman concisely articulated the correct response to tax reform proposals, explaining that while the intent of these reform was admirable, and often they had good content: 

the big problem is not taxes, the big problem is spending. The question is, “How do you hold down government spending?”

Unfortunately, at least for now, we will all have to wait to find out the answer.


Herman Cain’s 9-9-9 Plan: Neither Simple nor Desirable

Herman Cain

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Herman Cain is the most recently anointed top-tier candidate who will challenge Mitt Romney for the Republican nomination. His Florida straw poll win and a string of solid debate performances have seen him surging in the polls, and he is consistently polling second.

The driving force behind Cain’s rise has been his tax reform plan, the drumbeat of 9-9-9 can be heard in most of his debate answers, and nearly all of his interviews and speeches.

Part of the appeal of his plan, aside from that it was a (relative to the other candidates) concrete plan for tax reform, was its apparent simplicity. The plan seemed so simple that Cain was even able to reduce it to a soundbite, 9-9-9. Cain even sought to capitalize on his plan’s seeming simplicity by contrasting it with Romney’s 59 point economic plan, dismissing the former Governor’s plan as too complex. In reality, the ‘9-9-9’ plan is not nearly as simple as Mr. Cain would have you believe.

The 9-9-9 plan is actually only an intermediary step in Mr. Cain’s plan for tax reform. The first step would actually be to reduce individual and business taxes to a statutory maximum of 25 percent from their current maximums of 35%.  Mr. Cain would also Mr. Cain would eliminate all taxes on profits earned by multinational corporations outside the United States and abolish all taxes on capital gains.

Mr. Cain would put these three measures  into effect immediately without offsetting the lost revenue, with the stated claim of promoting economic growth.

Only then would step two of his tax plan be implemented, the payroll tax would be eliminated, and the vaunted 9-9-9 plan would be put into effect.

The work at this point, is still not over. In the next and final phase, Cain would call for the quick exit of the 9-9-9 plan and introduce  a fair tax at a rate of 25-30%.

So the seemingly simple plan, the one that fits so neatly into the 9-9-9 soundbite, is much more complicated when Cain’s entire tax reform plan is drawn out. It would require two transformational tax reform laws, presumably in the space of four years. The monumental nature of this task is hard to convey, getting to the intermediary 9-9-9 phase would require the most comprehensive tax reform seen in recent times.

When asked how he would attempt to push through these tax reforms, a task that would be Herculean even if the GOP controlled one of the chambers of Congress, Cain claims that the American people will be so strongly in favor of the 9-9-9 plan that they will put overwhelming pressure on their representatives to pass the reforms.

This seems to be at odds with the situation in reality. As Bruce Bartlett points out regarding phase 1, where the maximum corporate and personal tax rates are lowered and the capital gains tax is eliminated:

No mention is made on the site of a tax cut for those now in the 10 percent, 15 percent or 25 percent brackets. This means that the only people who would get a tax rate cut are those now in the 28 percent, 33 percent or 35 percent brackets. According to the Joint Committee on Taxation, only 4 percent of taxpayers pay any taxes at those rates… [and] two-thirds of all capital gains are reported by those with incomes over $1 million

It is hard to see the logic behind the claim that the average American is going to clamor for phase one of the plan that would largely benefit the most wealthy Americans, while not even remaining revenue neutral at a time when the country is running up some of the largest deficits in its history.

The 9-9-9 plan itself hardly leads one to think that the citizen body will be so in favor that it would bring so much pressure on legislators that they would be forced to pass it. The burden of taxation would be increased on the vast majority of lower-income Americans under the new plan. As many politicians on the right are fond of pointing out, 47 percent of  Americans pay no federal income taxes, and the poorest are not liable for payroll taxes either, as when income is low enough, the earned income tax credit offsets this obligation as well. These Americans would all see their tax burden rise substantially, while wealthier Americans would see a lower effective tax rate. Value judgements of whether ensuring that all Americans pay some taxes is wise aside, it is illogical to think that they will be in favor of it. Mr. Cain’s plan would face nearly insurmountable odds in getting any of the phases passed.

The multiple phases also raises the question as to whether even those in favor of 9-9-9 or the fair tax would support the initial phase, what would happen if after the maximum tax rates were lowered, the next phase of reform that would usher in the 9-9-9 plan was forestalled, and we were left with a system taking in drastically less revenue while not lowering the tax burden for the poorest Americans.

More questions arise regarding the tax reforms effect on other aspects of American society. What will fund the entitlement programs like Social Security and Medicare in each phase of the plan? How does Mr. Cain explain his support of the Chilean model for Social Security, in which younger workers would be able to opt out of Social Security and its payroll taxes in favor of personal savings accounts, if there is no longer a payroll tax to opt out of? Would younger workers of my generation pay something like 9-9-7.5? How can he in any way that later Presidents and Congresses will not simply raise the rates, causing the plan to become the x-x-x plan with ever-increasing rates?

A closer analysis of the 9-9-9 plan leads to many more questions than it answers. One thing is for certain, the surface simplicity of 9-9-9 quickly melts away under the glaring light of closer scrutiny.