Jeff Madrick

Roosevelt Institute Senior Fellow and Director of the Rediscovering Government Initiative

Recent Posts by Jeff Madrick

  • America Can Attain Full Employment with a Bold Approach to the Jobs Emergency

    Apr 9, 2014Jeff Madrick

    A new report from the Rediscovering Government Initiative lays out 15 ways the government can create more and better jobs starting right now.

    A new report from the Rediscovering Government Initiative lays out 15 ways the government can create more and better jobs starting right now.

    After five long years, the economy has at last produced enough new jobs to compensate for the 8 million lost in the Great Recession of 2009. But in that same period some 7 million more Americans reached employment age, and we have only produced about half the jobs we need to keep up with population growth. To make matters worse, the jobs created during the recovery pay on average much less than those lost. Yet rather than pulling out all the stops to create more and better jobs, too many politicians and economists tell us we can’t move too quickly. They cite limitation after limitation: inflation fears, budget deficits, skills mismatches, and so on. Americans deserve better than this defeatism. We deserve bold action.

    In a new report, A Bold Approach to the Jobs Emergency, the Bernard L. Schwartz Rediscovering Government Initiative offers fifteen ideas that could get us back to true full employment and at the same time build a foundation for rapid economic growth in the future. We are demanding a full-court press to recreate the economic opportunity that America once offered. We emphasize some ideas that have been heard before, but many that are forced to the back seat or are hardly talked about at all.

    There are taboos among policymakers that are holding us back. Above all, we must take fiscal stimulus seriously again. Today’s economy operates far below its growth potential. The fiscal stimulus we need should not only make the social safety net whole but also be tied to aggressive investment in transportation, communications, and clean technologies that have been badly neglected.

    The federal government can itself create useful, good-paying jobs in transportation, teaching, and health care. A carefully crafted federal job creation program, as was successfully enacted under FDR, can work today. Fifty billion dollars worth of new jobs could go a long way toward helping Americans.

    The repressive effect on jobs and wages that results from aggressive Wall Street practices is all but invisible in Washington. Academic economists are almost as bad as the Washington think tanks in paying too little attention to how big finance can undermine both jobs and wages. Our report highlights the findings of researchers such as Eileen Appelbaum, formerly of Rutgers, and Rosemary Batt of Cornell, who show that the leveraged buyout and privatization crazes have on average led to many lost jobs and significantly less spending on R&D. It also showcases the work of William Lazonick of the University of Massachusetts, Lowell, who has long called attention to how massive corporate stock buybacks may help shareholders in the short run but hurt the American economy by diverting investment.

    Poor wages are also part and parcel of America’s economic failure. Today’s typical household earns no more after inflation than it did almost 20 years ago. Only 44 percent of Americans think they are middle class, the lowest level recorded. However, until fairly recently, raising the minimum wage has also been taboo. The bill before Congress to raise the federal minimum wage from $7.25 to $10.10 may still not pass, but intelligently designed studies suggest such a hike could lift not just 1 million, as the Congressional Budget Office has too conservatively estimated, but 6 million people out of poverty and provide raises for about 25 million people. Similarly, we need an expansion of the Earned Income Tax Credit to childless adults, which the president supports.

    Most tragically, we neglect our young. Six million or so Americans ages 16 to 24 are neither in school nor have a job. Dozens of local agencies have been created to place these “opportunity youth” on a middle-class track. But they badly need to be scaled up, and federal support is the only way to do so.

    The new interest in funding pre-kindergarten in New York City and elsewhere is welcome. But help has to come much earlier in the lives of children in poverty. One in every five America children under the age of six live in poverty, the second-highest rate in the rich world. A growing body of research shows unambiguously how poor children are cognitively and emotional deprived—and how bleak their futures inevitably are. In America more than in any other rich country, inequality begins at birth. We need to address this crisis to begin building the economy of the future.

    If America wants a strong future, it had also better invest more in technological research. Government research has been the heart of the innovation economy, as economists have increasingly shown. But Congress mindlessly cut such research last year. It must be revived and expanded. Other recommendations in our report include investments in energy, national paid family leave policies, and re-vamped workforce training.

    The decline of work is not inevitable, and there are more ideas than the 15 we present in our report. We calculate that we can get the unemployment rate below 5 percent and raise wages with a combination of such programs, without incurring a dangerously growing budget deficit.

    But bankrupt ideology, narrow politics, and bad economics are robbing the nation of its confidence and hope for the future. A comprehensive jobs plan is not even being attempted in America. Failure becomes contagious. Let’s end the fatalism about employment in America now and win back the nation’s hard-won optimism. 

    Jeff Madrick is the Director of the Bernard L. Schwartz Rediscovering Government Initiative.

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  • The Progressive Caucus Budget Makes the Right Decisions

    Mar 12, 2014Jeff Madrick

    The "Better Off Budget" is the only budget proposal in Congress that really places people's needs ahead of political compromise.

    The "Better Off Budget" is the only budget proposal in Congress that really places people's needs ahead of political compromise.

    The Congressional Progressive Caucus has issued its annual budget and it is in different ways the antithesis of what both the Republicans and Democrats are offering. The Caucus calls it the “Better Off Budget," and it puts its money where its mouth is. Thank goodness they’ve issued it, because it puts in perspective how much is actually within our nation’s reach. It is aimed right where it should be: at creating jobs. The budget acknowledges that our jobs crisis is far from over (I’d call it the jobs emergency budget, of course). And it rightly says we can solve our problems.

    The proposals errs slightly on the side of economic optimism, but that is as it should be. It stands in contrast to the modest improvements in social policy proposed by the Democrats, which won’t get unemployment down to 5 percent in the foreseeable future, and to the insensitive regression proposed by Paul Ryan and the Republicans. Those proposals are all politics, with little caring about the people’s thirst for jobs and opportunity. The progressives toss political compromise aside to do the right thing.

    Their proposed budget does a lot of good in a lot of areas. It refuses to reduce entitlements; it provides a middle class tax break; it raises income tax rates on the wealthy; it provides a lot of money for infrastructure investment. I could go on.

    But in this brief analysis I want to focus on the question of how much stimulus the economy can stand, which is really a question about how much slack there is in the economy. Conventional analyses say that slack—the potential to grow—has fallen. It’s mostly not because the economy is growing and catching up with its potential. The reason is that people are dropping out of the work force, maybe for good. They are losing skills. Some are retiring or getting close to retirement. Capital investment has been okay, but it has been far from stellar and therefore not likely to create exciting new products and industries that also increase productivity.

    If the potential is not as high as typical economists, including the Congressional Budget Office, thought just a couple of years ago, we can’t push the economy up as fast as we might like, they argue.

    The irony is that potential is down, as conventional economists measure it, because of the Great Recession and historically slow recovery, not because of a structural change in the economy. In particular, labor productivity growth is not very good. Total factor productivity, which (allegedly) measures the productivity of capital and labor combined, is somewhat stronger by historical comparison. I say allegedly because total factor productivity is a pretty flaky number.

    Now, there is a pretty good relationship between how fast demand is growing and productivity growth, both labor and total factor productivity. In any case, if the potential of the economy is reduced because growth is slower, people can’t get jobs, and investment in research is far from hot—well, then potential would likely rise if we got the economy growing rapidly again. There is good theory, partly Keynesian but also something called Verdoorn’s Law, to suggest this could well be the case. 

    So, in sum, that’s what this debate turns on. Will stimulus bump up against a genuine GDP ceiling and cause inflation, or is that ceiling only an artificial one based on recent data generated in a very slow economic recovery? I’d argue the CBO analysis and that of others is proposing an artificial ceiling. We can growth much faster, and we can get unemployment down to 5 percent. More demand can and often has led to faster productivity growth and more aggressive capital investment.

    That’s what the Progressive Caucus Budget is all about. The nation can afford a decent social safety net and adequate investment in its future, and can get five to 10 million more people working again. If the progressives’ budget overstates the possibilities, it is not by much. 

    Jeff Madrick is a Senior Fellow at the Roosevelt Institute and Director of the Bernard L. Schwartz Rediscovering Government Initiative.

     

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  • The Congressional Budget Office Should Serve the People, Not Politics

    Mar 3, 2014Jeff Madrick

    The CBO's projections often miss the mark, but its mandate is to produce a politically useful number.

    The CBO's projections often miss the mark, but its mandate is to produce a politically useful number.

    The admirable Jared Bernstein entirely misses the point in his post about recent critiques of the Congressional Budget Office. Floyd Norris, Zachary Karabell, and Dean Baker have noted how often the CBO gets it wrong, and how it influences policy in damaging ways. I wrote last March in Harper’s Magazine that there should be a shadow CBO to correct and decipher CBO pronouncements.

    Jared counters that CBO economists are simply following ”state of the art” economics most of the time. What state of the art? Hasn’t confidence in “economic science” been sorely tested by the 2008 crash? It should have been tested long before that tragic event. In 2003, Robert Lucas said that we had solved the problems of depression. In 2005, Milton Friedman said that he wondered why so many people were worried about the economy because to him it appeared so stable—this at the height of the subprime mortgage boom. In 2008, Olivier Blanchard said macro was in good shape.

    Jared notes that the CBO assumes public spending will crowd out private spending as an example of how it follows textbook economics. That’s right, it does, and often entirely incorrectly. Textbook economics is getting a grilling by many macroeconomists these days.

    The point is that the CBO’s mission is all wrong. Jared kind of acknowledges this; he adds in parentheses they should give ranges, not single-point forecasts. But that is not a parenthetical point. It is the heart of the matter. 

    CBO economists can’t make single-point projections with any confidence, so why do they? These forecasts are often terribly misleading. The recent minimum wage report, as I noted on Next New Deal, is a perfect example. Everyone took the CBO's midpoint number as an actual projection. Why? Because the CBO said it was in just those words. That is its mandate. In addition, the CBO's “non-partisan” label is taken to mean "objective," and to non-practitioners, its projections simply reflect some hard, politically unbiased analysis.

    Just like Wall Street bankers, politicians want a forecast that is a single number they can use. A range of projections does not have as much political force as a single number with the authority of the “non-partisan” CBO. In other words, the CBO is meeting the needs of its clients, not the needs of the nation.

    It’s time to change the CBO's mandate fundamentally. These economists should produce ranges, they should explain as much as the project, and they should get over their habit of hiding the most important qualifications of their analysis in footnotes and appendices, thereby covering themselves (and perhaps relieving their guilt).

    The state of economics simply doesn’t warrant the certitude that the CBO almost always implies—and then qualifies, as I say, in the footnotes. It would be very useful if Jared himself led a charge in reforming the CBO's mission. That doesn’t mean firing the economists there. It means having them do what economists can do, and not do what they can’t.

    Jeff Madrick is a Senior Fellow at the Roosevelt Institute and Director of the Bernard L. Schwartz Rediscovering Government Initiative.

     

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  • We Need More Nuance from the CBO

    Feb 20, 2014Jeff Madrick

    The CBO's insistence on presenting just a single number makes its predictions misleading, and sometimes even useless.

    I have long thought we need two Congressional Budget Offices, the current one and a real one. The problem with the current “bi-partisan” CBO is again apparent in the wake of its claims about the impact of the president’s proposed increase of the federal minimum wage to $10.10.

    The CBO's insistence on presenting just a single number makes its predictions misleading, and sometimes even useless.

    I have long thought we need two Congressional Budget Offices, the current one and a real one. The problem with the current “bi-partisan” CBO is again apparent in the wake of its claims about the impact of the president’s proposed increase of the federal minimum wage to $10.10.

    But let’s take a step back. The CBO has long had little sensitivity to the impact of how it presents its invariably uncertain findings. To the contrary, it seems to respond to a demand from Congress and the general public for a concrete number, essential ambiguities aside. It has long presented one-number conclusions – the size of the budget deficit, the rate of economic growth, the impact on jobs of the minimum wage – as if people are educated enough in the uncertainties of economics that they won’t take the numbers too seriously. 

    But, in fact, they do. The CBO economists disingenuously cover themselves by burying the extensive qualifications of the data and research, as well as alternative possibilities, in dense appendices and footnotes. In the process, they feed politicians and pundits with projections the poor naïfs think are written in stone – or are, most likely, perfect for use as political cover. Is this unwitting, or does the CBO enhance its influence with these easy-to-digest but misleading pronouncements?

    But the CBO is worse than merely insensitive to its public relations impact. Their economists typically treat economic hypotheses as entirely true. A couple of centuries ago, John Stuart Mill pointed out that economics is hypothetical. CBO economists should go back and read this. They base forecasts on the imbedded idea that weak economies will automatically self-adjust within three or four years, for example. This is a neoclassical assumption, not a fact of life. They acknowledge that higher deficits can stimulate a weak economy but within a few years it will undercut growth. Evidence is highly ambiguous on this point. They have little compunction about making thirty-year forecasts, no less ten-year forecasts. No one knows what will happen in ten years. 

    The bi-partisan label has become comical. The CBO does not necessarily lean Republican or Democrat, but it is not truly objective. Economics does not allow that.

    A real CBO would present a range of projections and forecasts and make a priority of demonstrating how tentative most of its conclusions must be. The current CBO sometimes presents a secondary forecast if certain expected changes in the laws are actually made, but it should publish a range of likely outcomes with or without legal changes.

    I guess I am merely stating the obvious, but the obvious has to be addressed at some point. The minimum wage debate is another clear example. Read the appendices and footnotes and you see the CBO took its job seriously; its economists read a lot of research. For those families below the poverty line, income would rise by $5 billion; for those from one to three times the poverty line, incomes would rise by $12 billion. These are mere estimates, let’s keep in mind. Nearly one million would be lifted out of poverty. Those who earn some seven times the poverty line or better would see their incomes reduced because business profits might come down due to higher wages and prices may go up for the products they buy, If true, these estimates suggest a pretty nice redistribution of the national income to lower-income families, not bad in a time of intense inequality.

    But the headlines were created by the CBO’s claim that 500,000 jobs will be lost. Here’s the actual sentence: “Once fully implemented in the second half of 2016, the $10.10 option would reduce total employment by about 500,000 workers, or 0.3 percent, CBO projects.” The sentence that follows has the tepid disclaimer that there could be a wide range of job losses. But then why make the declarative sentence above? It’s the one, of course, that anti-minimum wage politicians focused on, as did much of the media. But the 500,000 number is not a forecast, it is simply a midpoint on this wide distribution from essentially zero jobs lost to one million. Oh, yes, the CBO eventually says that, but as a writer myself, I have to ask why the CBO doesn’t present the uncertainty immediately.

    The CBO, as is now widely reported, did no original research. It looked at existing studies. A recent one in particular, which showed substantial losses, used a highly dubious methodology. The study showed the biggest future job losses were in manufacturing, which has relatively few minimum-wage jobs. By contrast, it showed few prospective losses in retail and similar industries, which have many such minimum wage jobs. This is highly implausible. Economic critics concluded the methodology was flawed. Why did the CBO pay attention to it?

    It’s high time to rethink the purpose and practical capabilities of the CBO. It should be forthright about the ambiguities of economic science, it should avoid single-note forecasts, and it should make sure policymakers understand the risks and sensitivities of what they are doing. In sum, it should not produce simple answers to complex questions.

    Does any of this really need saying? Judging by the minimum wage brouhahah, it does. Ideally, we need a “shadow” CBO to challenge its findings and explain their many assumptions on a regular basis. That would be costly, I fear. But some review of the purpose of the CBO and what they emphasize would be very useful. 

    Jeff Madrick is a Roosevelt Institute Senior Fellow and Director of the Bernard L. Schwartz Rediscovering Government Initiative.

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  • A CBO Report Shows How Obamacare Will Help the Working Poor

    Feb 6, 2014Jeff Madrick

    Never mind the conservative fear-mongering. The Affordable Care Act's subsidies will boost the economy and free workers who were locked into their jobs.

    Never mind the conservative fear-mongering. The Affordable Care Act's subsidies will boost the economy and free workers who were locked into their jobs.

    The attack on the Affordable Care Act by conservative Republicans after the release of the Congressional Budget Office's new report was desperate. Bravo to much of the media for setting the story straight almost immediately. But so strong is the anti-government bias involving social policy that critics hardly stopped to think.

    No, businesses were not about to issue a couple of million pink slips, as Senate Republicans put it. Rather, because of the subsidy to buy health care, people could choose to quit their jobs or work fewer hours and lead a marginally better life. Heaven forbid.

    And that’s the real rub. Republicans must think this is a new dole for the undeserving. But actually, it’s another example of how perverse and unfair the health care system in America is. In other words, according to CBO estimates, 2 million people or so were basically working so they could get insurance. Working makes acquiring health care cheaper because you are in a group plan and the employer will often help subsidize the price. (Of course, that subsidy partly results in lower wages for the worker.)

    Because many Americans work just to get health care, they are locked into their jobs. And this may reduce their desire to bargain for higher wages out of fear of being fired.

    A few points should be kept in mind. The determinedly objective CBO is by no means always right. It is a peculiar construction, in fact. The CBO is not allowed to make sensible assumptions about the economy, but instead has to stick to the current law. So it can’t anticipate, except as an exception to the main forecast, a change in tax rates or stimulus. The CBO builds in a recovery from a recession automatically—a clockwork interpretation of what economists know as Say’s law, which holds that economies will bounce back automatically as wages, prices, and interest rates stagnate or fall. This notion was anathema to John Maynard Keynes. The CBO makes absurdly precise projections of events 10, 20, and 30 years out. All the while, it wears the mask of objectivity.

    The CBO’s estimate that Obamacare will result in 2 million people or so leaving the workforce, it admits, is “substantially uncertain.” There’s an understatement. Just a couple of years ago, it figured the number to be much less. But it says it did a more comprehensive analysis and included a few more recent studies, mostly about cuts in Medicaid. Some studies show that when a couple of states cut funding for Medicaid, people started looking for work. Other studies show little impact, however.

    A subsidy for the poor, as Obamacare is, benefits the poor. As the working poor make more money, however, the subsidy diminishes. They may leave their jobs as a result, now able to afford health care on their own.

    The CBO also said, however, that Obamacare “will boost overall demand for goods and services over the next few years because the people who will benefit from the expansion of Medicaid and from access to the exchange subsidies are predominantly in lower-income households and thus are likely to spend a considerable fraction of their additional resources on goods and services.” In contrast, people who will pay the modest increase in taxes to support the subsidies “are predominantly in higher-income households and are likely to change their spending to a lesser degree.”

    Just what the doctored ordered for a sick economy!

    In addition, the drop in total labor compensation as people quit their jobs will be less than the drop in the number of hours worked. Fewer hours worked but not as much lost in income. Pretty good policy. 

    Jeff Madrick is a Senior Fellow at the Roosevelt Institute and Director of the Bernard L. Schwartz Rediscovering Government Initiative.

     

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