The Progressive Budget Reminds Us That Government Can Create Jobs

Mar 17, 2014Nell Abernathy

Unemployment is still a major problem in the U.S., and the best solutions involve a more aggressive government response.

Unemployment is still a major problem in the U.S., and the best solutions involve a more aggressive government response.

The Congressional Progressive Caucus budget, released last Wednesday, is forecast to create more than 8 million jobs by 2017 – a claim that is bound to stir up an argument about the government’s role in job creation. It’s not a new argument – progressives and conservatives have been having it explicitly since 2008 and more implicitly for years before that – but it is worth revisiting, because progressives are losing, and it’s a battle we cannot afford to surrender.

First, some might wonder if we even need to worry about jobs anymore. Unemployment is falling, GDP has expanded, and the stock market has rallied. The political debate has shifted away from a focus on growth and toward the consequences of our failure to stimulate growth: rising inequality and poverty. But in the face of federal paralysis, the labor participation rate remains down, wages remain stagnant, and productivity continues to decline. Now more than ever, the government must restore the dream of dignified work to all Americans.

Even if we agree that there is a problem, the skeptics will argue that the government is too inefficient and bureaucratic to effectively create middle class jobs and support economic growth. But the 2009 stimulus package provides a prime example of effective government intervention. Economists of all stripes, including Alan Blinder, former vice chair of the Federal Reserve, and Mark Zandi, Chief Economist at Moody’s and former Economic Advisor to John McCain, agree that the ARRA succeeded in creating the 2-3 million jobs it was designed to create. In their analysis, Zandi and Blinder found that without the stimulus, the economy would have contracted 6 percent and unemployment would have hit 11.6 percent. Instead, at its worst, GDP declined 2 percent and unemployment hit 10 percent.

The problem was that the ARRA could not protect the U.S. from a shock that cost the economy 12 million jobs, because the $825 billion package was too small and tapered too soon to plug the $1.2 trillion drop in private demand.

Acknowledging the success of the stimulus, some conservative analysts argue the challenges we now must tackle are not remnants of the recession, which would be amenable to government intervention, but rather are the product of insurmountable structural trends – automation, globalization, financialization. But even if that is true, it’s not an excuse for the U.S. government to abdicate its role as a driver of economic growth. Indeed, a changing economic landscape requires an adaptive government to ease the transition. Increased automation requires reformed and renewed investment in human capital to allow American workers to dominate the information age. Globalized supply chains demand new labor laws to recognize the rise of sub-contracted work. A growing financial sector requires an enhanced regulatory regime to ensure capital is allocated toward productive uses.

Then we have the deficit scolds, who are likely to claim that the CPC’s proposals are fiscally unfeasible. While hysteria about the government debt has prevented lawmakers from passing an additional large-scale stimulus package, new U.S. debt projections, and the clear failure of Europe’s austerity measures, prove these threats to be overblown. The danger associated with deficits, rising interest rates, and run-away inflation are far from a reality in the current climate of below-target inflation and non-existent interest rates.

In fact, the U.S. budget deficit fell to 4 percent of GDP in 2013, according to the CBI, and was projected to decline to 3 percent, the average for the last 40 years, in 2014. At about 73 percent of GDP, the federal debt remains high; however, the most effective way to reduce the debt to GDP ratio is to grow GDP, not shrink debt. National debt topped 118 percent of GDP immediately following World War II, and then the debt doubled over the next 30 years. But because the economy grew rapidly, debt fell to a healthy 30 percent of GDP by 1981. Europe’s experience with austerity reveals the danger of valuing debt-reduction above growth. As spending reductions slowed rising debt, they also cut GDP and increased the relative cost of debt payments.

The CPC’s budget will create new jobs, improve job quality, and invest in future job growth. The ideas are not new; many, like investment in infrastructure and workforce training, have been proposed in bills currently sitting in Congress. Nor are they necessarily bold; for example, funding R&D and using fiscal stimulus were considered common-sense government policies in previous generations. The problem up to this point has not been a lack of good ideas. It’s lack of political will. Let’s reopen this debate and use the vast number of policy tools we know to be effective.

Nell Abernathy is the Program Manager for the Roosevelt Institute's 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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State of the Union 2014: Obama Offers Action, Not Apologies

Jan 29, 2014Jeff Madrick

The president promised to do what he can without Congress, even if it isn't much.

From a political point of view, President Obama gave one of the best speeches of his presidency last night. In this, his fifth State of the Union Address, he avoided all apologies. No word about the slow progress on cutting unemployment, or the failure of the healthcare.gov rollout, or the inability to pass gun control, or the extreme excess of government intrusion on America privacy.

The president promised to do what he can without Congress, even if it isn't much.

From a political point of view, President Obama gave one of the best speeches of his presidency last night. In this, his fifth State of the Union Address, he avoided all apologies. No word about the slow progress on cutting unemployment, or the failure of the healthcare.gov rollout, or the inability to pass gun control, or the extreme excess of government intrusion on America privacy.

His tone was resolute and optimistic, and he struck many progressive chords. He made a nation that is down feel up. President Obama in particular made a strong case for a higher minimum wage. Commentators like David Brooks have pooh-poohed this because it wouldn’t raise that many families above the poverty line. This is the height of insensitivity. The poverty line is desperately low in America. But more than half the benefit would go to families that earn $40,000 or less, families in which one of its members will get a raise—usually an adult—if the minimum wage is raised. That’s a family, not an individual. And the higher minimum wage bumps up wages just above it.

Any idea that Americans are getting paid what they deserve, which is the assumption the Brookses of the world make, is a triumph of utopian insensitivity.

President Obama gave a shoutout to Senator Tom Harkin, who is leading the campaign for a $10.10 minimum wage in Congress. We are proud to say that Senator Harkin was our keynote speaker at the Bernard L. Schwartz Rediscovering Government Initiative's jobs emergency conference last year.  

But as I say, the president didn’t dwell in the realm of apology. He will raise pay for those on federal contracts. He talked about equal pay for women. He wants an immigration bill. He implied that inequality cannot be tolerated at this level in America. He would offer subsidies for business to bring jobs home.

All these struck optimistic notes. But he avoided the policies that really need doing. Sequestration has to be ended and government spending pumped up to get unemployment lower at a faster pace. But he did not talk about fiscal stimulus. He would live within the bounds of the austerity economics he helped bring about, even if he was not nearly as responsible for it as the Republicans.

He did not talk much about fixes to Obamacare but made clear it is helping millions already. This may sound like rhetoric, but it is critical. Too few realize how beneficial the new plan is—which has partly been Obama’s fault. He has avoided talking much about it. Last night he came out swinging, justifiably so. But it needs some fixes, and eventually a public option.

The headline is that Obama says he will do what he can with or without a recalcitrant Congress. The truth is he can’t do much. But for a president who has not taken the battle to the members on the Hill, this speech was a triumph and long in coming. He put Congress on the spot. He should keep using the bully pulpit, unafraid to do so, because he is right and they are mostly wrong. 

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

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Lesson from December's Jobs Report: Turn On the Fiscal Jets

Jan 10, 2014Jeff Madrick

The economy is not yet strong enough to cope with tighter monetary policy, but fiscal policy is what's really missing from this recovery.

The weak employment report out today reinforces the view that the Federal Reserve should not ease up on monetary policy soon. The strength of this economic recovery is not yet clear, and the Fed is the only game in town due to sequestration of government funds.

The economy is not yet strong enough to cope with tighter monetary policy, but fiscal policy is what's really missing from this recovery.

The weak employment report out today reinforces the view that the Federal Reserve should not ease up on monetary policy soon. The strength of this economic recovery is not yet clear, and the Fed is the only game in town due to sequestration of government funds.

Waiting another three or four months to tighten policy and reduce quantitative easing will not change the course of America’s destiny. But moving now, as they have done ever so slightly, could easily pull the rug out from under this modest recovery.

The sharp fall in the unemployment rate to 6.7 percent was just about entirely accounted for by people dropping out of the work force. The employment-to-population rate is roughly at its lowest level in more than 30 years. Too many people are not working in America. For all the economic weakness in Europe, they have higher participation rates than the U.S. does.

The drum beat of optimism emanating from most economists recently will now be muted until the next set of data. The jobs numbers are the most telling indicator of economic strength. Economists turn on a dime when they are issued, but only because they can, given the computerized models that shift modestly with every piece of economic news. They should have a stronger analytical thesis than to depend on one month’s data.

The path forward is clear. We should keep in mind that the economy is not doing badly. On average, there has been moderate job growth over the last three months, just not nearly enough to justify an end to monetary stimulus now. We should wait at least a few months to make sure this recovery and expansion is truly solid.

The good news is that the disappointing employment data will reduce pressure on the Fed as Janet Yellen takes over the reins. The bad news is that it will unleash the anti-Obama forces who blame the slow economy on Dodd-Frank’s costs to the financial community, future fears of inflation, and of course the federal budget deficit. Tune in to Fox News after the employment data release and you'll find them saying "Obama did it."

Larry Summers offers the best advice: we have to turn on the fiscal jets. The first words out of anyone’s mouth about the economy should be that sequestration did it. Fiscal de-stimulus was huge in 2013. Government spending fell sharply. The deficit is no longer an issue, given unemployment around the current level.

Summers is being criticized by economists and commentators from across the political spectrum for claiming the nation may be in a period of secular stagnation. Summers noted that the economy was disappointing even before 2007. How could that be, ask some, if the unemployment rate got down to roughly 4.5 percent? 

John Taylor of Stanford is especially vociferous about how good the economy was under George W. Bush. Of course, he worked for Bush. But even apart from that, it is hard to take his claims seriously. 

Three points here. The labor participation rate under Bush never rose to the heights it reached in the second half of the 1990s. Had it done so, the unemployment rate would likely have been around 5.5 percent.

Second, wages rose very slowly. The low unemployment rate—to the extent that it fell—had a lot to do with slow-rising wages. And the wage share of GDP fell significantly, to levels well below what they were in the 1990s. The rise in consumption to support growth was based on borrowing, as we know, not strong incomes.

Third, capital investment was weak before 2007, never even close to returning to the levels of the second half of the 1990s. The right wing loves to blame lack of business confidence on low levels of capital investment today, but how do they explain the Bush era? 

So, to reiterate, Summers is right. We are wading in dangerous territory. On top of all this, there has been a confusing and disturbing downturn in productivity growth for several years—starting, again, before 2007.

We have a tool to deal with this: more government spending. But we get the opposite. Obsession with the budget has led to full-fledged austerity policies in America, as well as Europe.

There are some sweet spots in the economy. I am skeptical of fracking, but it is helping the economy now. Housing is picking up.

But any increase in interest rates without serious fiscal stimulus now is outright dangerous. The inflation fear-mongers are still out in force, of course. So let me repeat this: there is no appreciable inflation right now. And one last point: more growth in output could stimulate growth in productivity as well, a well-known economic relationship known as Verdoorn’s Law.

Will America do what’s necessary? Not enough of it. But at the least it should not reverse monetary policy yet. And there may be a little political room to push Washington toward spending in 2014. If so, the nation had better take advantage of it. 

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 Bernard L. Schwartz Rediscovering Government Initiative: Building on the Successes of 2013 in the New Year

Jan 6, 2014Jeff Madrick

The Rediscovering Government Initiative takes a look back and a look ahead...

The Rediscovering Government Initiative takes a look back and a look ahead...

The Bernard L. Schwartz Rediscovering Government Initiative had an active and rewarding second year. Our programs continue to be directed toward broadening the public discourse on the purposes of government, and in particular, countering the ideological anti-government attitudes that have so influenced discourse about public policies since the 1970s. We believe that many of America’s most challenging problems are a consequence of the neglect and misuse of government.

In 2013, we emphasized job creation. The facts are stark: America has a 7 percent unemployment rate four years into a recovery. It has a record-low employment-to-population ratio, especially for young workers. A record number of workers have been unemployed for more than six months.

In addition, the large majority of jobs created in the recovery have been low-wage jobs. As a result, typical household income is no higher than it was more than a decade ago. Unequal and stagnating incomes cannot be separated from the jobs crisis. There is concern that weak job markets are now a long-term reality.

To us, this is not just a jobs crisis. It is a full-fledged jobs emergency.

We also pursued other programs related to government and the perpetuation of the New Deal legacy of Franklin and Eleanor Roosevelt.

Here are a few of the 2013 successes we plan to build on in 2014:

A Conference: A Bold Approach to the Jobs Emergency

The crown jewel of our 2013 efforts was a June conference in Washington, D.C., which we called “A Bold Approach to the Jobs Emergency.” Our keynote speakers, Senator Tom Harkin (D-IA), Former Federal Reserve Vice Chairman Alan Blinder, and Congresswoman Jan Schakowsky (D-IL), addressed the jobs emergency from a variety of viewpoints to a jam-packed auditorium.

At the conference, we held seven separate panels on solutions to the jobs emergency. These included fiscal stimulus, public-private infrastructure projects, financial regulations to encourage jobs, improved education, raising the minimum wage, labor law reform, and local political advocacy programs.

Our panelists represented a diversity of backgrounds and perspectives, and included Ai-Jen Poo of the National Domestic Workers Alliance, Federal Reserve Board Governor Sarah Bloom Raskin, Gar Alperovitz of the Democracy Collaborative, Dean Baker of the Center for Economic and Policy Research, Damon Silver of the AFL-CIO, and Maya Wiley of the Center for Social Inclusion, along with Roosevelt Institute Fellows Dorian Warren, Annette Bernhardt, Richard Kirsch, and Mike Konczal.

The video and transcripts of the proceedings, along with summaries of the key points made in each panel, are available on our website.

A Report: “A Bold Approach to the Jobs Emergency: 15 Policy Ideas”

Despite a pessimistic and persistent refrain that government cannot solve America’s jobs problems, we learned from the many experts at our jobs conference that there are multiple ways to return to full employment. Based on these and other ideas we researched over the course of 2013, we will publish a report in January outlining 15 bold ideas to deal with the jobs emergency. Our report amounts to a call for renewed optimism about how we can solve this central economic problem.

A New Book: Myths of Government

In 2013, UC Press offered the Initiative a book contract, based on the essays presented by several participants at our Washington, D.C. conference on the purpose of government in summer 2012. Myths of Government will include contributions from Lane Kenworthy of the University of Arizona, Peter Lindert of the University of California at Davis, Jon Bakija of Williams College, and Rediscovering Government Director Jeff Madrick. The book debunks major economic claims that government’s role must be limited if economic growth and the standard of living are to be improved. To the contrary, it shows that constructive government policies are critical to the future of the economy and a rising standard of living for all.

Other Public Events

Here are a few of the public events we held:

-- In April, we hosted Mark Levitan and Moe Magali of the New York City Center for Economic Opportunity to discuss the staggering 30 percent youth unemployment rate in New York City and the job creation programs that the city government is implementing to mitigate this problem.

--In August, in New Orleans, we gathered leading local experts on youth unemployment, including Amy Barad of the Cowen Institute for Public Education Initiative, Cherie LaCour-Duckworth of the Urban League of Greater New Orleans, Lauren Bierbaum of Partnership for Youth Development, and Jerome Jupiter of the Youth Empowerment Project, to discuss strategies to reconnect the 6.7 million young people nationwide who are both out of work and out of school. Jeff Madrick wrote about the gathering in his monthly Harper’s magazine column, and Program Manager Nell Abernathy wrote a comprehensive post on the subject of youth unemployment for the Roosevelt Institute’s blog, Next New Deal. Jeff Madrick was interviewed on NPR’s Marketplace on these issues.  Roosevelt Institute | Pipeline, our nationwide network of young progressive professionals, co-hosted the event.

--In September, we hosted a panel in New York City entitled “Inequality: The Next Mayor’s Challenge.” Local experts outlined policies the mayor’s office could enact to fight rising inequality. The panel included David Jones of the Community Services Society, NYU professor Lawrence Aber, Maya Wiley of the Center for Social Inclusion, Tsedeye Gebreselassie of the National Employment Law Project, and James Parrot of the Fiscal Policy Institute.

--In October, as part of our commitment to updating the Roosevelts’ New Deal legacy, we partnered with the Frances Perkins Center in Portland, Maine to host a discussion on the changing attitudes of Americans toward government and how to keep the New Deal’s spirit alive. The event highlighted Perkins’s role as the FDR adviser most responsible for Social Security. Participants included Ai-Jen Poo, Sally Greenberg of the National Consumers League, and Jeff Madrick.

--Also in October, Jeff Madrick participated in “Progressivism in America: Past, Present, and Future,” a conference in Dublin, Ireland hosted by the Roosevelt Institute and University College Dublin’s Clinton Institute for American Studies. Madrick contributed an essay on the future of progressivism to be published in 2014.

Publications

Throughout the year, the Rediscovering Government staff published a range of longer-form essays and blogs that reflected the central themes of the Initiative.

The subjects we focused on most closely are listed below.

Youth Unemployment:

The Real Lost Generation, by Jeff Madrick for Harper’s Magazine

Tragedy as a Generation for US Youth, Jeff Madrick with David Brancaccio for Marketplace on NPR

How Can We Help America’s Opportunity Youth? Five Lessons Learned in New Orleans, by Nell Abernathy for Next New Deal

Fiscal Policy and Public Investment:

America Is Having the Wrong Fiscal Argument, by Jeff Madrick for Harper’s Magazine

Simpson-Bowles Consensus isn’t Common Sense. It’s Nonsense, by Jeff Madrick for Next New Deal

The Truth About the GOP's Phony Shutdown Offer, by Jeff Madrick for Next New Deal

Social Security:

No Need to Cut the Little that Recipients Get, by Jeff Madrick for The New York Times

Good News on the Deficit Makes Social Security Cuts Even Worse, by Jeff Madrick for Next New Deal

Monetary Policy:

A Bit of Good News, by Jeff Madrick for Harper’s Magazine

Summers’ View on Monetary Policy Not So Hidden, by Jeff Madrick for Next New Deal

It Would be Tragic to Raise Rates Now, by Jeff Madrick for U.S. News & World Report

Unemployment Benefits:

Conservatives and Progressives Agree: Congress Should Not Cut Unemployment Benefits, by Nell Abernathy for Next New Deal

Looking Ahead: 2014 

In 2014, we will continue to develop and promote ideas about the positive role of government in the U.S. in general as well as how government can and should improve employment opportunities for all Americans. We specifically plan to host public events and commission papers on three key strategies for improved employment and GDP growth: the minimum wage, infrastructure investment, and government support of research and development.

In addition, we will increasingly focus our efforts on reducing the number of children living in poverty in America, arguably America’s greatest social problem and a major contributor to inequality and stagnating wages. In June, we will host a conference in Washington, D.C. that will bring together top policymakers and advocates to promote an agenda for fighting child poverty and reducing inequality overall.

In September, Alfred A. Knopf will publish Jeff Madrick’s new book, Seven Bad Ideas; How Economists Damaged America and the World. Its theme is related to the neglect of government, and much of the contents of the book reflect issues and ideas pursued by Rediscovering Government. 

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Do Economists Understand How Power Shapes the Labor Market?

Jan 6, 2014Jeff Madrick

Even liberal mainstream economists often overlook the role of coercion in setting wages.

It was a great pleasure to read one of Paul Krugman’s columns over the holidays, entitled "The Fear Economy." I’d say it’s my favorite of 2013 because he took a decided step away from standard orthodox theory. Even Krugman rarely does that. His welcome and thankfully influential liberal ideas usually fall well within the scope of mainstream theory.

Even liberal mainstream economists often overlook the role of coercion in setting wages.

It was a great pleasure to read one of Paul Krugman’s columns over the holidays, entitled "The Fear Economy." I’d say it’s my favorite of 2013 because he took a decided step away from standard orthodox theory. Even Krugman rarely does that. His welcome and thankfully influential liberal ideas usually fall well within the scope of mainstream theory.

This was not the case in his December 27 column, or so I interpret it. Krugman talked about “power” in the labor market. When there aren’t enough jobs around, workers lose their bargaining power, he wrote, and they can’t maintain decent wages. This was a major statement by a Nobel winner.

Why? Well, the typical reader might say, “Of course there is power in the labor market. And unless there are labor unions or a low unemployment rate, the power belongs to the employer to set wages and hire and fire. What else is new?" But if you were an economist, odds are you wouldn’t say this. Power plays a peripheral role, if any at all, in conventional economics.

The invisible hand, remember, is, as Milton Friedman defined it, “coordination without coercion.” And the invisible hand, the mainstream believes, rules the labor market as it does most others. That is to say, no coercion. This is just not a view of Chicago School conservatives.

What does Krugman think? “Now, you may believe that employment is a market relationship like any other — there’s a buyer and a seller, and it’s just a matter of mutual consent,” he wrote in a blog post a few days earlier on the same subject (in which he nicely referenced the Roosevelt Institute’s Mike Konczal). “You may also believe in Santa Claus.”

Apparently most orthodox economists believe in Santa Claus. They claim workers are paid what they deserve, just as businesses pay the going price for copper or software. That price is reached fair and square through competition. If more workers are needed to produce the goods and services demanded in the economy, their price—that is, their wage-- goes up. But if fewer workers are needed, their price goes down.

That labor is paid what it deserves is a central tenet of modern capitalism. It is partly why economists believe that if you raise productivity, or output per hour of work, wages will follow. But productivity has been rising moderately strongly for a couple of decades and wages simply haven’t kept up.

And as Krugman notes, the rate at which workers quit their jobs has stayed very low. In other words, they are afraid to do so.

In conventional economics, the efficient and fair workings of the invisible hand are only disrupted when competition is artificially restrained by monopolistic or oligopolistic practices. In the labor market, that would mean there are too few businesses, so they don’t compete for workers. In practice, many and probably most economists rarely worry about that. They do worry about how labor unions might reduce competition on the other side of the equation, “coercing” wages up.

And it explains why so few economists have urged a substantial increase in the minimum wage until recently. If labor markets set the wage fairly, an artificial increase would reduce jobs. But if power is involved, a minimum wage regulation can offset the coercion from the top.

When Alan Greenspan was chairman of the Federal Reserve, he watched the quit rate mentioned by Krugman closely. If it got too high, he worried that pressures to ask for wage increases would build and lead to inflation, so he would have to step on the monetary brakes to get the unemployment rate back up.

I think Greenspan, an orthodox if highly ideological economist, probably believed fully in the invisible hand. So why did he worry about worker bargaining power? Maybe he thought that if the market were working properly, without help from unions, the quit rate would always be low. He seemed delighted when the quit rate remained low.

This is not to say there are no intelligent ways to talk about power within the orthodox conventions. One noted problem is a lack of adequate information to bargain and choose fairly, for example. Another is a famous theorem of Ronald Coase that differences can be negotiated, but I think that falls under the same principle of power.

Maybe the neglect of power is changing now, however. An economist calculated that in the Journal of Economic Issues -- granted, a left-wing journal -- there had been 44 articles with “power” in the headline since 2008, more than in the previous 16 years.

What is power? I’d call it the ability to make someone do what they don’t want to do. It's coercion by any other name, and it exists in modern labor markets. That’s a good start, anyway. And maybe soon we’ll start shedding some other myths of mainstream economics.

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

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A Silicon Valley CEO's Words Can't Hurt the Poor, But Government Can Help Them

Dec 18, 2013Nell Abernathy

Greg Gopman's callous comments about San Francisco's homeless demonstrate why we need government to support the most vulnerable Americans.

Greg Gopman's callous comments about San Francisco's homeless demonstrate why we need government to support the most vulnerable Americans.

So yet another Silicon Valley innovator is in trouble for publicly ranting about the horrifying experience of having to share San Francisco’s streets with our nation’s tired, poor, and huddled masses. Last week, AngelHack CEO Greg Gopman wondered why San Francisco’s homeless have the temerity to wander into civilized parts of the city. He wrote on his Facebook page, “You can preach compassion, equality, and be the biggest lover in the world, but there is an area of town for degenerates and an area of town for the working class. There is nothing positive gained from having them so close to us. It's a burden and a liability having them so close to us.”

The Internet went into a full-throttle shame-fest and forced Gopman to apologize on his Facebook page. Maybe I am jaded, but my indignation is a little less acute than some. Mostly, I don’t find arrogance and corruption on the part of industry leaders to be very novel. (To be fair, I’m not much surprised by arrogance and corruption on the part of think tank academics, non-profit do-gooders, or politicians either.)

Don’t econ textbooks tell us that our world is one comprised of individuals maximizing their own best interest? Why should any of us be surprised that techie X’s interest is to avoid homeless people or that banker Z’s interest is to get a really big bonus? While I vehemently oppose Gopman’s sentiments, I know that I am more likely to spend Wednesday night on my couch watching Nashville than working in a soup kitchen, so, you know, glass house and stones and all.

What this whole incident does underscore is the absolute need for a public sphere where we join together in service of something larger than our own petty interests. Through our government we can choose to live in a city and state and country where we are guided by more than our most self-serving of instincts. This is what so much of American anti-government rhetoric misses. The rules we choose to codify as “government” do not need to proscribe our freedom; rather, they can free us from the constraints of Lord of the Flies-like living.

This is a debate that could bring us back to Locke and Hobbes and even get us speaking in Greek, so instead I’ll stick to a few points.

1) Mr. Gopman is not unique in his dismissal of poverty in his neighborhood. Americans have demonstrated a remarkable ability to dismiss poverty in our country. Of the world’s top 35 richest countries, the U.S. is second only to Romania in child poverty. And just last week, Andrea Elliot at the New York Times put a face to the grim statistics with her meticulously reported series “Invisible Child.”

2) The belief that visionary entrepreneurs or privately funded non-profits can reduce poverty has not produced tangible evidence of success. The optimism from Silicon Valley that technology can save the world is perhaps best encapsulated by George Packer’s July New Yorker piece on the tech community’s political culture and Dave Eggers’ dystopian novel The Circle. We hear the same argument from Wall Street about the value of accessible capital; who can forget when Lloyd Blankfein claimed to be “doing God’s work”?  Indeed, finance and technology are powerful tools to improve lives, but who uses them and how they are used are important questions.

Keep in mind that despite the enormous increases in technology capacity and availability of credit, the official U.S. poverty rate has shifted from 14 percent in 1964 to 15 percent in 2012.  A new Columbia University study released last week measured American poverty according to location and transfers, and found the poverty rate in fact dropped from 26 percent in 1967 to 16 percent in 2012.  How did this drop occur? The researchers attributed the gains largely to government transfers.

3) The third false idea so often repeated is that the government cannot effectively do anything to help people. And as much as I wish the Department of Health and Human Services had turned to Mr. Gopman and his friends to build Healthcare.gov, I’m not ready to turn my back on government’s efficacy at tackling any or all public goals.

Let’s think of a few things that government has done that Mr. Gopman and the Silicon Valley crowd might appreciate. There’s the taxpayer-funded state college he attended, the government roads he drives on, the big bridges he probably crosses to get in and out of San Francisco, the public safety services he relies on to keep him from being mugged, the legal system he most likely employs to protect his company, and the cheap loans he may have benefited from thanks to remarkably low interest rates and inflation.

But let’s ignore all that and just focus on his bread and butter, technological innovation, which, Mr. Gopman and his friends may be surprised to learn, has been driven largely by government-funded research in basic science. Take the iPhone, for example. It took the genius of Steve Jobs to imagine and design the product, but it also took decades of government research to develop the components an iPhone needs to function. In a recent book, The Entreprenuerial State, Mariana Mazzucato traces the iPhone's roots to the defense researchers who developed the Internet, GPS, and the voice activation programs that served as Siri’s prototype. Public universities and labs funded by government dollars developed HTML and touch screens. Before going public, Apple even benefited from a $500,000 loan from the federal government’s Small Business Administration.

And for those who believe the private sector could have done it better, perhaps you will take the word of the American Energy Innovation Council, led by Bill Gates and Jeff Immelt. “When firms make investments in basic science or R&D, they create knowledge spillovers that benefit society as a whole, as well as other firms. Those other firms get a free ride on their competitors’ R&D investment. Because it is difficult for any individual firm to monetize all the benefits of these types of investments, the private sector has tended to systematically under-invest in R&D relative to the potential gains to society — even where a market for the desired technology exists.”

There is a time and a place for rugged individualism.  But I am grateful that I am dependent neither on the good will of Mr. Gopman nor the good will of any other rational self-interested individual for the common services I consume. Rather, I am relieved to rely on the good will of the public, that amorphous body in which we can all project our ambitions for a world more just and more free than one guided by the anarchy of our impulses.

Nell Abernathy is the Project Manager for the Roosevelt Institute's Bernard L. Schwartz Rediscovering Government Initiative.

 

Golden Gate Bridge image via Shutterstock.com 

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