EPOP Goes the Weasel?

Conventional wisdom has it that our current biggest economic problem — nagging high unemployment — began, starting in 2007, with the Great Recession, and that everything was rosy before that.

Trouble is, that's not quite the whole story. This chart from The Washington Post shows why:

Today, according to the "epop" statistics, only 66.7 of every 100 Americans of working age have jobs. For women, the figure is 62 percent; for men, 71.4 percent. But overall employment and that for each of the two sexes taken individually used to be significantly higher, reaching a peak in the total population in the year 2000.

An accompanying story by The Post's Peter Whoriskey can be read here.

Notice that the percentage of working-age men that are actually employed has been trending downward since at least 1970, according to the graph, while "epop" for women was trending upward prior to the general downturn in 2000.

Here's a longer-term look at the men's ratio, taken from FRED (Federal Reserve Economic Data) here:

(Click to enlarge.)

And the longer-term women's ratio, from here:

(Click to enlarge.)

From as far back as the start of the post-WWII era, in about the year of my own birth, 1947, to the start of the present century, employment among men has trended downward while that among women has trended upward. But since 2000, employment among both sexes has been heading downward, and the Great Recession has only exacerbated the problem.

I think we all need to keep these "epop" trends in mind as we debate what to do about the high unemployment rates that nag us today.

Equality of Economic Opportunity: Obama's Main Thrust

In the print edition for Sunday, Nov. 25, 2012, Washington Post economics writer Zachary Goldfarb offers his take on "How fighting income inequality became Obama’s driving force." This title is a misnomer because, as the article reveals, President Obama has worked most consistently to increase equality of economic opportunity — not income equality per se — for America's lower-middle and working classes.

Yet, overall, there is an increasing gap in incomes, wealth, and opportunity.

Obama's "consistent and unifying principle," writes Goldfarb, is "to use the powers of his office to shrink the growing gap between the wealthiest Americans and everyone else." And make no mistake, the gap between the incomes of the wealthiest among us and the incomes of everyone else has widened over the past 30 years. Here is a graph showing the extent to which the top 0.01% have increased their share of total national income since the Reagan years in the 1980s:

But Obama's solution to income inequality is not so much to redistribute income downward directly, through out-and-out welfare programs, as it is to open up new avenues of economic opportunity for those who need them most.

Perhaps surprisingly, the nation's first black president has long seen economic class, not race, as the great dividing line in our society, says Goldfarb. President Obama knows full well that "economic mobility has slowed or declined," according to Goldfarb, "providing young people with fewer opportunities than their parents had to ascend the economic ladder." So the Obama administration has done certain things to help offset that:

• The "Obamacare" health care reform law will, starting in 2014, charge the richest 1% an income surtax that will nick them for an average of an extra $20,000 apiece, with the proceeds going to "finance insurance subsidies and other coverage in 2014 for people in the lower middle class and below."

• The richest 1% along with the next 1% will pay income tax at a higher marginal rate of 39.6%, if Obama gets his way during the current "fiscal cliff" bargaining.

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By the way: We are hearing a lot about what income levels at the top of the spectrum would be taxed more heavily under the Obama administration's plan. The figure $250,000 for families ($200,000 for individual tax filers) keeps cropping up as, supposedly, the bottom end of the 2% range that would be taxed at a marginal 39.6% rate. But $250,000 represents a figure in the top 3%, not the top 2% ... see Want to Know Your Household Income Percentile Ranking? and also What Percent Are You?.

H-m-m-m-m-m-m ...

Here is a useful chart from Want to Know Your Household Income Percentile Ranking?:

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Yet President Obama's biggest concern is education, not taxation, Goldfarb writes. "Despite budget pressures," the article says, "he made a goal of having every student receive at least one year of college. ... Obama’s rhetoric reflects an acute awareness of recent research. The data show that rising inequality is largely the result of a changing economy that handsomely rewards people with better skills or credentials — a college education — and leaves people with a basic education at a disadvantage."

Obama's economic advisers, during his initial bid for the presidency in 2008, demonstrated to him that "the income of top earners had once climbed at about the same pace as every other category, but had sharply diverged in the previous 30 years. ... [And] the value of a college degree, always lucrative, had soared as a financial advantage. ... [And there's been a] startling drop in the demand for workers — in auto factories and clerical positions — who were being replaced by computers and machines."

Hence, in a nutshell, candidate Obama was convinced that "increasingly sophisticated technology required more educated workers, who subsequently could capture more of the nation’s income."

Fast forward to Obama's second term as president. What is now needed, say some experts, are accordingly "universal child-care and preschool programs, designed to start children on an early path to the skills they will need to succeed while freeing parents to earn more." Also needed are further government outlays to "reduce the escalating cost of college."

But both of those initiatives would cost the taxpayers considerable money. Goldfarb asks whether Obama dares propose them, in the teeth of a hostile Republican-run House of Representatives and of the current fiscal cliff discussions.

Stay tuned for more on that ...

The "Fiscal Cliff"

What is the "fiscal cliff"?

The federal government spends more money than it takes in in revenue. That's the annual federal budget deficit. Each year in which that happens, the cumulative size of the federal debt goes up. The federal debt is money owed to the public: lenders who buy government bonds. The government has to regularly pay those lenders interest on the debt. The higher the federal debt, the more interest is owed in each fiscal year.

It's dangerous to let the debt get too large as a percentage of "the economy," a.k.a. the gross domestic product. GDP is a measure of the size of the economy. It aggregates the money value of everything that is produced in a given year.

As the ratio of federal debt to GDP goes up, there is increasing fear that the government will someday have to default on its regular interest payments due to not having enough money left over from other spending to cover the payments. So the interest rate on government bonds has to rise to induce the public to keep buying bonds, and the whole debt-to-GDP problem spirals out of control as the ballooning size of interest payments eventually eats up the entire federal budget.

According to "Choices for Deficit Reduction," a November 2012 report by the Congressional Budget Office, in the 2012 fiscal year the federal deficit will be $1.089 trillion. The federal debt at the end of 2012 will expand to $11,280 trillion, or 72.6 percent of GDP.

To rein in the deficit and blunt the debt threat, Congress passed a law, the Budget Control Act of 2011, that would cause federal taxes in several categories to rise in 2013. The tax hikes would by accompanied by across-the-board cuts in defense spending and in discretionary domestic spending. Here is a graph showing what would happen on January 1, 2013, if we go over the "fiscal cliff":

(Click to enlarge.)

This graph comes from The Washington Post. You can access it here. You can also just click on the graphic to enlarge it.

The related Post article says that the fiscal cliff is "a towering accumulation of $500 billion in budget cuts and expiring tax breaks that would abruptly reduce government borrowing but could trigger a new recession."

Note that there are three kinds of tax hikes in store if we go over the "fiscal cliff" in January:

1. The "tax holiday" that was instituted during the first Obama administration will end, and so payroll taxes will rise.
2. The "Bush era tax cuts" on personal incomes will expire.
3. "Tax extenders" such as the "patch" which keeps the Alternative Minimum Tax on personal income from kicking in at very moderate income levels will vanish.

There is also the threat of the looming "sequester," a feature of the "fiscal cliff" in which automatic across-the-board cuts in the Pentagon budget and in so-called discretionary domestic spending will kick in, reflecting the terms of the 2011 "debt-ceiling deal." In that deal, Congress and the president agreed to set up a committee to devise a fair and balanced plan to cut the deficit. If the committee failed to agree on a plan, the automatic sequester would instead arrive on January 1, 2013. Well, the committee failed to agree, and the fabled sequester now looms.

Mandatory spending on entitlements such as Medicare and Social Security was left alone by the Budget Control Act and the debt-ceiling deal.

If sequestration actually goes into effect on January 1, 2013, along with the various tax increases, the CBO projects that the fiscal 2013 deficit will drop to $641 billion. It would otherwise be $1.037 trillion if the automatic spending cuts and tax hikes of the "fiscal cliff" were not to go into effect.

But those arbitrary expenditure cuts and tax increases which make up the "fiscal cliff" would mean less money is spent by the government and by consumers on goods and services. GDP would shrink as businesses sell fewer products and have to lay off more workers. The economy would surely enter another recession.

Those arbitrary expenditure cuts and tax increases will indeed happen unless a "grand bargain" is agreed to between Congress and the president before the end of 2012.

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So we are between a rock and a hard place. If we don't tame the deficit and pare down the federal debt, we face the looming threat of federal insolvency. But if we let automatic across-the-board spending cuts and tax increases go into effect at the end of 2012, we'll drive the economy back into negative GDP growth with a concomitant rise in unemployment.

Meanwhile, pending the arrival of either the "fiscal cliff" or some sort of "grand bargain," businesses can't estimate how fast GDP is going to grow. Anticipated fast GDP growth might induce corporations and small businesses to spend more money to expand. They'd hire more employees, more people would receive regular paychecks, and so they'd spend more money. Businesses would sell more goods and services, and GDP would grow still faster.

But worry about the "fiscal cliff" keeps that virtuous circle from developing. Businesses generally need to wait to expand until they know what the federal government is going to do about the deficit and the debt. They expect looming tax hikes would adversely affect them, as small business income is taxed as personal income of business owners ... and as corporate taxes would go up as well. Government spending cuts would likewise hurt businesses, as aggregate demand for what they make or do is concomitantly reduced in quantity.

Barack Obama, as our newly re-elected Democratic president, has said he wants to work with Congress to figure out how to combine tax increases with spending cuts in a way that would avert the most disastrous effects of the "fiscal cliff." He wants to increase taxes on people with incomes over $250,000, while holding taxes steady on those with smaller incomes. For each dollar of increased tax revenue, he wants to find $2.50 in carefully designed spending cuts that would minimally impact ongoing federal responsibilities and the economy.

Speaker of the House John A. Boehner, an Ohio Republican who was also just re-elected, objects to any tax-rate increase for richer Americans. Instead, Boehner prefers to collect additional income tax by virtue of eliminating or limiting deductions which reduce tax filers' taxable incomes below their actual incomes. Those "loophole" reductions would ostensibly accomplish the goal of collecting more money from the well-to-do while not hurting the middle class. Boehner would complement that aspect of deficit reduction with his own selection of appropriate spending cuts.

But Democrats charge that eliminating or limiting such deductions as those for home mortgages and charitable contributions would unacceptably nick the middle class, and in any case could not bring in enough new revenue. The rich would not be required to pay their "fair share." The economic recovery would be set back because too many of the dollars not collected from the well-off would be saved by those wealthy folks, rather than shelled out for goods and services. Dollars left with the middle class, on the other hand, would tend to be spent right away on things that businesses make or do. So the preference of Boehner and the Republicans for loophole reductions rather than tax-rate hikes, the Democrats say, wouldn't be the best thing for the economy.

And, Democrats say, Boehner would need deeper spending cuts than he admits to needing, in order to achieve any given deficit reduction target. That would cut too much into the ability of the government to carry out the functions most Americans expect of it.

The CBO report says that leaving the 2011 Budget Control Act in place, without any "grand bargain" modification, which the CBO calls its "baseline" scenario — it is the scenario represented by actually going over the "fiscal cliff" — will indeed reduce the deficit exactly as advertised. By fiscal 2020 the deficit would drop from the current $1.089 trillion to just $142 billion, after having dropped as low as $79 billion in fiscal 2018.

Under the CBO's "alternative fiscal scenario" — in which current tax breaks get extended rather than expiring, and the other provisions of the 2011 Budget Control Act get set aside — the deficit would stay big, so that by fiscal 2020 it would be fully $1.102 trillion annually. The debt would balloon to $19,477 trillion — where under the baseline scenario it would be only $13,964 trillion, or just 61.4 percent of the estimated GDP at that time. Under the CBO's "alternative fiscal scenario," the debt-to-GDP ratio would bloat to fully 85.7 percent. Even worse, by 2037 the debt-to-GDP ratio would skyrocket such that the federal debt is (gasp!) 200 percent of GDP!

The CBO explores other deficit reduction schemes besides the "baseline" scenario in its report, and suggests that some of them would successfully pare down the deficit in much the same way as the baseline "fiscal cliff" scenario does, but with fewer negative side effects on the economy or on the level of government services. In other words, there is much room for a "grand bargain" to be struck.

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Yet the CBO also finds that the 800-lb. gorilla in the room is something the "baseline" or "fiscal cliff" scenario doesn't address: entitlements. The anticipated level of "benefits from Social Security and Medicare and long-term care services financed through Medicaid" are set to grow unsustainably, mainly due to a large rise in the cost of delivering health care:

(Click to enlarge.)

The growth in Social Security benefits between now and 2037 is meanwhile expected to be quite moderate as a percentage of GDP, and other noninterest spending as a percentage of GDP is expected to decline. But government health care expenditures as a percentage of GDP will rise from roughly five percent today to around 10 percent by 2037!

Of that rise, the lion's share is due to Medicare. An aging population is expected to demand correspondingly more health coverage under the Medicare program ... even as the cost of health care delivery continues on its present trajectory of swift growth.

The CBO report says, "Unless [major federal health care programs and Social Security] are changed, or the increased spending is accompanied by some combination of sufficiently lower spending on other programs and sufficiently higher revenues, deficits will be much larger in the future than they have tended to be in the past."

So merely finding a way to avoid going over the "fiscal cliff" is not enough. Congress and the president have to find a way to tame the growth of Medicare as well.

Stay tuned for more about the "fiscal cliff" ...