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Article Artículo

Affordable Care Act

Volcker and Peterson: Ignoring the Lack of Demand Problem

Former Federal Reserve Board Chair Paul Volcker and private equity billionaire Peter Peterson had a NYT column this morning complaining that not enough attention is being paid to the national debt. The piece uses wrong-headed economics and xenophobia to try to scare readers into backing their austerity agenda.

On the economic side, it implies that the prospect of a rising debt to GDP ratio implies an imminent crisis.

"Yes, this country can handle the nearly $600 billion federal deficit estimated for 2016. But the deficit has grown sharply this year, and will keep the national debt at about 75 percent of the gross domestic product, a ratio not seen since 1950, after the budget ballooned during World War II.

"Long-term, that continued growth, driven by our tax and spending policies, will create the most significant fiscal challenge facing our country. The widely respected Congressional Budget Office has estimated that by midcentury our debt will rise to 140 percent of G.D.P., far above that in any previous era, even in times of war."

There are several points to be made here. First the ratio of debt service to GDP is currently just 0.8 percent. (This is net of interest payments rebated by the Federal Reserve Board.) This is near a post-war low. By comparison the ratio was over 3.0 percent in the early and mid-1990s. In other words, the reality is the exact opposite of what Volcker and Peterson claim, the burden of the debt on the economy is unusually low.

Second, if interest rates rise precipitously, which they imply will happen for unexplained reasons, we can always buy back the debt at large discounts, thereby reducing the debt-to-GDP ratio. This would be an absolutely pointless move, but if distinguished people who can get columns in the NYT think the debt-to-GDP ratio is important, it can be done to humor them.

Finally, the widely respected Congressional Budget Office (CBO) has repeatedly been wrong in predicting that interest rates will rise. (They also seriously over-estimated the cost of the Affordable Care Act and health care more generally.) Ever since 2010 CBO has projected that interest rates will bounce back to pre-recession levels. Each time they have been shown wrong as interest rates remained low.

The reason for the low rates is the weak level of demand in the economy. In this context, the deficit is a good thing and a bigger deficit would be better. It would generate more demand, output, and employment. It would also make us richer in the future since at higher levels of output firms invest more. Also, many workers who are out of the workforce for long periods of time can end up permanently unemployable.

As a result of the low deficits and weak demand in the post-recession years the widely respected Congressional Budget Office estimates that the economy's potential GDP in 2016 is almost 10 percent smaller (almost $2 trillion) than the potential it had projected for 2016 before the crash in 2008. This "austerity tax" is costing the country $6,200 per person in lost output. For some reason, Volcker and Peterson would have us ignore this huge and growing burden that the country now faces as a result of a sustained period of weak demand and instead concern ourselves with the improbable scenario they paint in their piece.

CEPR / October 22, 2016

Article Artículo

United States

Workers

What Paid Sick Days Mean for Domestic Violence Survivors

Some may see evidence of domestic violence as a visible mark on the body — a bruised face, perhaps a broken arm, or much worse for many victims. However, what we may not see are the economic consequences suffered by those who have been abused: how many days of work a victim has missed due to domestic abuse, or how many jobs she or he may have lost due to their abuser’s actions. Domestic violence isn’t limited only to acts of physical violence; abuse may result in financial and economic consequences that take away a survivor’s autonomy. Public policy can help mitigate these devastating effects of domestic violence. A key policy that can help is paid sick days that cover time off to deal with legal and health consequences of abuse. If implemented, such paid sick days laws would positively impact all workers, and also benefit domestic violence survivors.

Paid sick days laws are starting to sweep the country — there are now 37 jurisdictions that have paid sick day laws in effect or where such laws will be implemented soon. Paid sick days provide economic security for victims of domestic violence so that taking time off to deal with domestic violence issues — court appearances, doctors’ appointments, meetings with social workers, or healing — wouldn’t mean survivors have to forfeit income or put their employment in jeopardy. All five states that have passed paid sick days laws — Connecticut, California, Massachusetts, Oregon, and Vermont — include provisions where sick time can be used for specific “safe time” purposes. This allows workers to take time off for purposes related to domestic violence. However, not all city jurisdictions with paid sick days include this provision, an oversight that needs to be corrected. Paid sick days would allow victims time to seek lifesaving services from local domestic violence programs.

CEPR and Tillie McInnis / October 18, 2016

Article Artículo

Robert Samuelson is Worried About Debt

Yes, what else is new? Today's column highlights the growth in debt-to-GDP ratios in both the public and private sectors in the last decade. There are three points worth making on this issue.

The first one is that Samuelson's concern, as noted in the headline, is that the growth of debt will leave us open to another financial crisis. The problem here is that it goes along with the myth that the financial crisis was something that sneaked up on us that no one could detect. In fact, the financial crisis, was a crisis because a bubble was moving the real economy. The housing bubble was driving well over $1 trillion in demand through its impact on residential construction (which was a record high as a share of GDP) and consumption, as people spent based on bubble generated housing equity.

The surge in both areas was easy to see for anyone who looks at the data. It was an astounding failure of policy makers (think Alan Greenspan and the Fed) that they somehow either didn't see the bubble or didn't realize the importance of its collapse to the economy.

This matters because it is wrong to imagine that a potential economy wrecking bubble can grow without any sentient beings seeing it. The policymakers and economists who totally missed the housing bubble have a stake in pretending that it was all very difficult, but their story is not true. It was simple, they just chose not to look at the data and think for themselves.

CEPR / October 17, 2016

Article Artículo

Affordable Care Act

A Little Pre-Election BS From the White House on Income Inequality

I respect Jason Furman, the chair of President Obama's Council of Economic Advisers. I think he is doing a great job in this position. He has called attention to many of the ways in which the government intervenes in the market, like professional licensing (think doctors), intellectual property rules (patents and copyrights), and other restrictions are acting to redistribute income upward. He has also attacked silly myths, like the idea that workers in the U.S. are dropping out of the labor market because of our generous disability program and other benefits. (In a recent report, Jason noted that the U.S. has among the least generous welfare supports of any OECD country, yet it ranks near the bottom in labor force participation rates for prime-age [ages 25–54] men.)

Anyhow, in spite of my respect, I feel the need to call him out on trying to pull the wool over folks' eyes in a recent column. The column touts many of the positive measures (in my view) to help people at the middle and the bottom under the Obama administration, such as expansion of the earned income tax credit, the child tax credit, and most importantly the Affordable Care Act which has extended health insurance coverage to 20 million people and allows people with serious health conditions to get insurance at the same price as every one else. These measures have been paid for by higher taxes on the wealthy. This is all very positive and the Obama administration deserves credit for these measures, even if I would have liked to see it go much further.

However, the reason my BS detector went off is that Furman tried to claim we had turned the corner in some big way on the upward redistribution of income from the last four decades. He tells readers:

"Partly as a result of these policy changes, the top 1 percent’s share of income after taxes was 12 percent in 2013 (the most recent year for which data are available), well below its 2007 peak and roughly equal to its share in 1997."

CEPR / October 15, 2016