James Pethokoukis

Politics and policy from inside Washington

The Great Wage Drop and wage insurance

Jan 11, 2011 15:58 UTC

Big WSJ story on how the Great Recession has reduced wage growth. When the unemployed do return to work, it is often with markedly lower salaries. Here is the money graf:

Between 2007 and 2009, more than half the full-time workers who lost jobs that they had held for at least three years and then found new full-time work by early last year reported wage declines, according to the Labor Department. Thirty-six percent reported the new job paid at least 20% less than the one they lost The severity of the latest downturn makes it likely that many of the unemployed who get rehired will take wage cuts, and that it will be years, if ever, before many of their wages return to pre-recession levels, says Columbia University labor economist Till von Wachter. “The deeper the recession, the lower the wage you’re going to get in the next job and the lower the quality of your next job,” he said.

And here is the money chart:


I am always a bit dubious of these sorts of charts since they depend on accurately measuring inflation.  Some liberal economists, for instance, claim wages have been falling since the Golden Era of the 1970s. More likely that they actually went up by at leasts 20 percent in real terms, according to researchers at the Fed.  But I have no doubt that wage growth slowed during the downturn and many folks have suffered a real and permanent loss of income. I think you will hear Democrats talk more and more about wage insurance — having government temporarily make up the shortfall between old and new jobs — especially with Gene Sperling back in the White House. He is a big proponent of the policy.  And we shouldn’t forget that John McCain proposed something like this back in 2008 during the campaign. Here is what I said back then:

This is an idea that Democrats have been inching toward: a move to a Danish-style “flexicurity” system. In that country, workers who lose their jobs have almost their entire salary replaced by the government but are also required by the government to aggressively look for new employment or accept retraining in a new field.

It’s very expensive. For the United States, completely copying the Danish model—lauded by many as a response to globalization-inspired worker angst—could cost some $400 billion to $500 billion a year if it is as expensive for us as it is for the Danes.

Now what McCain seems to be proposing is a more modest “wage insurance” idea. Under a plan originally put forward by Brookings Institution economist Robert Litan and University of California-Santa Cruz economics Prof. Lori Kletzer, a laid-off worker who once earned $40,000 and found a new job paying just $30,000 would receive $5,000 a year–broken down into quarterly payments–for two years after the initial layoff. Such a plan might cost $4 billion a year.

Yale political scientist Jacob Hacker would up the ante considerably with a $34 billion-a-year “universal insurance” program. If a family experienced catastrophic medical costs or a large drop in income—say, more than 20 percent—owing to a variety of common risks (unemployment, loss of wages because of sickness or childbirth, temporary disability, or the death of a spouse), Hacker’s universal insurance plan would make up a portion of the loss ranging from 20 percent to 50 percent of all losses or costs in excess of a fifth of that family’s income. And House Ways and Means Chairman Charles Rangel has a $1 billion-a-year plan to expand Trade Adjustment Assistance, a benefit and training program for manufacturing workers who lose jobs to trade, to include service workers.

Of course, there are downsides here. First, it could make U.S. labor markets less mobile and dynamic as there would be less incentive for workers to get back into the workforce or start a new business because of Uncle Sam’s largess—especially if the carrot isn’t accompanied by a stick. Second, the program might grow ever bigger, becoming a massive new entitlement.


We’re in need of a “fairness” index in regards to public vs private sector wages-including legacy/pension costs! Also, why shouldn’t 20% of the FED & State jobs be PT and Temp like they are in the private sector? Ask what your country can do for you?

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Obama deficit panel veers dangerously off track

Oct 26, 2010 16:39 UTC

Here’s the problem with President Barack Obama’s deficit reduction commission: Exploding debt caused by out-of-control healthcare spending is an Extinction Level Event for the U.S economy.  By 2050, according to the Congressional Budget Office, the national debt will likely be three times as big as the overall economy with Medicare and Medicaid gobbling up half the budget.

And that’s not even the worst news. Such a fiscal path would cause an economic implosion long before 2050. Financial Armageddon. Yet the Obama panel almost certainly won’t come to agreement on any fixes for healthcare entitlements. Probably not Social Security, either.

But the group is eyeing $1 trillion in annual tax breaks as a way of cutting the budget. These “tax expenditures” include a variety of credits and deductions for federally favored activities. Many economists on both sides – and a few brave politicians – agree, however, that such favoritism introduces harmful market distortions.

While low interest rates and lax regulation had star billing in the American housing bubble, the $89 billion mortgage deduction in 2008 also was a supporting player. It’s also true an aging society and advancing technology are prime drivers of rising healthcare costs. But so too is giving related benefits a $131 billion annual tax break.

Let’s say America axed mortgage-interest deductions, child tax credits and the ability of employees to pay their portion of their health-insurance tab with pretax dollars. All these are mentioned in a Wall Street Journal story on Monday. Analysis by Americans for Tax Reform finds the net effect would be a $2.4 trillion tax hike over the next five years. (Mortgage interest deduction: $638 billion; child tax credit: $60 billion; exclusion for employer-provided health insurance: $1.66 trillion, including higher FICA taxes.)

Such a fiscal drain would surely put America back into recession, unless marginal tax rates were also lowered to compensate.  Cutting the total amount of tax expenditures by half might allow the top income tax rate to be cut from 35 percent to 25 percent.  That is what you want in an ideal, pro-growth tax system: low rates applied to a broad base.

The politics are treacherous. That’s why major reform hasn’t happened in a generation. Back in 1986, Congress agreed to eliminate scores of tax loopholes for individuals. But lawmakers wisely sweetened the bitter medicine at the last minute by lowering the top marginal tax rate by nearly half, making those breaks less valuable. Many businesses were also willing to accept fewer tax breaks and pay higher total taxes in exchange for a simpler code and a lower rate, although this didn’t make it into the final bill.

Obama’s panelists should draw on this experience. They could advocate trimming some of the $90 billion in annual business tax breaks and subsidies while also paring the tax rate on profits, currently the second highest among advanced economies. And if they want to trim tax breaks for individuals, sharply lower marginal rates should accompany.

Austerity alone won’t solve America’s debt problem. We also need to boost growth. Some on the Obama panel seem to have forgotten this.


Any free marketer should be against all these welfare giveaways. We use euphemisms like “tax credits” but in reality they are not different than entitlement payments. They distort the free marker and have one group of people (renters) subsidize another group (mortgage debtors).

If the new Congress is truly free marketers, they will eliminate all these unfair welfare giveaways.

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Austerity by default

Oct 26, 2010 13:55 UTC

Some folks want austerity in the worst way. They may just get it, says the NYTimes:

What could result is “deficit reduction by gridlock,” said John Podesta, the president of the progressive Center for American Progress and a chief of staff in the Clinton White House. That would be the outcome if Republicans, as expected, block additional unemployment aid and if the parties deadlock in the lame-duck session over pending appropriations and the Bush tax cuts that expire Dec. 31. That would leave lower spending levels in place for the fiscal year 2011 and force Mr. Obama and Republicans to try to reach a tax compromise next year.

Again, I find it hard to believe that Congress would ensure a recession by letting all the Bush tax cuts expire. I still think a deal gets struck in January.

The Obama recovery vs. the Reagan recovery

Oct 13, 2010 19:52 UTC

Expect to see this chart from the Heritage Foundation all around the blogosphere. I don’ t think it is completely fair given the different flavors of the two recessions. But I certainly don’t think the current recovery is a robust as could possibly be expected. I think even the POTUS would concede that.



I agree with James Pethokoukis and CND I guess it’s too naive to judge two completely different recessions with a simple graph line without undertanding the context.

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A chat with economist Glenn Hubbard

Oct 13, 2010 15:26 UTC

In their must-read policy manifesto, “Seeds of Destruction,” Glenn Hubbard and Peter Navarro outline the biggest economic problems facing America and what can be done about them. Hubbard is the former head of the Council of Economic Advisers under George W. Bush and is now dean of Columbia Business School. Navarro, a Democrat, is a business professor at the University of California, Irvine and author of  ”The Coming China Wars.” Here are some excerpt from a chat I had with Hubbard:

What could we have done back in 2009 to put the U.S. economy on a better growth trajectory today?

One, not introduce a lot of policy uncertainty — not have healthcare mandates that raise the cost of hiring, threaten tax increases on small  business — but more positively, if one wanted to do stimulus, things you could have done included a payroll tax cut, investment incentives and perhaps even a corporate tax cut.

In the book, you mention trade reform to deal with China’s weak currency and protectionist limits on market access. But what should be done beyond more talks with Beijing?

We have to remind the Chinese leadership that it is in their self-interest to increase domestic consumption. Our self-interest is just the opposite, we need to be saving more. For that environment to be successful, we still need to open markets between the two countries. And where we do see unfair practices, we continue to call attention to them. The currency is not the top thing I am worried about.

You have an idea for a flexible carbon tax. Why would Republicans go for that?

I am not a politician, but I think a couple of things might attract Republican interest. We’re not trying to raise revenue with this. The revenue should be recycled through tax cuts. The point here would be to solve the uncertainty problem in the private sector. You want to promote innovation, but you don’t want something like cap and trade.  But [with really low oil prices], you won’t have the innovation. But if you can go to businesspeople and say I guarantee you [big price swings] won’t happen, then you will get the innovation.

Did we really need to put taxpayer money into the bank back in 2008?

I do think we needed to recapitalize some of the banks. TARP got off to a rocky start because that is not where the Bush administration started. They sort of wound up in a good place but it was a rocky road. The other issue at the time that made is hard was the seeming capriciousness of how each bank failure was handled. That kind of policy uncertainty was chilling.

What would be the best way to deal with the housing market?

I would try to do what we can promote overall economic growth and do what we can to aid consumers in the housing market without subsidizing housing, the plan that Chris Mayer and I put out.  It’s actually a pretty simple solution. Normally a recovery would be helped by a lot of refinancings given the very low mortgage interest rates. But that isn’t happening. And I think if we took away some of the structural impediments and allowed more refinancings, more people could stay in their homes. It would be like a long-term tax cut, and it wouldn’t cost the treasury a dime.

What are the political and economic risk to more quantitative easing by the Federal Reserve?

Quantitative easing still probably has the capacity to lower long-term rates a bit, but it’s only a bit. If the Fed did another trillion dollars of quantitative easing, maybe 20 or 30 basis points in the ten-year rate — but is that what’s really holding back investment? I don’t  think so, and it raises the risk of a very large balance sheet being hard to pull back, politically. So personally I wouldn’t do it. And it also complicates the recapitalization of the banks because currently banks are recapitalizing themselves by borrowing money from the Fed at zero and buying government bonds. The flatter the slope of the yield curve, the lower the profitability. I am just mystified why people think this is a silver bullet.

How long before the U.S. debt burden begins to cause an adverse market reaction?

I think as soon as a real recovery takes hold, we are going to see some real uncertainty being created in the bond market. The U.S. fiscal situation is really perilous. It’s not a new story, but the political unwillingness to deal with it will finally start to really trouble people. In order to head that off, we need to do something. Personally, I would start with Social Security since it something we know how to do and shouldn’t be that controversial.

Does America need to pay more in taxes?

I think it’s a question for the American people about what they want government to do. If we want a government [where spending as a percentage of GDP] is rising into the mid [20 percent range], then the easy answer to your question is “yes.”  But if we want a government that is more along traditional lines, then we don’t need to do that. That is really the first order question, and once we decide the answer to the that question, we need to pick a tax system that raises revenue at the lowest cost. But the big thing is “What government do you want?” and this is what voters will have to decide.


I don’t even know how I ended up here, but I thought this post was good. I do not know who you are but certainly you are going to a famous blogger if you aren’t already Cheers!

U.S. states in a $3.2 trillion pension hole

Oct 12, 2010 20:06 UTC

Some scary numbers from new research by finance professors Robert Novy-Marx of the University of Chicago and Joshua Rauh, Associate Professor of Northwestern University in Evanston, Illinois.

We begin this article by discussing the true economic funding of state public pension plans. Using market-based discount rates that reflect the risk profile of the pension liabilities, we calculate that the present value of the already-promised pension liabilities of the 50 U.S. states amount to $5.17 trillion, assuming that states cannot default on pension benefits that workers have already earned. Net of the $1.94 trillion in assets, these pensions are underfunded by $3.23 trillion. This “pension debt” dwarfs the states’ publicly traded debt of $0.94 trillion. We show that even before the market collapse of 2008, the system was economically severely underfunded, even though public actuarial reports presented the plans’ funding status in a more favorable light. While we take no stand regarding the optimal amount of state government debt, we do believe it is important to point out that total state debt with pension liabilities included is actually almost 4.5 times the value of outstanding state bonds.


Areas hardest hit appear to be the “rust belt” and high population states. Could it be that pro-free market policies accepted on faith over the last 30 years have not produced wealth for the nation. The Honda Accord came out in 1980 and US Auto Management has not been able to beat it. I guess you could say Reaganomics and the Honda Accord were too much for American Business to negotiate. National planning is needed to balance business’s short term planning problem. Hiring more MBAs will not fix this threat to national security.

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The oh-so-slow recovery

Sep 21, 2010 16:25 UTC

A great chart from David Rosenberg of Gluskin Sheff showing just weak this recovery has been:


Obama’s September surprise?

Sep 1, 2010 14:12 UTC

A few initial thoughts on Obama considering tax cuts to boost economy (via WSJ story):

1) WH already has broad plans on drawing board for a $200-$300b stimulus plan, half tax cut, half infrastructure. I reported this a month ago.

2)  Payroll tax cut is not a bad idea for stimulus, but U.S. has longer-term job and growth problem that needs to be addressed.

3) Payroll tax cut for $400 billion in early 2009 would have been better than Obama’s $862 billion plan.

4) Any short-term tax cut should be coupled with long-term deficit reduction plan.

5) A really bad payroll number on Friday could change political dynamic on this.

6) How would this square with WH’s new focus on deficit reduction, the supposed reason why Bush tax cuts on rich should not be extended? Indeed, WH has doubled down on this with adviser Jason Furman making this point yesterday.

7) Here is how one smart Washington observer framed things for me:

If it’s a one-year extension of all expiring tax provisions (including extenders), it would be a very smart political move for him.  He would triangulate his base and appeal to swing indies.  It also undercuts one of the main GOP arguments.  The stock market would surge.  It’s a total no-brainer, unless you are just that ideologically-addled not to do it.

If it’s “tax relief” for non income taxpayers, or tax cuts that are so difficult to qualify for no one bothers (see: small business health insurance credit), it won’t go anywhere and he’ll get no bounce from proposing it. If he wants to use taxes to change the dynamic (or at least blunt the wave), it needs to be bold and he needs to piss off the Congressional leadership.

A one-year extension of all expiring tax relief would probably get 230 votes in the House and 55 in the Senate.  Ask a vulnerable House Dem off the record if he would vote for that, and see how quickly he says, “you bet.”

Update: This from the WH press office: “The President and his economic team are discussing several options to continue on the path to recovery, but any reporting on decisions made or timing is premature.”

Why only 41 percent of Americans approve of Obama’s job performance

Aug 18, 2010 18:42 UTC

The latest Gallup numbers are not good for the White House or congressional Democrats. The overnight tracking has Barack Obama’s approval-disapproval rating at 41 percent-52 percent. Based on the Rahm Emanuel formulation that for every point below 50 percent, the Dems lose five House seats, it looks like the GOP will take the lower chamber. This bit from a Weekly Standard piece I did pretty much explains it:

Declaring a “Recovery Summer” victory tour at the start of June must have looked like a pretty safe wager for the Obama administration. The economy seemed to have shifted firmly into gear during the spring. Lawrence Summers, director of the National Economic Council, told the Financial Times in early April that the economy was “moving toward escape velocity. You hear a lot less talk of ‘W’-shaped recoveries and double-dips than you did six months ago.”

A big reason for White House optimism was a stronger job market. The economy added an average of 320,000 net new jobs a month during March, April, and May, about half of them in the private sector. Granted, the unemployment rate still hovered close to 10 percent. But if the economy kept growing at a 3 percent annual clip or greater—creating lots and lots of new jobs in the process—unemployment would eventually fall, perhaps dramatically. As one White House insider remarked upon reviewing all the macro-indicators and then evaluating the economic team’s performance, “It looks like we got things just about right.

Since then, however, the economy has fallen back to earth, and “Recovery Summer” looks more like a bad bet. Private sector job growth has fallen by two-thirds, and the unemployment rate is still at a sky-high 9.5 percent. And if the size of the U.S. workforce, as measured by the Labor Department, had stayed constant since April—instead of shrinking by a million—the unemployment rate would be 10.4 percent. Jobless claims are at their highest level since February. Worse yet, the expansion is decelerating. After growing by 5.7 percent in the final quarter of 2009 and 3.7 percent in the first quarter of 2010, GDP advanced by just 2.4 percent from April through June, according to the Commerce Department. And new data show the final second-quarter number may actually be closer to flat, with growth for the rest of the year just 1 to 2 percent at best.


Not to mention, Potato, that not all government spending is “stimulus,” so what you quoted isn’t actually a contradiction. It might be an unrealistic expectation, but it’s not a contradiction.

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