If the Fed can’t help the long-term unemployed, no one will

via The Brookings Institute
via The Brookings Institute

Via Jordan Weissman at Slate:

There are 3.8 million Americans who have been out of work for 27 weeks or more. These are the country’s long-term unemployed, as defined by the Department of Labor. And right now, they’re the subject of the most important ongoing argument about the state of the job market.

In recent months, a growing chorus of economists and writers have concluded that “the long-term jobless don’t matter to the economy,” as Wonkblog’s Ylan Mui put it in a recent headline. At least, they don’t when it comes to issues such as inflation and pay growth. (I’m guessing most everyone agrees that their personal suffering matters a great deal, and that the world would generally be better off if they were working). The idea is that these unlucky millions are so far from employers’ radars, and so unlikely to ever hold a steady job again, that their presence no longer influences rest of the labor market. Should the economy heat up, businesses will start paying out higher wages to keep or poach workers who already have jobs before they dip into the pool of people who have been out of the game for more than six months. And if wages escalate, so too could inflation…

In other words: The Federal Reserve probably can’t help the long-term unemployed to begin with, nor should it risk trying.

Yesterday, however, the hawks received a big intellectual boost, courtesy of a new paper debuted at Brookings by Princeton economist and Obama advisor Alan Krueger. It is a grim document, to say the least. Krueger and his co-authors, Princeton’s Judd Kramer and David Cho, suggest that many of the long-term unemployed may never work again and “tentatively conclude” that, as a group, they “exert relatively little pressure on the economy.” Wonkblog’s Mui has already written a solid summary, andThe New York Times’ Binyamin Applebaum has a very useful take. But here are three of the key points:

1. The overall unemployment rate doesn’t seem to affect inflation. That depends on the short-term unemployment rateSome economists have argued that the traditional relationship between unemployment and inflation, known as the Phillips Curve, fell apart after the recession. But Krueger and his coauthors find that once you pull the long-term unemployed out of the equation and focus only on the short-term unemployed, it works again like new. The same goes for the relationship between wages and unemployment. But why? That brings us to…

2. The long-term unemployed rarely return to work. Between 2008 and 2012, the authors found that, after 15 months, only 11 percent of the long-term unemployed were back in a full-time, steady job (as shown in the Brookings graphic below). This is in keeping with research that has found employers ignore job applicants who have been out of work for an extended period. But the problem may go deeper. The long-term unemployed, the authors write, seem to be on the margins of the labor market, and have difficulty sustaining employment once they find it. Many ultimately lose interest in work altogether.

3. Worse yet, even a stronger economy might not help their predicament.The paper finds that the long-term unemployed don’t fare much better in states with low overall joblessness than they do in states with high overall joblessness. Regardless of the health of the local economy, they’re about equally likely to find a new job as they are to leave the labor force entirely.

…for now, it’s worth remembering why the stakes of the debate are so high. We can all probably agree that Congress is not going to step in and do something dramatic to help the unemployed find work. That makes the Fed is more or less their last hope. If it can’t help, or decides not to try, nobody will.

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Why is it that millions of Americans who have jobs can’t make ends meet?

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Good question.

Via The Week:

Who are the working poor?

They’re the millions of people who have jobs that leave them mired at the edge of poverty. Their ranks include legions of retail clerks at chains like Walmart, fast-food workers, dishwashers, customer assistance representatives, home health-care aides, factory workers, and farm laborers. Some 46.2 million Americans now live in families where someone is working but earning less than the poverty line: $11,702 a year for an individual or $23,021 for a family of four. Many economists have a broader definition, saying that the working poor are those whose incomes do not cover basic needs: food, clothing, housing, transportation, child care, and health care. By that standard, there are more than 146 million Americans in the poor-but-working class. People in this category generally have no savings and survive from check to check, often filling in the gaps by going into debt. “Any little thing — a child getting sick, a car breaking down — those are quite significant events for these working families,” said Brandon Roberts of the Working Poor Families Project.

Where do they live and work?
About half the working poor are white, mostly living in the South or Southwest. But African-Americans and Latinos are vastly overrepresented in their ranks: Over a quarter of blacks and Latinos live in poverty, while only a tenth of whites do. Most commonly they work for major national chains whose business models depend on very low labor costs — Walmart, Pizza Hut, McDonald’s, Target. In these hugely successful companies, most of the profits go to top management and stockholders. The top 50 employers of low-wage workers, a recent study found, paid their top executives an average of $9.4 million a year and have returned $175 billion in dividends to their shareholders since 2006. In contrast, the typical worker eligible for the Earned Income Tax Credit, a tax break for low-income workers, has an adjusted gross income of $13,900. Since the Great Recession of 2008, about 60 percent of the jobs created in the U.S. have been low-wage ones. One out of four Americans now earns less than $10 an hour.

Is the minimum wage too low?
There is a strong case that it is. The federal minimum wage has been frozen at $7.25 since 2009, and the cost of living has risen more than 7 percent since then. Some economists argue that paying workers more would mean fewer jobs as labor costs rose, but others say that basic economic principle doesn’t hold at the low end of the job spectrum. Many of these service jobs can’t be outsourced or automated. But thanks to globalization and the waning power of labor unions, workers have little leverage to press for higher salaries.

Why are unions shrinking?
One major factor is that the manufacturing companies that were once a union stronghold have closed or sent their jobs overseas. But that’s not the whole story. Canada’s economy has seen similar changes over the past four decades, yet union membership there is still 30 percent, whereas in the U.S. it is 11.3 percent overall and less than 7 percent in the private sector. In the U.S., unions have dwindled partly because poor leadership has damaged their image, and partly because of “right-to-work” laws, now in place in 24 states, which effectively bar unions from organizing workers.

Do the working poor pay taxes?
They pay federal payroll taxes and sales taxes at the same rate as more affluent Americans, but they do not pay federal income taxes. Under tax programs that both Republicans and Democrats supported as a way to get poor people off welfare, workers with low incomes qualify for the Earned Income Tax Credit and often the Child Tax Credit. Perversely, however, these special tax breaks serve as disincentives for the working poor to make more money. A single mother earning $18,000 a year loses tax credits and benefits as she climbs the income scale, so for each additional dollar she makes, she effectively keeps only 12 cents. She has little incentive to increase her hours and her income unless she can make a major jump in salary.

Why not simply get a better job?
The best way out of low-paying work is to get a good higher education. But most of the working poor come from struggling communities where schools are not well financed, and kids who attend bad elementary and high schools are far less likely to attend college. Even today, only 30 percent of Americans get college degrees. And for those with only a high school diploma, job prospects are more limited than ever; the average high school graduate today makes $12,000 less than the average high school graduate did in 1980. Men who are unemployed or in low-wage jobs tend not to marry, or if they do, are likely to get divorced, creating a vicious cycle: Their children often grow up in single-parent homes, which are far more likely to stay poor. “Folks in our state are working hard, but for many families, working hard just isn’t enough,” said F. Scott McCown of the Center for Public Policy Priorities in Austin. “Things need to change.”

How taxpayers subsidize Walmart
Walmart is the largest private employer in the U.S. — and has the most workers on public assistance. In 2007, the company shifted from regular shifts to flexible shifts, a change labor activists said was designed to force full-time workers to downgrade their status to part-time, so they would not qualify for health insurance or other benefits. The result is that hundreds of thousands of Walmart employees rely on state benefits or Medicaid. Most of the company’s warehouses are contracted out to temp agencies, so even if a warehouse loader works full-time in a Walmart warehouse for years, he gets no benefits. Walmart has also spent at least $1 billion since 2005 settling lawsuits over unpaid wages or illegal working conditions. One study estimated that Walmart workers cost taxpayers more than $1 billion every year.

Five Things to be Hopeful for in 2013

Owner Unknown
Owner Unknown

The promised follow-up, Five Things to be Hopeful for in 2013 by Paul Brandus.  Check it out:

On New Year’s Eve, I [Brandus] alerted you to “5 disturbing trends to watch in 2013.” It’s a gloomy assortment of troubles, to be sure, and because of their slow-moving speed and complexity, they often get underreported —or ignored altogether — by our mainstream media. That’s not to suggest that all is gloom and doom, of course. Also beneath the media radar are many things we can cheer. From a long, rosy list, here are five things to be hopeful about:

1. We’re winning the war on heart disease and cancer
Slowly but surely, we are beating these killers. Mortality rates from heart disease were down 68.3 percent between 1975 and 2008, while cancer death rates were down 11.7 percent over the same period. Why the discrepancy? Heart disease can be rather straightforward, at least when compared with the many types of cancer, which require different types of drugs and treatments. Even so, the number of American men dying from cancer is dropping by about 1.8 percent a year, and 1.4 percent for women. The drop in death rates is even more pronounced for black and Hispanic men — evidence that long-term efforts to improve cancer awareness, screening, and treatment are paying off. But more needs to be done: While falling death rates are steady for the “big four” cancers — lung, colon, breast, and prostate — there is evidence, the American Cancer Society says, that cancers are increasing among less-common forms such as pancreas, liver, thyroid, and kidney. Also growing: Melanomas.

2. Energy independence is actually possible
Every president since Richard Nixon has talked of an energy-independent America. That’s all it has ever been — talk. But now, in case you haven’t noticed, several big trends are occurring simultaneously which, together, are bringing us closer to making energy independence a reality.

First: We’re importing less oil — a lot less. Since peaking in 2005 at 60 percent, our dependence on foreign suppliers has slid to 42 percent. Second, production here at home is booming. The largest driver of this has been the new (and environmentally controversial) technology of hydraulic fracturing (“fracking”), which allows producers to tap huge reservoirs of oil and natural gas in shale rock formations beneath dozens of states. Geologists say there could be more than 1 trillion barrels of oil in these deposits — four times the proven reserves of Saudi Arabia. In fact, predicts the International Energy Agency, the U.S. is on track to become the world’s largest oil producer just seven years from now. The implications for our economy and national security are profound.

That’s not all. Natural gas prices have plunged and are now competitive with coal. As electric utilities switched from coal to natural gas (which emits half the carbon dioxide), CO2 emissions fell in 2012 to their lowest levels in 20 years.

Also changing the dynamic: Tougher fuel efficiency standards for cars, which are reducing energy demand. The average car and truck will be required to get 54 miles per gallon by 2025, saving drivers thousands of dollars over the life of any new vehicle.

Finally, renewable energy (which is not without environmental concerns either) continues to grow, and now accounts for 13 percent of all U.S. electricity.

3. We’re enjoying a manufacturing renaissance
Low-skill, low-pay manufacturing jobs are gone and aren’t coming back. But high-skill, high-pay jobs are growing, as America’s manufacturing industry moves up the value chain. The National Association of Manufacturers estimates that there are some 600,000 openings right now — for those with the right set of skills and education. Many of these jobs require strong STEM training (Science, Technology, Engineering, and Math). Have this background? Congratulations: You’ll make $500,000 more over the course of your career than someone who doesn’t.

Some of this revival is linked to developments elsewhere — rising labor costs in China, for example — but many are homegrown. The steady decline in the dollar (which makes our exports much more competitive around the world), cheaper energy costs, intellectual property safeguards, and a resilient, mobile workforce, are among the reasons why more goods — and goods of higher economic value — are being made here.

Also important: Foreigners, eager to lower their own costs and be close to key U.S. markets, are pouring in capital: $91 billion in 2011, the highest since the global recession hit in the last decade. That other nations are investing here is a sign of confidence in America, and while there are some who resent or fear foreign investment (hardly a new phenomenon), we should, in fact, welcome it. Investment capital is agnostic: It flows to the best opportunities regardless of where they are. America must continue to be among the destinations of choice for foreign investors.

4. We’re safer
Mass shootings like the Sandy Hook tragedy get lots of attention (as they should), but much less attention is given to the broader long-term trend: Crime rates are falling steadily in the United States. The FBI reported in October that violent crime — murder, rape, robbery — fell 3.8 percent in 2011, the fifth consecutive annual drop. Property crimes hit a nine-year low.

What’s behind the steady drop? Criminologists point to several factors, including higher rates of incarceration and better use of data and technology — such as a lot more surveillance cameras. It also doesn’t hurt that the population is aging. Violent crime tends to be committed by people who are younger.

5. We’re climbing out of debt
No, not the federal government — which has now hit its latest debt ceiling of $16.4 trillion — but us. The amount of debt Americans carry — mortgages, student loans, credit cards, etc. — now stands at $11.3 trillion. An astronomical amount for sure, but that’s down from $12.7 trillion back in 2008. The Federal Reserve’s household “debt service ratio” (the ratio of debt payments to disposable personal income) fell to 10.61 percent in the third quarter of 2012, the lowest since 1983.

This is very good news. Not owing anyone a nickel is the ultimate freedom, so good for you. But there is a downside to your penny pinching: The economy at large is heavily dependent on consumer spending. So the more you save, the more you pay down debt translates into fewer vacations, new clothes, and dining out. Which in turn threatens the jobs of others. But the economy can take care of itself — your job is to improve your own finances. As I pointed out in my last article, most Americans have precious little stashed away for their golden years. Keep saving, folks.

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Paul Brandus is an award-winning member of the White House press corps who founded West Wing Report in 2009. Follow him on Twitter: @WestWingReport.

Are Democrats better than Republicans at creating jobs?

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While I think the truth sits somewhere in between, as it most always does, there can be some confidence in saying that Republican stewardship of the economy has not been more effective than Democratic stewardship.

And while there are many confounding factors (the politics of both parties has changed a great deal over the years, the economic policies of one administration can take years to come into effect and benefit or harm another administration, and others mentioned), one take-away we should all be able to agree upon is that the simple explanations and analysis so often spouted by the talking heads are rarely the best explanations.  Bad methods of analysis lead to bad data and worse conclusions.

Via The Week:

Bill Clinton threw out a lot of statistics during his well-received speech at the Democratic National Convention, but none turned more heads than his assertion that Democratic presidents have created 18 million more jobs than Republicans. “Since 1961, for 52 years now, the Republicans have held the White House 28 years, the Democrats 24,” Clinton said. “In those 52 years, our private economy has produced 66 million private-sector jobs. So what’s the jobs score? Republicans 24 million, Democrats 42 [million].” Politicians are known to stretch statistics to fit their needs, and Clinton’s numbers, at first blush, just seemed too lopsided to be true. But fact-checkers across the board agree: The statistic is solid. Here, a guide to Democrats’ whopping advantage in the jobs score:

Clinton didn’t fudge the numbers at all?
No. Tracking job statistics from the month a president took office to the month he left, Democratic presidents from John F. Kennedy to Barack Obama oversaw the creation of an average of 150,000 private-sector jobs per month, compared with 71,000 a month for Republican presidents. And if you take other factors into account — such as discounting a president’s first year, since his own policies likely haven’t taken effect — Democrats still come out on top by healthy margins.

Which presidents fared best?
Clinton — somewhat uncharacteristically — didn’t mention that his presidency accounted for an astonishing 50 percent of the Democrats’ score. Ronald Reagan was the main driver of job growth for Republicans, overseeing 60 percent of their job gains over these 52 years.

Why the big difference?
Clinton ascribed Democrats’ economic success to their policies and governing philosophies. “It turns out that advancing equal opportunity and economic empowerment is both morally right and good economics,” he said. “Why? Because poverty, discrimination, and ignorance restrict growth.” Many liberals agree, and think the stat should be a staple in Democratic pitches. “Why why why why why haven’t Democrats spent years pounding this home?” says Michael Tomasky at The Daily Beast. “This should be the first talking point out of the mouth of of every Democrat who ever goes on TV to discuss anything.”

But isn’t it more complicated than Clinton claims?
Yes. “It’s probably fallacious to simply ascribe the economy’s strong performance under Democrats to Democratic policies, and vice versa,” says Rick Newman at U.S. News & World Report. “Economic policies take years to filter into the real economy,” and it’s possible that Reagan’s policies set the stage for the economic boom years during the Clinton administration. Furthermore, party identification isn’t a reliable gauge. “The policies of Republican Richard Nixon, who by today’s standards would be considered a liberal on domestic policy, reflect little of the positions of today’s Republican Party,” says Glenn Kessler at The Washington Post. And the truth is that presidents don’t actually have that much influence over the economy. Some would argue that it’s mere luck that Clinton was sworn in just as the tech industry took off.

Still — isn’t this good news for Democrats?
“The irony is obvious,” says Newman. “Republicans are considered the business-friendly party, while ‘tax and spend’ Democrats are regarded as redistributionists eager to transfer wealth from those who have it to those who don’t.” The lazy stereotype doesn’t hold up against the numbers.

Tempering Expectations for Economic Recovery

From CNN.com

Do you feel the slow but steady recovery of the broader economy? Many do not yet, as detailed in this recent piece by David Frum for CNN.com:

Friday’s weak jobs report is more than a disappointing blip.

It is a glimpse ahead of our disappointing future.

Nearly three years from the beginning of the economic recovery in the summer of 2009, the U.S. economy has replaced not even half the jobs lost in the slump of 2007-2009. At the current pace of job creation, it will take until 2017 to replace all the jobs lost.

But of course the population has grown since 2007, so “replacement” is not good enough. We are even further away from equaling the employment rate of 2007 — the proportion of the working-age population at work.

Even when (or if) full job recovery does come, it will not restore the economy of 2007 just as it was.

Recessions reshape economies.

The best book written about the social effects of the Great Recession is Don Peck’s “Pinched.”

Peck shows us a new world emerging from the catastrophe of 2008, a new world that most Americans will find harsher than the old.

For example: Despite the long, slow relative decline of manufacturing as a source of American jobs, the total number of manufacturing jobs in the United States had remained constant at about 18 million for decades. Between 2007 and 2009, the number of manufacturing jobs dropped by 6 million.

While manufacturing is beginning a recovery now, itseems impossible that the sector will regenerate to anything like its former extent.

The new jobs being added to the U.S. economy pay less, on average, than the jobs lost — which is why the average rate of pay in the United States remains stagnant or even drops as the number of jobs slowly grows.

At the top of the economic heap, recovery has been more complete. The richest Americans suffered sharp shocks to their wealth when markets collapsed in 2008-2009. As financial markets have revived, so has the wealth of the top 1% (households earning more than $380,000 per year.)

The top 5% have done OK, too. (The top 5% begins a little south of $200,000 in household income.)

For most of the country, however, the outlook is — to borrow Peck’s title — “pinched.” Young people who come of age in the crisis will earn less through their lives than those who came of age during happier times. Marriages break up. Babies are not born. A sense of unfairness spreads through the society. Politics becomes angrier and more paranoid — for those who take part — while many others drop out of public life entirely, disregarded and alienated.

The country’s political class tends to discuss these hard economic and cultural facts as if they were interesting only in relation to the presidential race, as if the only questions that mattered about economics were: “Good for Obama?” “Bad for Obama?”

For most of the country, however, Barack Obama is a flickering electronic image, an only intermittently interesting distraction from the realities of life: stagnant pay, unattractive job options, darkening retirement prospects for the middle-aged and narrowing opportunities for the young.

What would it take to do better? The answer, ironically, will be nearly equally difficult (but in very different ways) for politicians of either party.

To do better, we’ll need a program to stimulate employment for the long-term unemployed — including potentially a New Deal-style requirement that nobody receive benefits without working. It’s no good to anybody — the unemployed least of all — to allow the unemployed to collect two years’ worth of benefits while waiting at home, their skills atrophying, their resumes going stale.

To do better, we may need to induce employers to create jobs, not only through tax cuts but through direct subsidies, including subsidies of the cost of health coverage. (Especially for older workers, health costs can be more of a deterrent to hiring even than the cost of wages.)

We will need to curtail the generosity of Medicare to open fiscal room for government programs to support opportunities for the young.

We will need a permissive monetary policy that accepts moderate inflation to reduce the burden of mortgages and other debts — even if it bites a little into savings and fixed incomes.

We’ll need above all to recognize the magnitude of the social distress we still face, even as the economic statistics tell us of a recovery that moves financial markets and presidential polls — but that threatens to bypass tens of millions of Americans for months and years.

Editor’s note: David Frum, a CNN contributor, is a contributing editor at Newsweek and The Daily Beast. He was a special assistant to President George W. Bush from 2001 to 2002 and is the author of six books, including “Comeback: Conservatism That Can Win Again.”