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As they say, if you want to get a job, it helps to have a job. The San Francisco Fed:
In conventional models of the labor market, unemployed people search for jobs and respond to job openings posted by employers (as in Mortensen and Pissarides 1994). However, job search is not limited to just those currently without jobs. Each month, millions of employed people also search for new jobs hoping to change employers. While a lot is known about the job-search behaviors of the unemployed, the same is not true for the employed.
In this Economic Letter, we investigate active job searching among the employed and its implications for labor market turnover. We find that people on a payroll actively search for jobs at about half the rate as those without jobs. Employed workers who search are much more likely to transition into a new job than those who do not. However, roughly three-quarters of job switchers did not report having looked for a new job, because there are many more nonsearchers than there are job-seekers. Instead, workers who switched jobs seem to have been actively sought out and recruited by their new employers.
The US runs a massive welfare state. But Big Government is probably bigger than you realize. And it’s mostly not being run for the folks who need it the most, as New York Times reporter Eduardo Porter explains. In his piece, Porter cites new Peterson Institute research that notes government’s direct social spending (at all levels) is 19% of GDP vs. the advanced economy average of 21.5% and 26.3% for the three Nordic nations plus Austria, Belgium, France, and Italy.
But that sort of calculation misses a lot. It misses “tax breaks with a social purpose” such as the Earned Income Tax Credit and the tax exclusion for employer-provided healthcare. Nor does it include how other governments try to “claw back” benefits by taxing them. Make those adjustments, and the US suddenly looks much less exceptional. Peterson’s Jacob Funk Kirkegaard: “The United States general government in fact spends only a few percentage points of GDP less on social affairs than most of the Scandinavian welfare states.”
And when you add in private spending, including some mandated by law, you see the US has a pretty massive social safety net. Kirkegaard: “Taking the full effects of tax systems and social spending from both private and public sources into account, the United States is seen to be devoting more resources toward social purposes than is generally acknowledged. In fact, only the French spend more than Americans, while the alleged welfare-addicted Scandinavians and Europeans spend less on average.”
But here’s your trouble: When you combine the distribution of federal benefits and tax expenditures, you find that $32,000 goes to the top 20% versus $24,000 a year to the bottom 20%. And a big reason for that is that wealthier Americans get a lopsided benefit from tax breaks. More than half of the combined benefits of the 10 largest tax expenditures go to that top fifth of households, with 17% going to households in the top 1%. Porter:
Such spending through the tax code not only offered the false promise of smaller government. Its most insidious effect was to hide what the government does and, notably, to shield from political debate which people it benefits most. That is clearly not those of middle and low income, who don’t earn enough to qualify for many tax deductions and often don’t even claim them. Built in the shadows, protected from democratic accountability, the government developed into a Rube Goldberg contraption that has only a weak claim to a defensible social purpose. It might not be the smallest government in the advanced world, but it can lay claim to being among the least efficient and the most unfair. …
Interestingly, this suggests that the idea animating most liberal Democrats these days — that government must tax and spend more to provide the generous social insurance that is common among America’s peers — might be wrong. Indeed, looked at this way, the government might actually be big enough. But if the United States is to moderate the extreme inequities thrown up by the market economy and provide a true safety net to people in need, the federal government would have to tax and spend very differently.
My take on how to spend less money on people who need it the least: (a) expand the EITC, (b) better target Social Security, (c) rethink the mortgage interest deduction , (d) phase out and replace with a tax credit the tax exclusion for employer-provided health care. Just for a start …
Tax collections from individual Americans last year reached their highest share of the U.S. economy in seven years while corporate tax revenue again lagged historical averages, a new congressional report showed on Monday. The Joint Committee on Taxation (JCT) said in a review of the tax system that individual federal income tax receipts were 8.1 percent of gross domestic product (GDP) in fiscal 2014. That level was last achieved in 2007 before the financial crisis plunged the economy into its worst recession since the 1930s.
As large companies clamor for tax code reforms aimed at reducing corporate rates, the JCT data show individual wage-earners and business owners who treat their firms’ profits as personal income are bearing an increasing share of the U.S. tax burden. Meanwhile, federal corporate income tax collections were just 1.9 percent of GDP, up slightly from the past two years, but below the 2.6 percent average since 1950.
Don’t get me wrong, I assume the data itself are correct. But I would guess that many Reuters readers would draw the conclusion that the corporate tax burden should increase, at least back to its historical level. But keep in mind that corporations, as a recent AEI analysis noted, “are merely institutions through which people conduct their business affairs. … Taxes on corporations must ultimately be borne by individuals, although it is unclear how the burden is divided among corporate shareholders, other recipients of investment income, employees, or consumers of corporate-sector goods and services.”
Capital can be shielded from U.S. corporate income taxes by funding projects outside of the United States rather than within its borders. If capital flees the country in response to higher corporate income taxes, then American workers have less capital to work with, reducing their productivity and, ultimately, their wages. The wage decline means labor bears a share of the burden of the corporate tax, not just capital. The exact portion of the corporate tax burden that ends up getting shifted to labor depends upon a number of factors, including the extent to which the flight of capital from the United States drives down worldwide returns, the degree of international mobility of capital and labor, and the substitutability of capital and labor.
The JCT has decided to assign 25 percent of the burden of corporate income taxation to labor and 75 percent to capital. The Congressional Budget Office recently made the same allocation after assigning for many years the entire burden to capital. The Office of Tax Analysis at the Treasury Department also began assigning part of the corporate tax burden to labor in 2009; it now allocates 18 percent of the burden to workers and 82 percent to capital.
These agencies’ recognition that workers bear some of the burden of the corporate income tax is a good first step, but there is more to do. The empirical literature, which American Enterprise Institute economist Aparna Mathur and I reviewed in a 2011 Tax Notes article, indicates that the share borne by labor is higher, possibly much higher, than the agencies assume. Several studies have shown that a $1 increase in corporate tax revenue might decrease aggregate wages by more than $1 — high-end estimates show them falling $2 to $4. That means a corporate tax cut might be a big gain for lower-income Americans.
So increasing the corporate tax burden also means increasing the tax burden of American workers (and the reverse). But there might be a better way, one that involves getting rid of the corporate tax …
The postwar period has seen a huge increase in the credit-to-GDP ratio, driven in large part by mortgage lending. (See here for what I have written about “mortgage Keynesianism.) And how has this phenomenon affects US economic recoveries? In an economic report for the San Francisco Fed, economists Òscar Jord, Moritz Schularick, and Alan M. Taylor examine that question (ans they refer to the above chart]:
Figure 3 confirms several well-known results and provides some new ones. First, recessions associated with financial crises are deeper and last longer, no matter the era. Second, it was harder to recover from any type of recession in the pre-WWII era than it was later. The typical postwar recession lasted about a year. After two years, GDP per capita had grown back to its original level and continued to grow for the next three years. Financial crisis recessions lasted one year longer and only returned to the original level by year five.
More interesting in Figure 3 are the two alternative scenarios in which credit in the expansion grows above average. A credit boom, whether in mortgage or nonmortgage lending, makes the recession slightly worse in the prewar period, especially when associated with a financial crisis. But in the postwar period an above average mortgage-lending boom unequivocally makes both financial and normal recessions worse. By year five GDP per capita can fall considerably, as much as 3 percentage points lower than it would have otherwise been. In contrast, booms in nonmortgage credit have virtually no effect on the shape of the recession in the same postwar period.
Why the difference? At this point we can only speculate. A mortgage boom gone bust is typically followed by rapid household deleveraging, which tends to depress overall demand as borrowers shift away from consumption toward saving. This has been one of the most visible features of the slow U.S. recovery from the global financial crisis (Mian and Sufi 2014).
If Congress and the President were compelled to design from scratch a policy to increase upward mobility, it’s likely that they would (eventually) come to agreement on a set of strategies. The policy would try to increase parent incomes, increase work among parents, reduce out of wedlock births, and boost the skills of poor children. Welfare reform seems to have succeeded advancing the first three of these objectives. The implication is that further safety net reforms along the same lines—require more of beneficiaries but provide more in terms of work supports—could also move more poor kids up. And if conservatives were also to introduce a serious early childhood agenda, we’d have all four bases covered.
Just how tight is the US job market? With America getting older, you have to control for the aging factor. One way to do that is by examining the employment of males 25-54. David Andolfatto and Michael Varley of the St. Louis Fed go one step further and compare US employment rates to those of Canada. Over the long term, the rates in both economies have tracked pretty closely.
One difference is that Canada had a long, nasty recession in the early 1990s while the US counterpart was shorter and shallower. But our Great Recession in 2008 was worse than Canada’s downturn. Andolfatto and Varley speculate whether the 1990s Canadian downturn suggests where the US might be in its labor market recovery (based on the above chart):
It is tempting to conclude, on the basis of this comparison, that the U.S. recovery in employment is not yet complete. If the Canadian experience is a guide, it may still take three to four years for employment to return to a “normal” level of between 87 percent and 88 percent. Since the current U.S. employment rate for prime-age males is presently 84.5 percent, one could make the case that there is still some “slack” in the U.S. labor market.
Here’s what economists mean when they talk about stagnant middle-class incomes: In the first quarter century after World War Two, median household incomes rose by about 3% a year. Since then, about 0.2% a year, or virtually flat.
Why the big downshift? In a new analysis, Goldman Sachs cites a number of reasons: (a) slower productivity growth, (b) labor getting a falling share of national income, (c) greater income inequality, and (d) rising cost of living, particularly energy and healthcare.
But are middle-class fortunes about to change? Goldman Sachs economists, including Jan Hatzius, say they “expect real median household income to grow significantly faster over the medium and longer term than in the dismal 1973-2013 period.” And the main reason why is that they see “signs that the widening of the US income distribution is leveling off.”
First, the tightening US labor market should favor wage income over capital income. Second, there been a stabilization in the distribution of wage income between workers in the 90th percentile and those in the 50th percentile. Goldman: “In particular, the headwind from a shifting income distribution seems to be abating. After a big widening in the 1980s and 1990s, the distribution of wages has been fairly stable in the last 10-15 years, and the labor share of GDP has now probably stopped falling as well.”
Moreover, the bank also expects better productivity numbers. Real GDP per hour rose 2.8% annually in the quarter century before 1973, but just 1.8% since, including 1.2% during this recovery. But the economists note that much of the weak productivity performance the past few years comes from weak capital spending, not slower innovation. And the former should improve to around 2%.
Goldman’s bottom line: “Our conclusion is that the stagnation in middle-class incomes since the 1970s is likely to give way to moderate growth. … our expectation remains that real median household income growth will return to a growth pace of 1%-1½%. This would only be half as fast as in the immediate postwar period, but still a meaningful improvement over the past four decades.”
My take; Great news if true, obviously, though it should be noted that Goldman has been one of the more optimistic Wall Streets firms. As an aside, I would add that broader measures of middle-income — such as ones that are post-tax and include the value of health and retirement benefits, food stamps, and Medicare-Medicaid — show far stronger income growth in recent decades. The CBO, for instance, finds “cumulative growth in the inflation adjusted after-tax income [including transfers] of households in the 21st to 80th percentiles” was an estimated 40% from 1979 though 2011.” That ain’t nothing, but less than the immediate postwar period. Of course, the postwar period also includes many one offs including tight labor supply and a unique global competitive position.
It’s not just left-wing progressives and Occupy Wall Street remnants who think US income inequality is a problem. A large 2014 Pew poll found about two-thirds of Americans think the income gap has gotten worse and that government has a role in reducing that difference. Even 45% of Republicans think government should do something.
But do what exactly? Noam Scheiber in The New York Times summarizes research that found just 13% of wealthy Americans said government should “reduce the differences in income between people with high incomes and those with low incomes.” And only 17% percent said the government should “redistribute wealth by heavy taxes on the rich.” (Also, according to a different study, the wealthy view the income gap as reflecting the results of individual choices and mistakes rather than larger forces.) The rest of America, on the other hand, finds more appealing the idea of tax-driven redistribution. Scheiber points to a 2013 Gallup poll that found by 52%-45% Americans think wealth should be more evenly distributed with 52%-45% favoring tax hikes on the wealthy.
How will the next US president see things? The same as their donors, according to Scheiber:
Appearing at a candidate forum in late January, three likely Republican presidential contenders — Senators Ted Cruz,Marco Rubio and Rand Paul — all made a striking confession: They considered “the increasing gap between rich and poor” to be a problem. But on the question of whether the government should intervene to solve it, Mr. Cruz and Mr. Paul rejected that approach, and Mr. Rubio appeared to agree with them. When “government takes over the economy,” Mr. Cruz said, “it freezes everything in place. And it exacerbates income inequality.” He proposed lowering taxes and loosening regulations instead. …
Jeb Bush, arguably the most outspoken potential Republican candidate on the subject, has struck much the same posture as his more conservative rivals. “We believe the income gap is real, but that only conservative principles can solve it by removing the barriers to upward mobility,” Mr. Bush wrote when announcing the formation of a political action committee this year. Mr. Bush vowed to “celebrate success and risk-taking, protect liberty, cherish free enterprise.” … It’s not just right-wing presidential aspirants like Mr. Cruz and Mr. Paul whose statements on inequality diverge from public opinion. Hillary Rodham Clinton, though she has been more open to a government role in solving the problem, has yet to mention tax increases as a possible answer.
A few thoughts:
1.) The Gallup poll results on redistribution are roughly same as they were in back in 1985 and haven’t moved much except around the Financial Crisis and Internet stock bubble/bust. The numbers on tax hikes are also about the same as when that poll was first taken in 1999. So greater inequality has not been matched by a markedly greater desire for redistribution.
2.) Maybe one reason for the above results is that income inequality looks most severe when you look at the pre-tax, pre-transfer “market income” numbers of inequality researchers Thomas Piketty and Emmanuel Saez. But the 99% do a lot better – both in terms of inequality and income growth — when you factor in all the redistribution going on through the tax code and welfare state. Other recent research shows upward mobility has also deteriorated despite greater high-end inequality. It’s a complicated story.
3.) While Hillary Clinton has not proposed raising top tax rates, it is not hard to envision her, like President Obama, supporting a reduction in tax breaks favoring the rich and using that money for, say, universal preschool.
4.) How should Republican pols think about income inequality? This is my short version:
The big problem with high-end inequality is not that it necessarily reduces GDP growth. Instead, it increases the impact of barriers to income mobility such as poor schools, pricey colleges, weak public transit, and onerous occupational licensing schemes. If you can’t climb the ladder, then a top rung that’s ever further away becomes a bigger problem. While conservatives should applaud when an entrepreneur strikes it rich thanks to an innovative new idea, product, or service, they should freely criticize crony capitalist policies that benefit the powerful and politically connected, such as special tax breaks, strong intellectual property laws, or the safety net for Wall Street banks that are “too big to fail.”
5.) Let me also add that there is much to be said for limiting inefficient upper-end tax breaks — such as for healthcare and housing — and using some of that dough to expand tax credits that support work and increase take-home pay for working class Americans. At the same time, Republicans should continue to emphasize the need to increase the pace of economic growth as the greatest economic challenge facing America right now — even through polices such as reducing business taxes that may strike some as inegalitarian.
An interesting “what if” scenario from Deutsche Bank’s Gaël Gunubu on H.J. Heinz ‘s purchase of Kraft Food, particularly as it concerns the role of the Oracle of Omaha:
Thought experiment: how would this “merger” have been reported if you swapped the popular, cuddly Warren Buffet with Gordon Gekko? No-doubt critics would have recalled his audacious acquisition of Heinz two years ago. Next the sad tales of fired workers and shuttered factories in order to recoup the 40 per cent he paid above the decade average sector ev/ebitda multiple. Having squeezed Heinz’s ebitda margin to 28 per cent (the global sector average margin is just 11 per cent) the story turns to Gordon’s attack on Kraft. Goosed earnings on a 14 times multiple unfairly justifies taking control of the merged company (Kraft makes almost twice the revenues and more profit). Questions would have swirled around the sustainability of Heinz’s opex cuts and the fate of Kraft’s 22,000 employees. But it’s Warren, not Gordon – so such a narrative is unimaginable.
The disappearance of middle-skill, middle-paying jobs over the past generation is a global phenomenon. One I have written frequently about. The technical term is “job polarization.” Jobs are created at the top and bottom but not so much in the middle. Machines have been replacing humans in middle-skill jobs that involve, as described by economist David Autor, “performing routine, codifiable tasks.” More from the St. Louis Fed:
Whether the routine activities be manual (production, craft and repair; or operators, fabricators and laborers) or abstract/cognitive (sales, office and administrative), they have the common trait of being increasingly performed by machines or computers, goods for which prices have fallen substantially in recent years (both absolutely and relative to labor).
One pattern is that middle-skill/wage jobs suffer disproportionate losses during a recession and then see weak growth during the subsequent recovery. That certainly seems to be the case during the Great Recession and the Not-So-Great Recovery, as reflected in the above chart. But there might be a bit of good news this front, according to economist Josh Learner (via FiveThirtyEight’s Ben Casselman):
The good news is that middle-wage jobs are starting to make a comeback. 2014 was the best year for these jobs since 2005, both in the absolute number of gains and in terms of growth rates. Much of the improvement can be tied to construction workers, however 8 of the 11 broad occupational groups within middle-wage jobs picked up in 2014, including teachers and admin support, while production and transportation remained strong. While economists debate the semantics of the manufacturing renaissance, production employment is clearly on the mend.
That being said, middle-wage jobs still trail the top and bottom. Specifically, while high- and low-wage jobs have fully regained their recessionary losses and never been more plentiful, middle-wage jobs have regained just 43 percent of their losses and remain 4.6 percent below their peak levels. A majority of Americans are still employed in these occupations (62 percent), and while middle-wage jobs will continue to increase in aggregate, their share of the labor market is shrinking.
Also note this chart from Lerner showing where job growth has been:
Kind of looks like an “average is over” economy.