The New Economics of Jobs Is Bad News for Working Class Americans — and Maybe for Trump

The New Economics of Jobs Is Bad News for Working Class Americans — and Maybe for Trump

January 16, 2018

Many political observers still seem flummoxed by the fact that millions of working-class Americans voted for Donald Trump after supporting Barack Obama not once but twice.  One important reason may lie in certain large-scale changes in America’s job market over the last decade.  The growing role of a college degree in landing a job is well documented.  Now, new household employment data reported by the Bureau of Labor Statistics (BLS) show that over the last decade, Americans with college degrees can account for all of the net new jobs created over the last decade.  In stark contrast, the number of Americans with high school degrees or less who are employed, in this ninth year of economic expansion, has fallen by 2,995,000.

We use the household employment survey here instead of the business establishment survey, because it tracks the education of everyone who gains or loses a job, month by month.  In the latest survey covering December 2017, the number of college graduates with jobs jumped by 305,000 – while the numbers of employed Americans with no high school degree fell by 132,000. High school graduates with jobs dropped by 38,000, and employees with some college but no degree declined by 45,000.  That’s a window into what’s happened across the U.S. economy throughout this business cycle – and the fact that GOP rule hasn’t helped working class  Americans with jobs could create problems for them in 2018 and 2020.

The near decade from January 2008 to December 2017 covers every facet of the current business cycle, except its very end.  The first five years from January 2008 to January 2013 included the recession and financial crisis followed by a modest recovery, and the second five years from January 2013 to December 2017 have seen a reasonably steady expansion.  In a normal cycle from recession to recovery, economists expect to see substantial job losses followed by offsetting job gains.  In the aggregate, that is just what happened in the first five years of this cycle: millions of jobs were lost from January 2008 to December 2010; but by January 2013, the number of employed Americans had recovered to nearly the same level as in January 2008.

But the composition of that workforce – who lost their jobs compared to who landed new jobs – changed in decisive ways.  From January 2008 to January 2013, millions of people without college degrees lost jobs and never regained them, while all of the job gains went to the one-third of the labor force (as of January 2008) with at least a B.A. degree. (See the Table below.)  So, while total employment in January 2013 was just 341,000 less than in January 2008, the number of Americans without a high school diploma who were employed fell by more than 1.6 million. The number of high school graduates with jobs fell by more than 2.8 million, and the number of working people with some college training but no BA degree fell by 227,000.  Over those same five years, the number of college-educated Americans with jobs increased more than 4.3 million.

In the following five years of economic expansion, employment rose rapidly.  From January 2013 to December 2017, the BLS household data show that the number of Americans with jobs increased by 10,997,000, for net job growth of 10,656,000 (10,997,000 – 341,000).  Every educational group saw net job gains – but the distribution of those gains very badly short-changed Americans without college degrees.

Consider, to start, the country’s high school graduates.  In January 2013, they comprised 27.3 percent of the labor force – but their job gains of 720,000 from that time to last month account for only 6.8 percent of all employment growth.  Similarly, Americans who attended college but didn’t earn a B.A. degree accounted for 27.9 percent of the U.S. labor force in January 2013, and they claimed only 15.3 percent of the subsequent job gains.  Strikingly, people without high school diplomas found jobs in this period at a rate that more nearly reflected their share of the labor market:  They comprised 8.2 percent of the workforce in January 2013 and claimed 7.0 percent of net new jobs created from that time to the present.  The only big winners were college graduates.  They accounted for 36.5 percent of the U.S. labor force in January 2013; yet, they claimed 71.0 percent of the net new jobs created since then.  To sum up these figures: of the 10,656,000 net new jobs created from January 2013 to the December 2017, 7,564,000 went to college graduates.

Changes in the Employment of Americans, by Education, 1/2008 to 12/2017

 

No HS Degree

HS Diploma

Some College

College Degree

Total

From
Recession to Recovery: January 2008 to January 2013

U.S. Labor Force 1/08

12,343,000

38,302,000

37,441,000

44,655,000

132,741,000

Share of Labor Force

9.3%

28.9%

28.2%

33.6%

100.0%

Net Job Losses or
Gains,

 1,644,000

 2,815,000

  227,000

+ 4,345,000

  341,000

Economic Expansion:
January 2013 to December 2017

U.S. Labor Force 1/13

11,083,000

36,666,000

37,441,000

48,924,000

134,114,000

Share of Labor Force
1/13

8.2%

27.3%

27.9%

36.5%

100.0%

Net Job Gains

744,000

720,000

1,628,000

7,564,000

10,656,000

Share of Job Gains

7.0%

6.8%

15.3%

71.0%

100.0%

Share of Labor Force,
12/17

7.3%

25.7%

27.1%

39.9%

100.0%

As these data above show, the skewed distribution of job opportunities has affected the composition of the labor force.  As job opportunities have increased for college-educated Americans, their share of the U.S. labor force climbed from 33.6 percent in January 2008 to 36.5 percent in 2013 to 39.9 percent in December 2017.  Similarly, as job opportunities narrowed for non-college educated people, more became discouraged and bailed out of the labor force.  Over the last decade, the share of the U.S. labor force comprised of people without high school diplomas fell from 9.3 percent to 7.3 percent, the share with no more than a high school degree fell from 28.9 percent to 25.7 percent, and the share with some college training but no B.A. fell from 28.2 percent to 27.1 percent.  Too often, the downward spiral has not ended with joblessness.  Researchers have found that nearly half of working-age men who have left the labor force use pain killers on a daily basis.  Moreover, new research shows that on a county by county basis, each percentage-point increase in unemployment is now accompanied by a 7.0 percent increase in hospitalizations for opioid overdoses and a 3.6 percent increase in opioid-related deaths.

Americans without college degrees, who continue to comprise 60 percent of the labor force, are now effectively penalized in every phase of the business cycle.  From the first month of the last recession in January 2008 to December 2017, well into year nine of this expansion, the number of employed Americans with high school diplomas contracted by 2,095,000, and the number of people working without a high school diploma fell by 900,000.  Further, the share of all job gains claimed by Americans with some college but no B.A. degree was just over half their share of the labor force.  Through it all, the number of college-educated Americans with jobs jumped by 11,909,000.  That’s 1,253,000 more than the total 10,656,000 net new jobs created across the economy, suggesting that college grads are also now claiming new jobs that used to go to people without a B.A. degree.

If the disappointment of millions of working-age Americans without college degrees helped drive Trump’s 2016 victory, the Republicans’ political prospects may be even worse than voter surveys suggest.  The booming stock market and great top-line employment numbers have not touched these labor market dynamics.  Nor will the GOP’s vaunted tax changes make a difference:  The success of those changes rests on their spurring a capital investment boom, but the technologies that dominate capital investment today are typically used and operated by college-educated workers.  And when the current business cycle finally ends next year or the year after, workers without college degrees will dominate the jobs losses  By 2020 and perhaps this coming November, Trump and his GOP colleagues could well face a political revolt from the same voters who took a chance on them in 2016.



Does Science Prove that the Modern GOP Favors the Rich?

December 7, 2017

Virtually everyone outside the Trump administration agrees that the GOP tax plans passed by the House and the Senate will aggravate income inequality.  In fact, the party-line votes on both plans are the latest instance of a remarkable fact:  Over the last 40 years, income inequality has accelerated when Republicans held the White House, the Congress or both, and slowed when Democrats were in charge.

No one is claiming that the GOP created America’s dramatic increase in income inequality.  In a recent study issued by the Center for Business and Public Policy at Georgetown University’s McDonough School of Business, our analysis showed that changes in the U.S. and global economies and technology did most of that.

Between 1977 and 2014, the average pre-tax income of the bottom 50 percent of Americans—everyone below median income – increased just 1.7 percent, inching up from $15,948 to $16,216 (2014 dollars).  Over the same years, the average pre-tax income of the top one percent soared 207 percent, jumping from $424,631 to $1,305,301.

During these years, Washington stepped in with new spending and tax credits that modestly helped the bottom half of Americans: Their average post-tax income rose 22 percent, from $20,390 in 1977 to $24,047 in 2014.  But tax and spending changes had little effect on the top one percent, whose average post-tax incomes still rose 196 percent, from $342,328 to $1,012,429.

Partisan politics also played a major role: The actual income paths of both groups from 1977 to 2014 depended on whether Republicans or Democrats controlled the White House and/or Congress.  For example, when Republicans held the presidency, the top one percent’s rising share of all post-tax income accelerated on average by 0.4 percentage-points, while under Democratic presidents their rise correspondingly slowed by 0.4 percentage points.  Similarly, the bottom 50 percent’s falling share of post-tax income accelerated under GOP Presidents by an average of 0.5 percentage-points – and again, their decline decelerated by that much under Democratic presidents.

The story is the same with Congress.  During years of GOP control, the decline of the bottom half’s share of national income accelerated, on average, by more than 0.5 percentage-points – and then slowed by about that much when Democrats were in charge of Congress.  Party control of the legislative branch had the least effect on the income path of the top one percent: Their rising share of post-tax income accelerated by an average of 0.3 percentage-points during GOP Congresses, and decelerated by that much during years of Democratic control.

Finally, the results when either party controlled both the White House and Congress were the sum of the results for each branch.

This isn’t conventional wisdom dressed up as science; it is a scientific demonstration of how much elections matter. To test the limits, we also conducted a thought experiment: What would the incomes of the bottom half and the top on percent look like, if one or the other party had controlled both branches of government for the entire 37 years? We assume here that the economy’s course was unaffected by our hypothetical one-party government, and that each party maintains the distributional tendencies in tax and spending policy uncovered in our analysis.

With these assumption, we calculate that if Democrats had been in charge the entire time, the post-tax income of the bottom 50 percent, on average, would have been an estimated $526 higher per-year or a total of $19,539 more for the whole period.  Moreover, the top one percent would have taken home $14,226 less per-year, on average, or $526,373 less for the whole period.

Operating on the same assumptions, we calculate that Republican control of both branches for the entire period would have increased the post-tax income of the top one percent by $28,029 per year, on average, or $1,037,086 for the whole period; while the incomes of the bottom 50 percent of Americans, on average, would have been $563 less per year, or $20,848 less for the entire period..

Helping the rich and letting those in the bottom half fend for themselves, it seems, is now part of the modern GOP’s DNA – and moderate resistance to that course seems to be embedded in the Democrats’ genes.

 



Blame the Economy for Widening Inequality – And Washington for Doing Little about It

October 3, 2017

America’s widening income inequality has become a subtext across most debates in domestic policy.  GOP plans to repeal and replace Obamacare failed in large part because virtually every expert warned that the changes would end coverage for millions of people with modest incomes and cut taxes for high-income people.  President Donald Trump’s push to cut business taxes will likely meet a similar fate.  He shouldn’t be surprised: The populist revolt that helped elect him has been fueled by popular anger over Washington’s incapacity to do anything about how the economy skews its rewards towards those at the top and away from most everyone else.

Ask the right questions, and the income data reveal a great deal about how this inequality took hold over the last 40 years.  It is given that the American economy and politics both changed dramatically over this period.  But how did each of those forces affect the distribution of incomes? In a new study just issued by the Center for Business and Public Policy at the McDonough School of Business at Georgetown, I used statistical analysis to explore this question.  It turns out that we can track the economy’s role in growing inequality by following the changing distribution of all pre-tax income, and then track the role of politics and the government by following the changing distribution of all post-tax income.

It also turns out that the new populists, or at least their feelings, are justified:  As economic changes have produced widening income inequality, the government has remained largely though not entirely on the sidelines.

To begin, the data show that rising inequality in the United States began in 1977, and the same data series ends with 2014, giving us 37 years of income information on both a pre-tax and post-tax basis.  Over those years, the share of pre-tax national income going to the bottom 50 percent of Americans – that is, not taking account of changes in taxes and government transfers – slumped from 20 percent to 12.5 percent.  This was the doing of a changing economy as globalization and technological advances steadily squeezed the wages and working hours of tens of millions of low, moderate and middle-income Americans.

Over the same years, the share of all pre-tax income going to the top one percent of Americans soared from 10.7 percent to 20.1 percent.  The economic drivers were the same.  In their case, the rapid progress of globalization and new technologies boosted both the returns on capital – think of soaring stock markets – and the compensation of millions of American business executives and professionals.

“Income shares” are economist-speak, so let’s translate them into the average incomes for each group.  The results are sobering.  The average pre-tax income of the bottom 50 percent of Americans, in 2014 dollars, inched up from $15,948 in 1977 to $16,216 in 2014, for a raise of $268 or 1.7 percent over 37 years.  The top one percent lived in a different economy:  Their average pre-tax income in 2014 dollars jumped from $424,631 in 1977 to $1,305,301 in 2014, a raise of $880,670 or more than 207 percent.

To see what the government did about all this, we shift the analysis to the two groups’ income shares and average incomes on a post-tax basis.  The data show, first, that the government took some steps to soften the blow for the bottom 50 percent of the country and were modestly effective.  After taking account of changing tax and spending policies since 1977, the share of all post-tax income going to the bottom half of the country fell from 25.6 percent in 1977 to 19.4 percent in 2014.  So, their income share dropped 24.2 percent on a post-tax basis, compared to 37.5 percent on a pre-tax basis.

The difference tells us what the government actually accomplished:  Washington managed to offset a little over one-third of the adverse impact of globalization and new technologies for the bottom 50 percent of Americans [1 – (24.2 / 37.5) = 0.355].  Their relief came mainly from government steps to expand the earned income tax credit, broaden access to Medicaid, and provide subsidies for health insurance under Obamacare.  Other tax changes made the federal income tax moot for most of this group, but increases in payroll tax rates offset those gains.

Turning to actual incomes, we find that the average post-tax income of the bottom half of the country increased over this period, in 2014 dollars, from $20,390 in 1977 to $24,925 in 2014.  That signifies a raise of $4,535 or 22 percent over 37 years – not much, but better than the 1.7 percent gains in average pre-tax income.

Washington has been more solicitous of the top one percent of the country.  After taking account of changes in tax and spending policies, their share of all post-tax income jumped from 8.6 percent in 1977 to 15.6 percent in 2014.  So, the income share going to the top one percent of Americans increased 81.4 percent on a post-tax basis, compared to 87.8 percent on a pre-tax basis.

Once again, the difference tells us what Washington did: 37 years of tax changes and spending offset about 7 percent of the fast-rising income gains claimed by the top one percent [1 – (81.4 / 87.8) = 0.073].  In more concrete terms, the average post-tax income of the top one percent of Americans increased, in 2014 dollars, from $342,328 in 1977 to $1,012,429 in 2014.  That’s a sweet raise of $670,101 or 196 percent over 37 years.

Over nearly four decades, then, Washington demonstrated moderate concern about the declining position of the bottom half of the country while affirming the rising position of those already at the top.

This record tells us it is time to address the real drivers of widening inequality:  Shift our focus from half-hearted redistribution to serious economic reforms — aggressive anti-trust for all concentrated industries, for example, and universal access to free retraining at community colleges — that can put average Americans in a better positions to capture the rewards of globalization and technological change.



Donald Trump and Paul Ryan’s Plan to Put Foreign Investors First

March 29, 2017

The “Border Adjustment Tax” (BAT) endorsed recently by President Trump is his administration’s first foray into international economics. It is an inauspicious start.

BAT advocates like House Speaker Paul Ryan promise it will cut the trade deficit by making U.S. exports cheaper abroad and foreign imports more expensive here. The truth is, a BAT won’t much affect U.S. exports or imports, and it certainly won’t create jobs. It would produce a large stream of new federal revenues, and it could trigger retaliatory tariffs on some U.S. exports. A BAT also would enrich a great many foreign investors and companies, and leave a lot of American investors and large companies poorer. All told, it’s the kind of “bad deal” that Mr. Trump once railed against.

Mr. Trump and Speaker Ryan never mentioned a BAT until recently, and the reason they like it now is that it’s a cash cow to pay for their sharp cuts in corporate taxes. The Trump-Ryan BAT would give U.S. producers a 20 percent rebate on the wholesale price of any goods or services they export – 20 percent, because that’s the GOP’s preferred corporate tax rate – and impose a 20 percent tax on foreign goods and services imported here from abroad. It would raise trillions of dollars, because we import about $500 billion more per-year than we export.

For conservatives at least, all those revenues should be a red flag. In a populist period, a subsequent President and Congress may well decide to raise corporate taxes — and when they do, the BAT’s fat revenue stream could well go to fund progressive causes.

Mr. Trump still has no Council of Economic Advisers, so maybe he believes that a BAT will spur U.S. exports and create jobs. Even Peter Navarro should to be able to tell him why that won’t happen. At first, a BAT would strengthen demand for U.S. exports and weaken demand for foreign imports here. But those shifts in demand would quickly strengthen the dollar and weaken foreign currencies, perhaps enough to offset the BAT’s initial impact on import and export prices. In theory, the currency movements triggered by the changes in prices brought about by the BAT should restore pre-BAT prices for both imports and exports, so the only change would be a lot of new revenues from taxing net imports.

In practice, the BAT’s impact on the dollar and U.S. trade is a roll of the dice. As Federal Reserve chair Janet Yellen noted recently, no one knows how closely the currency changes will mirror the BAT’s direct effects on prices. If they overshoot, U.S. consumers will pay more for imports; if they undershoot, U.S. export prices won’t fall much. On top of that, no one knows how much of the BAT tax U.S. importers will pass along to American consumers, and how much of the BAT rebates U.S. exporters will pass along to their foreign customers. Finally, painful retaliation might follow, since China and others won’t take kindly to paying a 20 percent tariff on their exports to the United States, and China’s competitors won’t like the BAT’s substantial devaluation in the yuan-dollar exchange rate.

One effect is certain: The BAT will harm U.S. investors and reward foreign investors as the currency changes reduce the dollar value of U.S.-owned assets abroad and increase the foreign-currency value of foreign-owned assets here. The Bureau of Economic Analysis tells us that in the second quarter of 2016, Americans held foreign stocks, corporate and government bonds, and derivatives worth $12.9 trillion; and foreign-owned financial assets in the United States totaled $20.3 trillion.

If we assume the Trump-Ryan BAT leads to a 20 percent increase in the value of the dollar and a corresponding 20 percent decline in the trade-weighted value of foreign currencies, it would reduce the value of U.S.-held financial investments abroad by nearly $2.5 trillion and increase the value of foreign-owned financial investments here by more than $4 trillion. What kind of deal is that, Mr. President?

The trillion-dollar losers will include U.S. investors in European or Asian mutual funds; U.S. companies with profitable foreign subsidiaries, from Microsoft and Facebook to Coca Cola and Pfizer; and U.S. banks that lend to foreign companies. The trillion-dollar winners will include foreign investors with U.S. mutual funds; foreign companies with major American subsidiaries, from Toyota and Anheuser Busch to Unilever and Phillips; and foreign banks who lend to U.S. companies.

Perhaps the best motto for the Trump-Ryan BAT is “Put Foreign Investors First.”

Robert J. Shapiro, chairman of the economic and security advisory firm Sonecon, was Under Secretary of Commerce for Economic Affairs in the Clinton administration. In the 2016 campaign, he advised Hillary Clinton.

 



The Trump and Clinton Foundations Are Character Tests that Hillary Clinton Passes and Donald Trump Fails 

September 14, 2016

Donald Trump’s charge that Hillary Clinton used her office as Secretary of State to service donors of the Clinton Foundation exemplifies a regular Trump tactic: Preemptively charge your opponent with what you know you’ve done.

So, fully aware that his own family foundation is a shoe-string operation that breached IRS regulations, or worse; Trump and his surrogates charged for months that the Clinton Foundation’s funding and works are proof of corruption. No disinterested party found any such proof.

Instead, a review of the dimensions and operations of the two foundations suggest that the Clintons built a serious and effective philanthropic enterprise while Trump’s foundation is a sham.

To start, the creation and funding of a private foundation can provide a measure of its founder’s generosity, because virtually all family foundations involve substantial gifts from their founders. Public records do show that the Clintons have contributed $5 million to $10 million, or roughly five to ten percent of their personal assets, since establishing their foundation 15 years ago.

According to a far-reaching  new investigation by David Fahrenthold of The Washington Post, Trump also contributed some $5.5 million to his foundation from 1987 to 2008. What does this say about their relative generosity? Trump says he’s worth $10 billion, so he has contributed .00055 percent of his personal assets — that’s 55 one-thousandths of one percent — to the Trump Foundation.

By contrast, the Clintons have contributed roughly five to ten percent of their personal assets to the Clinton Foundation. So, the Clintons have been 90 times more generous than Trump in funding their respective family foundations.

The Clintons’ charitable ambitions also are orders of magnitude greater than Trump’s. In 2013, the Trump Foundation provided grants totaling $913,000 for good works, while the Clinton Foundation spent $196 million on its good works. Do the math: The Clinton Foundation spent 215 times as much as the Trump Foundation on charitable works. This huge difference has import beyond their respective founders’ benevolent aspirations, because private foundations are major sources of public goods and welfare.

In 2008, a colleague and I published the first broad analysis of the benefits generated by private foundations, and found that each dollar in grants and support by those foundations produced welfare benefits valued at $8.58. On this basis, the Clinton Foundation grants and operations in 2013 helped generate benefits totaling nearly $1.7 billion, compared to $7.8 million in benefits generated by the Trump Foundation.

Another meaningful measure of a foundation’s value is the nature of its activities. The Clinton Foundation is known best for its Health Access initiative,  which, according to the World Health Organization and others, has dramatically cut the cost of HIV and anti-malarial treatments for tens of millions of sufferers in low- and middle-income countries.

The Clinton Foundation also sponsors programs to reduce the risks of climate change, including partnerships with businesses to retrofit their building for green energy; a joint initiative with the Scottish Hunter Foundation to target the roots of poverty in Africa; an alliance with the American Heart Association and the Robert Woods Johnson Foundation to reduce childhood obesity; disaster relief efforts following the 2004 Indian Ocean earthquake, Hurricane Katrina in 2005, and the 2010 earthquake in Haiti; and a partnership with the Bill and Melinda Gates Foundation to collect and compile information from around the world on the status of women. The head of the independent watchdog group Charity Watch, Daniel Borochoff, recently called the Clinton Foundation “one of America’s great humanitarian charities.”

The Trump Foundation reports no joint initiatives with other charitable organizations and few good works of any kind.  Instead, Trump’s foundation appears to be mainly a personal platform for its founder.

Fahrenthold’s investigation  found repeated instances of Trump soliciting funds from other foundations, a common charitable fundraising tactic. But Trump then used the funds donated to the Trump Foundation to make a donation in the name of the Trump Foundation, without adding any funds or operations of its own. In fact, all Trump Foundation grants since 2008 have been funded by others, because Trump himself has contributed nothing to his own foundation for the plast eight years.

Trump also appears to use his novel approach to philanthropy for his own personal profit: He solicited a $150,000 donation from the Charles Evans Foundation to benefit the Palm Beach Police Foundation, packaged it as a $150,000 grant from the Trump Foundation, arranged for the police foundation to receive the grant at a gala held at his Mar-A-Lago Club in Palm Beach, and then charged the police foundation $276,463 to rent Mar-A-Lago for the event.

Similarly, after Trump offered to personally donate $500,000 to charities highlighted on his “Celebrity Apprentice” television show, NBC/Universal which airs the program, donated $500,000 to the Trump Foundation to cover Trump’s “personal” pledges. Trump also appears to violate federal regulation of foundation by using foundation funds for personal benefit: The Trump Foundation paid $20,000 for a six-foot portrait of Trump that now hangs at one of his gold resorts; after Melania Trump bid on and won the painting at a charity auction held, of course, at Mar-A-Lago.

There is also the much-reported case of Trump’s foundation contributing $25,000 to the campaign of Florida Attorney General Pamela Bondi while Bondi’s office was investigating consumer complaints about Trump University.  Shortly there]after, A.G. Bondi declined to join other state attorneys general in a suit against the now-defunct Trump University.  Beyond the Trump Foundation’s direct breach of IRS regulations, for which it paid a nominal fine, the conduct fairly smacks of the pay-for-play corruption that Trump charges his opponent has committed.

Finally, Fahrenthold found five cases where the Trump Foundation claims it made donations, totaling $51,000, which the purported beneficiaries say they never received. The subjects of this trick included a veterans’ charity in Vermont, a pro-life nonprofit in Kansas, a Latino AIDs charity in New York, a children’s medical center in Omaha, and an umbrella organization for small charities in Los Angeles.

In the end, the questions raised about the Trump and Clinton foundations go to the character of Hillary Clinton and Donald Trump. Hillary and Bill Clinton have built an esteemed charitable foundation that has improved and saved the lives of millions of people around the world. Donald Trump has created a con, inveigling others to finance him play-acting as a philanthropist, and turning a profit for himself in the bargain.



Bloomberg’s Education Reforms Will Be His Legacy

December 17, 2013

As Michael Bloomberg prepares his exit as New York City’s mayor, a new analysis suggests that his signature reforms of public education will comprise much of his legacy. Unsurprisingly, the reason is hard economics. Under his reforms, the share of NYC youths earning their high school diplomas and the share going on to college both rose sharply. For some 71,000 young New Yorkers, the “income premiums” associated with those improvements should add more than $15 billion to their lifetime incomes — and the benefits are not limited to those students. The study also found that home property values rose substantially in the neighborhoods where schools improved the most, by as much as $60 billion.

I conducted the study with my colleague Kevin Hassett, in conjunction with The Fund for Public Schools. We focused on changes in three objective measures of student performance: test scores by NYC public school students on statewide tests, high school graduation rates, and rates of college attendance.

We started with the test scores on statewide tests, to see if those scores tracked the improvements in graduation and college attendance rates. With other researchers, we found that they did: From 2006 to 2012, the “mean scale” scores of NYC students on English Language Arts tests rose two percent, twice the gains of all students across New York State. Similarly, NYC students’ scores on the statewide mathematics tests increased four percent, compared to a three percent gain across the State. Moreover, students from the poorest parts of the City, the Bronx and Brooklyn, showed the greatest improvements.

Students from low-income, minority backgrounds also account for much of the improvements in high-school graduation rates. From 2006 to 2012, the four-year graduation rate of NYC students increased from 49 percent to more than 60 percent, a jump of 23 percent. Progress by African-American and Hispanic students drove much of those increases. From 2006 to 2012, graduation rates for African-American students increased from less than 43 percent to 55 percent, a 28 percent jump. Similarly, the graduation rates of Hispanic students rose from 40 percent to nearly 53 percent, a 31 percent improvement.

It hardly bears repeating that students who graduate high school earn substantially higher incomes throughout the working lives than those who drop out. Economists use those differences to calculate the “net present value” of a high school diploma — the value in today’s dollars of the additional income which, on average, they will earn over their lifetimes. Today, that net present value comes to $218,000. Using 2006 graduation rates as our reference, we calculated that from 2008 to 2012, 41,000 more NYC public high school students earned their diplomas than would have occurred if the same share of students had graduated as in 2006. That tells us that the improvements in graduation rates under the Bloomberg reforms will raise their lifetime earnings by nearly $9 billion.

Similarly, from 2008 to 2012, nearly 31,000 more NYC public school students enrolled in institutions of higher learning than would have occurred if the college enrollment rates of NYC students in 2006 had persisted. To calculate the net present value of the additional lifetime income all of the additional NYC students who enrolled in college, compared to ending their educations with a high school diploma, we tracked the income differences, less the average cost of college tuition and their foregone income while in college. We found that the lifetime value of enrolling in college comes to $207,000, in today’s dollars – which tells us that the net present value of the additional income that the additional 31,000 NYC college attendees will earn comes to $6. 4 billion. On top of the income gains derived from higher high-school graduation rates, this suggests that improvements in student performance under Bloomberg’s reforms should raise the lifetime earnings of NYC students by some $15 billion.

Better schools also are associated with higher property values, so we tested whether these improvements had those effects in New York City. Using a technique that tests for statistical causality, called the “Granger Causality” test, we analyzed the relationship between changes in NYC property values by zip code, covering 94 NYC zip codes, and changes in graduation rates in those zip codes. It showed that each one percent improvement in the graduation rates in a zip code led to a 0. 53 percent increase in residential property values in that zip code, in the following year. On this basis, we estimate that NYC’s rising graduation rates from 2008 to 2012 have added more than $37 billion to the total value of NYC residential housing.

We also explored whether New York’s major expansion of charter schools has had economic effects. At a basic level, Bloomberg’s strategy granted schools and their principals much greater autonomy — and large funding increases to accompany it — in exchange for greater accountability for the results. The reforms also expanded school choice for NYC public school students, and then enhanced those choices by adding nearly 200 new public charter schools. This combination of greater accountability and enhanced choice intensified competition for students among schools, especially since funding follows the students.

While two national studies have found that across the country, charter schools do not outperform other public schools, three recent studies of NYC concluded that students at those schools perform better than students at other City public schools. We tested whether Bloomberg’s expansion of charter schools also has affected property values in the City, independent of changes in graduation rates. We found that across nearly 200 NYC zip codes, the addition of one new NYC charter schools in a zip code led to a 3. 8 percent increase in residential property prices in that zip code in the following year. Based on the expansion of those schools in this period, the results suggest that the charter-school reforms have added more than $22 billion to NYC residential property values. On top of the boost in property values tied to higher graduation rates, these results suggest that Bloomberg’s reforms have added nearly $60 billion to NYC residential property values.

Across the country, the record of educational reforms is mixed. Nevertheless, by several objective measures, the academic performance of New York City public school students has improved markedly under the reforms enacted since 2002. Moreover, those improvements can be expected to generate large income benefits for tens of thousands of New York City students, and they already have produced substantial economic benefits for New York City homeowners. These achievements deserve emulation. 



Are Republican Leaders Suffering from Stockholm Syndrome?

October 1, 2013

With a good part of the federal government closed for business, the pathologies driving it are too obvious to ignore. The diagnosis begins with the fact that there is no partisan argument this time about overall federal spending. The White House and congressional Democrats have simply accepted the arbitrary cuts of the sequester process, despite evidence that they’re slowing the economy. So instead, the rightwing of the House GOP is holding normal government operations hostage to a variety of demands tied to the Affordable Care Act.

Now, Obamacare has been a central focus of the Tea Partiers since 2010, when its passage helped elect a number of them to Congress. But three years later, their continuing single-mindedness about those reforms looks like a pathological obsession. Too strong? Their threats to close down Washington unless the President agrees to sacrifice his signature achievement — and their confidence that they can bend him to their will — have been unaffected by not only the 2012 elections, but also the prevailing consensus that their strategy will cost the GOP even more in 2014.

This week, the pathology has spread to the Republican leadership. Since Tea Party members make up less than one-quarter of the House GOP and an even smaller share of the Senate, they always need support from their more moderate colleagues and Party leaders to carry out their threats. Those leaders and colleagues have long argued publicly against the Tea Party strategy — that is, until this past weekend. After months of being held hostage themselves to Tea Party threats of insurrection and primary challenge, House Speaker Boehner, Senate Minority Leader McConnell and most of their associates have now identified with their captors and adopted their worldview. In short, they’re suffering from a political version of “Stockholm Syndrome.” If they don’t recover quickly, much of the national government could remain closed for a long time.



The Economic Appeal of the Occupy Wall Street Movement to Middle-Class Americans

October 24, 2011

Seemingly out of nowhere, economic inequality is no longer the political issue that dares not speak its name. Since the days of Ronald Reagan, politicians who talk about reducing disparities in incomes or wealth have been promptly charged with “class warfare.” The stunning success of the Occupy Wall Street movement in attracting adherents and sympathizers could change that, at least for the current political season. What lies behind the movement’s surprising middle-class appeal, however, isn’t high unemployment or slow economic growth. The real reason is that the 2008 meltdown and its economic aftermath have cut the wealth of millions of average Americans by up to half — and Washington has been unwilling to do anything about it.

There is little controversy among economists that the fabled U.S. land of opportunity has become one of the world’s most unequal societies. Using the standard measure (the “Gini Coefficient”), America now ranks 93rd in the world in terms of economic equality. That puts us behind places like Iran, Russia and China. The poverty in those places is much worse, but the concentration of wealth is much greater here. According to the Federal Reserve, the top 1 percent of us in 2007 owned nearly 35 percent of everything of value, net of debt — that includes savings, stocks and bonds, real estate, art, furniture, clothing, on and on. Perhaps more important, the top 20 percent of Americans owned 85 percent of the country’s net wealth.
Yet, such striking inequality still cannot explain the appeal of Occupy Wall Streeters — I’ll call it the OWS movement — because comparable disparities of wealth have been around for a generation. Go back to 1983, and the top 1 percent of Americans owned 34 percent of the country, and the top 20 percent claimed 82 percent.

The answer here lies in the particular way that the financial and housing meltdown has affected middle-class families. Consider the following: While the bottom 80 percent held only 15 percent of the nation’s wealth in 2007, most of it was tied up in the value of their homes. We know that, because when we break down that 15 percent figure, we find that the bottom 80 percent held just 7 percent of all financial assets in 2007 but 40 percent of all residential real estate assets. And the housing boom topped out in 2007.

The reason the OWS movement resonates so broadly today lies in the subsequent loss of so much housing wealth.  The 2008 meltdown and its aftermath have driven down the value of residential real estate by about 35 percent. And that 35 percent included most or all of the equity that millions of middle class families had in their homes in 2007.  America already was a place where 80 percent of the people held only 15 percent of the country’s wealth. Now, do the math. About half of that wealth was in financial assets like savings and pensions (the Fed’s 7 percent figure), and the rest was in home equity. So, since 2007, the bottom 80 percent of Americans have lost up to half of their net wealth.

Those losses also aren’t distributed evenly:  Households in their 30’s and 40’s, for example, usually have almost everything they own tied up in their home equity, and which typically adds up to less than one-third of their homes’ value.  They’ve been wiped out, wealth-wise.  Older households, on average, have larger home equity, so they still have some modest increment of wealth. But if they’re approaching retirement or already retired, there’s also little they can ever do to make up their losses.
When middle-class Americans turn to Washington, they see the resounding success of the government’s efforts to stabilize the financial markets – where the top 1 percent derive most of their wealth. The rich are back to becoming even richer. That’s the way America has operated for at least the last generation. What grates on middle-class Americans this time is that they’ve been getting poorer. And Washington has done little to stabilize the market from which they derive most of their wealth, which is housing.

To be fair, President Obama can claim a little credit here, since he has proposed a series of initiatives to support housing, mainly by giving banks incentives to refinance more mortgages at favorable terms.  But the largest force driving down housing prices and wiping out middle-class home equity is sky-high home foreclosure rates.  The President hasn’t yet taken on those foreclosures, but he still has time to champion a new initiative.  For instance, he could call for temporary loans for families whose mortgages are in trouble, financed through lending by the Federal Home Loan Banks.

Mitt Romney, Obama’s most likely challenger, can’t call for anything.  Last week, Romney went to the state with the highest foreclosure rate in the country, Nevada, and made what may turn out to be a very costly mistake.  Embracing GOP dogma that “the right course is to let markets work,” he declared that Washington should let the foreclosure process “run its course and hit the bottom.”

Yet, this is the very process now hollowing out a good-sized slice of the American middle class.  Given Romney’s position, the issue provides a new opportunity for the Obama campaign.  Much more important, however, the problem itself presents a critical challenge for economic policy makers. If they and the next President ignore it, inequality in America almost certainly will enter a very nasty, new phase.



Grading Obama and the GOP Hopefuls on their Plans for Jobs and the Economy

September 12, 2011

Last week’s GOP debate at the Reagan Library, followed the next night by the President’s address to Congress, threw into stark relief the strengths and weaknesses of each side’s understanding of jobs and the economy. The Republican hopefuls get a gentleman’s C on the impact of regulation on economic activity. But their approaches to the overall economy and job creation ranged from silly to dangerous, and earn them all F’s. The President has to produce results, and his ideas aren’t constrained by primary challengers. This may help explain why his approaches are broader and more thoughtful, earning him a solid B on the overall economy and an A-minus on job creation.

All of the Republican hopefuls — the two leaders Rick Perry and Mitt Romney, the so-serious minded Jon Huntsman and Ron Paul, and the media-infatuated Michelle Bachmann and the rest — agreed on one economic prescription: Apply deep and immediate budget cuts to an economy generating little growth and no jobs. This common position not only defies the basic dynamics of supply and demand in a slow economy. It also rejects the policies of the last five GOP presidents. After all, it was true-blue conservatives Ronald Reagan and George W. Bush who justified big spending increases for defense and big tax cuts to boost the flagging economies of their own times.   

Nor are the Republican wanna-be’s chastened by the current examples of Germany, France and Britain, which all embarked on austerity programs this year while the European Central Bank (ECB) raised EU interest rates. The results have been even more anemic growth than our own. In fact, the two GOP frontrunners along with the inimitable Mr. Paul not only demanded deep spending cuts, but also sided with the ECB by denouncing Fed chairman Ben Bernanke as an inveterate inflationist. The markets they all claim to worship don’t see it that way, since our long-term interest rates remain near record lows. For their determined contempt of introductory macroeconomics, all of the GOP putative presidents flunk.

The current President at least appreciates that this economy needs a boost, not more headwinds. His package adds $450 billion over 12 months, in theory adding new demand equal to 3 percentage points of GDP. In practice, it would work out to be less than that, since people will save some of the money they gain from lower payroll taxes, and some of the tax cuts for businesses won’t be taken up. The administration also gets credit for recognizing that the sick housing market is a critical piece of the puzzle behind the slow economy. Their answer, however, misses the most basic point: Mr. Obama called for expediting Fannie Mae refinancings to put more money in the pockets of some homeowners. But that won’t affect the more economically consequential, high foreclosure rates that have been pushing down housing values, and so dampening people’s willingness to spend. On balance, give the President’s economic team a solid B on the overall economy.

Both sides also call for tax cuts to spur job creation. All of the GOP candidates, however, would focus on cutting corporate taxes. Now, most economists agree that the corporate tax cries out for reforms, especially a lower marginal rate tied to ending distorting tax breaks for favored industries.  But no reputable economist who doesn’t aspire to a top position in the next GOP administration has found that those reforms would have noticeable effects on jobs in any short or medium-term. With large U.S. businesses already holding some $1 trillion in banked profits, by what economic logic would additional tax cuts move them to create jobs?

The only route from this GOP position to new jobs depends on lower corporate taxes translating into higher dividends, mainly for the very affluent, which they would then spend, boosting demand. Even so, much of those additional dividends probably would be saved, which wouldn’t create any jobs under today’s conditions. Moreover, the GOP hopefuls also insist on spending cuts to offset any lower corporate tax revenues — and that would mean job losses. For their resolute ignorance of labor economics and public finance, these hopefuls score another F.

President Obama’s tax plan is both more detailed and better targeted to creating jobs — which should be unsurprising, given how much he has riding on near-term results. He would reduce the cost to businesses of creating new jobs and maintaining their current workers. To do this, he would temporarily suspend the employer side of the payroll tax for new hires by firms with about 1,000 employees or less, and temporarily cut by half all employer-side payroll taxes for firms with about 100 workers or less. This strategy is eminently sensible — and downright brilliant compared to the broad corporate tax cut championed by the Republican hopefuls. Full disclosure: I’ve urged the administration to propose cutting the employer side of the payroll tax since December 2009, including eleven times in these blog essays.

The decision to limit these new tax incentives to small and medium-size companies is less than ideal, since big businesses employ nearly half of all workers. On the other hand, big businesses are sitting on hundreds of billions of dollars in banked profits, so they clearly have the means to hire more workers. On balance, these proposals deserve an A-minus.

The same score goes to the President’s call for more direct, job-related spending. This includes new funds for the states to prevent more layoffs of teachers, police and firefighters; new support for school construction; and additional investments in infrastructure (through a National Infrastructure Bank). More problematic are the jobs benefits from other parts of the plan, including support for expanded access to high-speed wireless and public-private partnerships to rehab homes and businesses. There’s also little direct jobs benefit in the administration’s otherwise-laudable plans to reform the unemployment insurance system and bar employers from discriminating in hiring against long-term jobless people. All told, another A-minus.

The Republican hopefuls have time to develop better strategies for growth and jobs, especially compared to their current dismal positions. They’ll have to play catch-up, however, because President Obama has proposed a sound new jobs agenda. And if congressional Republicans refuse to work with him on it, the public will know whom to blame.

 



The Best Advice for the President: Think Big and Move On

August 10, 2011

In good times, a President without clear economic policies may not suffer for it. But in shaky and uncertain times like today, failing to advance a coherent strategy to ease people’s genuine economic troubles can be fatal politically, for a president or his opponent. Yet, it happens with some regularity, often because the candidate simply prefers to talk about foreign policy or other things. Consider the first George Bush in 1992, dismissing people’s economic worries to return again and again to his Gulf War success. Think of John McCain in 2008, with no plan to stem the financial meltdown but eager to talk about his opponent’s character failings. And reaching further back, there was George McGovern decrying the Viet Nam War, but with little to say about the inflation and slow growth.

Both parties will certainly have economic programs for 2012. Yet, both parties are in danger of passing lightly over the core issues of jobs, housing values, and incomes. The problem for the Republican nominee is the Tea Party, which may well force him or her to embrace its radical bromides. That assumes, of course, that the GOP doesn’t nominate Rick Perry or Michelle Bachman, who won’t need to be convinced. Whoever the nominee is, he or she will have to stand for abolishing the minimum wage. On the budget, the nominee will have to support moving Medicare towards vouchers with spending caps that don’t take account of health care costs, and a balanced budget amendment that won’t take account of recessions. The nominee also will have to stand for the repeal of Wall Street regulation and more tax cuts to frost the cake of the rich.

This prospect presents President Obama with two choices. He can run against the Tea Party platform and insist that a minimalist approach is preferable to the other side’s eccentric agenda. One catch is that the GOP nominee almost certainly will have a “Sister Souljah” moment when he ostentatiously distances himself from some loony piece of the Tea Party platform. (My personal favorite is the call to abolish our “fiat” currency and revive the long, well-buried gold standard.)  And if the GOP nominee can weave a story about how a balanced budget and less government will help create jobs and restore housing values, and repeat that story often enough, it could be sufficient to trump Democratic minimalism.

But the President has another choice. He can offer up a new program of “Big Ideas” that directly takes on jobs, stagnating incomes, housing values, and the nation’s debt. The conventional wisdom is that this is too risky, because it would tacitly acknowledge that his first-term program didn’t deliver the prosperity his economic team promised. But since everyone in the country is already aware that it didn’t deliver as promised, acknowledging it would be a small concession.

To be sure, the Tea Party-dominated House probably wouldn’t pass anything that Obama proposes before the election. The economy will get a little more support from the Fed, but essentially will be on its own. Nevertheless, the President can lay a foundation for stronger job and income gains in a second term — if he’s reelected — by campaigning for a new economic program.

With persistent, high unemployment, Obama needs to show that he knows how to reduce the costs for businesses to create new jobs and preserve old ones. One direct way to do that would be to cut the employer side of the payroll tax by half, and then he could propose to pay for it through tax reforms that include a carbon-based tax to help address climate change. He also can show that he knows how to help create new, small businesses which, in turn, will create new jobs. Since our major financial institutions have largely stopped providing credit to small entrepreneurs, he could propose a new government-sponsored enterprise that could float bonds for community banks to finance those business loans.

The biggest obstacle to a stronger recovery remains the sick housing market. Nearly two-thirds of American households, in effect, grow poorer every month as the values of their homes decline and, with it, any equity they built up. And people who feel they’re becoming poorer don’t spend, which in turn keeps this recovery anemic. The best leverage we have to stop the decline in housing prices is to bring down home foreclosure rates. The President can show he knows how to do that too, by proposing a new temporary loan program for homeowners with mortgages in trouble. To be sure, this is treacherous territory, politically and economically, since it could enrage homeowners who don’t qualify and induce moral hazard for those who do. But the President can address both problems with some tough love. Homeowners who receive the loans would be on the hook not only to pay them back. On top of that, 10 percent of any capital gains from an eventual home sale could go back to the taxpayers.

Finally, the President can show that he knows how to help Americans prepare for the new jobs that the rest of his program would help create. Nearly half of all working people age 35 and over today still have only the most rudimentary computer skills, leaving them unprepared to perform well in most 21st century jobs. The President could propose a new grant program for community colleges that will keep their computer labs open and staffed in the evenings and on weekends: Any adult would be able to walk in and receive IT training at no personal cost.

This program won’t assuage the Tea Party’s followers — in fact, it will likely incense them. Let’s hope so. The President should welcome a debate — okay, a pitched battle — over a genuine and understandable strategy to improve the lives of Americans. Even if unemployment is still well over 8 percent, a serious plan to bring it down should trump the grab bag of far-right nostrums that passes for policy in the Tea Party.