Brookings: Experts - Adam Looney

Is Starting College and Not Finishing Really That Bad?

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 07 Jun 2013 11:36:00 -0400

Editor's Note: In this month’s employment analysis, The Hamilton Project's Michael Greenstone and Adam Looney examine whether starting college is still worth the investment for students who fail to complete a degree. The findings suggest even completing “some college” has a higher rate of return than many conventional investments including stocks, bonds, and real estate.

Employers added 175,000 jobs in May, according to today’s employment report from the Bureau of Labor Statistics, about the same average pace of job creation over the prior year. All of the job increases were in the private service-providing sector; employment edged down in both the goods-production sector, which includes construction and manufacturing, and in government. This reflects a longer-term pattern: over the prior year, employment in the service sector has increased by almost 2 million jobs, while employment in the goods-producing sector has been essentially flat, and public employment has declined. Also in May, the unemployment rate edged up to 7.6 percent. The broadest measure of employment—the employment-to-population ratio—was 58.6 percent, the same as a year ago. It has remained roughly at the same level since late-2009.

These latest jobs and unemployment statistics, however, do not tell the full story of how all Americans are faring in today’s economic climate, as workers with more education continue to be employed at higher rates and earn more than their less-educated counterparts. Indeed, as previous Hamilton Project work has shown, the rates of return to a two- or four-year college degree are high. In recent years, however, there has been increasing concern about students who begin two- and four-year colleges but fail to complete a degree—particularly in light of the large increase in student debt and growing talk about the high costs of college.

In this month’s employment analysis, The Hamilton Project examines whether starting college is worth it for students who fail to complete a degree. Our startling finding is that it is: these students’ lifetime earnings are roughly $100,000 higher (in present value) than that of their peers who ended their education after high school. Measured by the rate of return, getting some college is an investment with a return that exceeds the historical return on practically any conventional investment, including stocks, bonds, and real estate. (Of course, the return to some college is considerably smaller than the return to finishing either an associate’s or bachelor’s degree.) We also continue to explore the nation’s “jobs gap,” or the number of jobs needed to return to pre-recession employment levels.

The College Earnings Premium

More education corresponds to better employment opportunities, even in the current, tepid job market. In April 2013, according to BLS data, the unemployment rate for individuals age twenty-five and older without a high school diploma was 11.4 percent; for high school graduates, 7.2 percent; for individuals with an associate’s degree, 5.0 percent; and for graduates with a bachelor’s degree or higher, unemployment was only 3.6 percent. Based on a more expansive measure of employment—the employment-to-population ratio—these disparities are even larger. Of all individuals without a high school diploma, age twenty-five and older, only 39.9 percent had a job; for high school graduates with no additional education, the employment rate was 54.5 percent; for individuals with an associate’s degree it was 68.6 percent; and for graduates with a bachelor’s or higher it was 73.2 percent. Interestingly, the unemployment rate for individuals that reported some college but no degree was below the national average at 6.6 percent and the employment-to-population ratio was 60.9 percent. These numbers, and all the calculations presented in this report, are described in detail here.

In addition to increasing the chances of employment, education also has a substantial effect on one’s earnings potential. The graph below shows the average annual earnings of individuals with varying levels of educational attainment. Those with a bachelor’s degree earn a premium of roughly $30,000 each year relative to those with just a high school diploma. Over a lifetime of work, a college graduate with a bachelor’s degree would earn over $500,000 more than an individual with just a high school diploma.

What has not been previously appreciated is that even those who enroll in a two- or four-year program but do not attain a degree also experience substantial increases in earnings. On average, these individuals made about $8,000 per year more than those with just a high school diploma. Over a lifetime, this results in over $100,000 more in earnings.

Are the Increased Earnings Worth the Investment?

In today’s job market, where even some college graduates are struggling to find work, many wonder whether the high cost of college is worth the eventual earnings payoff. First, students face the out-of-pocket costs of tuition. On average, annual tuition and fees are about $3,000 at two-year colleges, $13,000 at four-year colleges, and $27,000 at professional degree programs.

But the true cost of college is more than just tuition; it also includes the opportunity cost of being in school and not working, as college students forgo income that they could have earned by being in the classroom. (The cost of college does not, however, include the price of room and board; all individuals must pay for food and shelter regardless of if they are in college.) Between the ages of eighteen and twenty-one, the earnings of individuals with only a high school degree (and not in school) rise substantially, from $8,000 to $15,000—and that’s among individuals that actually have a job. Thus, the forgone earnings associated with going to college are about $49,000 for a four-year program and $20,000 for a two-year program.

Despite these daunting costs, as we showed in earlier work, the annual rates of return of investing in an associate’s or bachelor’s degree are two to three times higher than those from alternative investments including stocks, bonds, gold, treasury bills, and the housing market. But what about students who start college but find that they are unable to complete their degree? Do the costs they incur for achieving some college outweigh any benefits they receive for their years in school?

In the graph below, we extend our earlier analysis to include the returns to investing in a professional degree and investing in some college. The graph shows that, on average, attending some college but not receiving a degree also has a higher return than all other conventional investments. The annual rate of return of an investment in some college was 9.1 percent. This rate of return is more than 3 percentage points higher than the average stock market returns and 7 percentage points higher than the returns from investing in Treasury bonds.

Of course, the high rate of return associated with attending a few years of college does not imply that dropping out of college is a better option compared to completing a bachelor’s or associate’s degree. Graduates with a bachelor’s degree annually make about $32,000 more than individuals with only some college. Instead, what this analysis suggests is that the downside risk of trying for a college degree but not making it all the way to a degree is not that bad, and could still be worth the investment of time and tuition.

Our method of analysis does not reveal whether college education causes the increased earnings. It is likely that college graduates have different aptitudes and ambitions that might affect earnings. However, a large body of academic research suggests that there is a causal relationship between education and later earnings, and that the investment in education causes the later increased earnings. Our analysis also only looks at the average returns for those who have attended some college; these returns may not apply to potential students considering attending but who have lower levels of preparation or determination than this group. And, naturally, the outcomes for any one person may be higher or lower than these averages.

The May Jobs Gap

As of May, our nation faces a jobs gap of 9.9 million jobs. The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions of job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

To explore the outcomes under various job creation scenarios, you can try out our interactive jobs gap calculator by clicking here. You can also view the j obs gap chart for each state here.

Conclusion

As the unemployment rate continues to decline, it is important to remember that Americans without a college or high school education are still experiencing above-average rates of unemployment. Addressing this problem requires not only creating new jobs but also ensuring that the workforce has the skills necessary to fill these jobs. Although some people currently question whether the cost of college is worth the investment, the evidence suggests that rate of return is much higher than many alternative investments, even for students that don’t ultimately finish a degree.

Unfortunately, the college attendance and completion rates of low-income students have not kept up with those of their better-off classmates leaving them further behind in today’s challenging labor market. To help shed light on this disturbing trend, The Hamilton Project will host an event this month focusing on the economic imperative of increasing college opportunities for low-income students. As part of the event, the Project will release a new proposal by Caroline Hoxby of Stanford University and Sarah Turner of the University of Virginia that outlines a strategy for identifying promising low-income, high-achieving students and providing them with customized information to help improve their college opportunities. The identification and implementation of policies that increase such opportunities, especially for low-income students, is critical for the economic mobility that is part of the social fabric that has bound our country together. For more information or to register for the event, click here.

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Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Image Source: © Brian Snyder / Reuters

Supporting Broad-Based Economic Growth and Fiscal Responsibility through Tax Reform

Adam Looney — Wed, 22 May 2013 02:30:00 -0400

Chairman Murray, Ranking Member Sessions, and Members of the Committee: Thank you for inviting me to share my views on the role of tax reform in supporting broad-based economic growth and fiscal responsibility.

The United States faces a daunting outlook for budget deficits, an increasingly challenging global economy for many American workers and businesses, and rising income inequality.

Improvements in tax policy could help address these challenges by making our tax system more fiscally sustainable, more efficient, and more fair. Indeed, any tax reform will be evaluated based on how it affects each of those three criteria.

But improving on all three dimensions simultaneously is increasingly difficult because of tradeoffs between competing goals of efficiency, revenues, and equity.

Today’s long-term budget outlook means that we’re likely to need higher tax revenues in the future. And rising inequality means that changes in policy will be increasingly scrutinized for how they affect the progressivity of the tax schedule. But a tax reform that devotes revenues to deficit reduction and retains our progressive system would have much more difficulty achieving other goals—such as lowering tax rates.

In my testimony today, I want to describe some of these tradeoffs and some potential paths forward.

Tax Reform and the Budget

Much of the energy surrounding tax reform focuses on the model of the Tax Reform Act of 1986. In that reform, tax rates were lowered substantially and the lost revenue was restored by cutting tax breaks, deductions, exclusions, and other so-called tax expenditures. That reform enhanced economic efficiency without increasing the deficit. In the 27 years since then, however, the economic context has changed, making such a reform harder to achieve.¹

First, we face a dire long-run budget outlook; most believe that putting the budget on a sustainable path will require contributions from both spending cuts and revenue increases. Many hope that tax reform can help produce those revenues.

This makes tax reform more difficult because revenues allocated to deficit reduction are revenues that cannot be used to reduce rates, and vice versa.

Moreover, raising revenues and cutting rates at the same time is a tall order. At first glance, the list of tax expenditures is projected to add up to $1.4 trillion in 2015.² But that figure dramatically overstates the revenue gains that are available from cutting expenditures.

Some expenditures, including obscure items like imputed rent, would be difficult to eliminate for practical or administrative reasons; others, like credits and deductions for working families with children are integral to combating poverty and encouraging employment. These categories account for roughly one quarter of all tax expenditures.³ An additional one-third of the tax expenditures arise from the preferential treatment of savings and investment. And the largest non-savings-related expenditures include those for health insurance, mortgage interest, state and local taxes, and charitable contributions. These, and many others, tend to serve substantive goals, remain on the books because they were too difficult to eliminate in 1986, and, as you well know, are backed by popular constituencies.

In addition to political difficulties, there are basic practical issues to consider. Certain tax expenditures exist for the purposes of simplifying the tax system, to reduce record keeping, or to minimize the filing burden on taxpayers. Eliminating those provisions or scaling back others could make the system more complicated and onerous.

Because of such considerations, the Congressional Research Service warns that “it may prove difficult to gain more than $100 billion to $150 billion” each year from reducing tax expenditures.⁴ And those estimates are based on a 35 percent top rate; if marginal tax rates were reduced, eliminating a dollar’s worth of deductions would raise proportionately less revenue. In other words, if eliminating a dollar of mortgage interest today raised 39 cents, under a top rate of 25 percent, it would raise only 25 cents—37 percent less.

To put these numbers in perspective, in order to be revenue-neutral, the tax plan included in House Budget Committee Chairman Ryan’s budget would require eliminating roughly $450 billion worth of tax expenditures each year just to balance out the individual income tax rate cuts targeted in his plan.⁵ The plans initially developed by the Domenici–Rivlin Task Force and the Bowles–Simpson Commission, which reduce rates and contribute to deficit reduction, likely require reductions in tax expenditures of a similar or larger magnitude.

The gap between the reductions in tax expenditures required by such plans and those that could be agreed upon illustrates the challenge of formulating a plan that achieves both lower rates and higher revenues.

Tax Reform in a Progressive System

A second consideration is the issue of rising income inequality and its relationship to the tax code. Earnings have risen dramatically at the top—by more than 250 percent over the past 30 years for households in the top one percent of the income distribution. At the same time, many households at the middle and bottom have experienced stagnating or even declining earnings. Changes in the tax system over the past 30 years have exacerbated these problems; the very people who have received the biggest income gains in the past three decades have also seen the largest tax cuts. A progressive tax code is perhaps the most significant and powerful tool available to counteract income inequality. Indeed, there are increasing calls for policymakers to use the tax code for that purpose.

Such concerns were much less salient the last time we did tax reform. In 1986, the phenomenon of rising inequality had yet to be fully discovered or understood, and the technical expertise to measure how the tax system affected inequality had yet to be developed.

Today not only are concerns about the progressivity of the tax schedule heighted, but so is our ability to measure how tax changes affect different groups. That raises the level of scrutiny directed to reform and also reveals a substantive tradeoff: that any changes in rates and tax expenditures must balance out within income groups in order to retain a progressive tax structure.

In a series of papers, colleagues at the Tax Policy Center and I analyzed these tradeoffs by examining a hypothetical reform with the stated goals of maintaining tax revenues, lowering marginal tax rates, while at the same time ensuring a progressive tax system.⁶ We took as an example a plan that lowered the top rate from 35 to 28 percent and continued the low rates that apply to savings and investment. These rate reductions are roughly the same levels specified in earlier plans from Bowles–Simpson and Domenici–Rivlin, but are substantially smaller than those specified in Chairman Ryan’s plan. We asked what it would take to achieve other goals of revenue and progressivity.

In that analysis, we estimated the revenue losses due to lower rates, and then tried to pay for those revenue losses by eliminating tax expenditures. We assumed that certain tax expenditures were off the table because of the administrative difficulty of closing certain breaks; others were off the table because they provided preferential treatment for savings and investment.

Overall, the available tax breaks were enough to offset revenue losses from lower rates. But this resulting tax schedule, we found, was less progressive. Even when we implemented the most progressive way of reducing the remaining tax breaks, there was simply not enough revenue from these breaks in the top brackets to offset the revenue losses from lower marginal tax rates.

This result—that this sort of base-broadening reform led to a less progressive tax system—was true even when we incorporated revenue feedback, not just according to the standard dynamic effects used by Tax Policy Center, Treasury, and the Joint Committee on Taxation, but also additional feedback effects from optimistic estimates of potential economic growth, drawn from theoretical models.

The implication is that such a tax reform must give up on at least one of its stated goals: either higher-income taxpayers would receive a tax cut and middle- and lower-income taxpayers a tax increase; the deficit would go up; preferences for savings and investment would have to be reduced; or marginal tax rates would need to be higher.

Prospects for Reform

Of course, these considerations don’t rule out tax reform; indeed, many experts have put forward plans that provide more incremental reforms that simultaneously achieve efficiency gains, higher revenues, and a more progressive tax system. But such plans require substantial compromises.

For instance, certain plans proposed by the Domenici–Rivlin Task Force and the Bowles–Simpson Commission achieve their distributional goals by eliminating preferential rates for capital gains and dividends and curtailing other savings and investment-related tax breaks.

A host of other incremental reforms propose improving the efficiency of the tax system not by reducing rates but by reducing inefficient or wasteful tax expenditures. For example, deductions and exemptions—like for mortgage interest, that currently provide tax savings of up to 39.6 percent—could be replaced with flat credits of, say, 15 percent, providing continued support for homeowners but in a less-costly and more progressive way.⁷ An overall limit on the value of tax expenditures at 2 percent of income would provide an across-the-board reduction in costly tax expenditures.⁸ The President’s Budget includes a provision to limit the amount that certain tax deductions and preferences can reduce tax liability by to 28 percent. And at a meeting convened by the Hamilton Project last February, a bipartisan group of tax experts presented proposals to reduce benefits from the mortgage interest deduction, subsidies for fossil fuels, preferences for retirement savings, and the overall value of deductions.⁹ A common thread is that all of these proposals enhance economic efficiency, raise revenues, and increase progressivity.

Beyond economic appeal, proponents of this approach hope for political appeal. To paraphrase Harvard Professor Martin Feldstein: if Republicans want to reduce the deficit by cutting spending and Democrats want to increase revenues, by focusing on tax expenditures we should find a middle ground.¹⁰

1. For a further discussion see: Greenstone, Michael, Dmitri Koustas, Karen Li, Adam Looney, and Leslie B. Samuels. “A Dozen Economic Facts About Tax Reform,” The Hamilton Project (May 2012).

2 Marron, Donald B. “How Large are Tax Expenditures? A 2012 Update,” Tax Notes (April 9, 2012): 235.

3. For a description of these expenditures, see Nguyen, Hang, James Nunns, Eric Toder, and Roberton Williams. “How Hard Is It to Cut Tax Preferences to Pay for Lower Tax Rates?” Tax Policy Center (July 10, 2012): Table 1.

4. Gravelle, Jane G. and Thomas L. Hungerford. “The Challenge of Individual Income Tax Reform: An Economic Analysis of Tax Base Broadening,” Congressional Research Service (March 22, 2012): 3.

5. Tax Policy Center Table T13-0110

6. Brown, Samuel, William Gale, and Adam Looney. “On the Distributional Effects of Base-Broadening Income Tax Reform,” Tax Policy Center (August 1, 2012); Brown, Samuel, William Gale, and Adam Looney. “TPC’s Analysis of Governor Romney’s Tax Proposals: A Follow-Up Discussion,” Tax Policy Center (November 7, 2012); Marron, Donald. “Understanding TPC’s Analysis of Governor Romney’s Tax Plan,” Tax Vox (August 8, 2012); and Nguyen et al. (2012).

7. Batchelder, Lily L., Fred T. Goldberg, Jr., and Peter R. Orszag. “Reforming Tax Incentives into Uniform Refundable Tax Credits,” The Brookings Institution Policy Brief 156 (August 2006).

8. Feldstein, Martin, Daniel Feenberg, and Maya MacGuineas. “Capping Individual Tax Expenditure Benefits,” NBER Working Paper 16921 (April 2011)

9. See Alan Viard, “Replacing the Home Mortgage Interest Deduction,” Joseph E. Aldy, “Eliminating Fossil Fuel Subsidies,” Karen Dynan, “Better Ways to Promote Saving through the Tax System,” and Diane Lim “Limiting Individual Income Tax Expenditures” in 15 Ways to Rethink the Federal Budget, The Hamilton Project (February 2013).

10. Feldstein, Martin. “A Simple Route to Major Deficit Reduction,” The Wall Street Journal (February 20, 2013).

Authors

Adam Looney

Image Source: Chris Maddaloni

Should the United States Have 2.2 Million More Jobs?

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 03 May 2013 10:30:00 -0400

Employers added 165,000 jobs in April, according to the Bureau of Labor Statistics, following upwardly revised gains of 332,000 in February and 138,000 in March. The three-month average pace of job gains of 211,000 was slightly above the average pace of 173,000 jobs over the last twelve months. The unemployment rate edged down to 7.5 percent, and the fraction of the population reporting a job edged up. The unemployment rate has now declined 0.6 percentage point since last April, although much of this change can be attributed to declining rates of labor-market participation rather than increases in employment.

These numbers continue a pattern of steady growth in the labor market, but they also confirm that America’s recovery from the Great Recession is still very much a work in progress. The public sector, especially, has been a drag on the economy in recent months. While the private sector has added roughly 2.2 million jobs over the past year, employment in state, local, and federal governments has declined by 89,000, including significant losses to teachers and emergency responders. In this challenging economic climate, there is growing concern about how sequestration—the across-the-board budget cuts to discretionary spending that took effect on March 1—may negatively impact the recovery even more. Indeed, forecasters at the Congressional Budget Office project that the sequestration could reduce overall GDP growth in the United States by 0.6 percentage point and cost the economy 750,000 jobs by the end of 2013.

In this month’s employment analysis, The Hamilton Project examines the trajectory of public-sector employment since the onset of the Great Recession and contrasts this decline to periods of economic recovery after previous recessions. We find that the last several years’ policy choices are starkly different from those following previous recessions. Specifically, there are 2.2 million fewer jobs today, relative to what would have occurred with the policy response typical of the five preceding recessions. We also continue to explore the “jobs gap” and find that the country needs to add about 10.0 million jobs to return to pre-recession employment levels.

Government Employment Since the Recession

The downward trend in public-sector employment, described in a Hamilton Project report last summer, has continued into the opening months of 2013. While the private sector has added jobs to the economy in every month since March 2010, a total increase of approximately 6.8 million jobs, the public sector has contracted. To put this in perspective, federal, state, and local governments added jobs in only twelve of the thirty-eight months since March 2010 and have lost more than 625,000 jobs over this period.

The graph below shows the ratio of government employment to the civilian non-institutional population (every civilian in the United States sixteen and older who is not in prison or a live-in care facility) going back to 1980. For the twenty years prior to the Great Recession, this ratio stayed relatively constant, but since then it has dropped precipitously, except for the temporary uptick in 2010 when government employment rose to accommodate demand for U.S. Census workers.

This figure shows that the percentage of individuals working for federal, state, and local governments is at a decades-long low. In fact, the ratio of government employment to population has not been below 9 percent since the mid-1960s. The result, as detailed in last summer’s Hamilton Project report, is over 200,000 fewer teachers, 50,000 fewer policemen, and 6,000 fewer air-traffic controllers since 2009.

Government Policy: It's Different This Time

By cutting jobs during a period of already high unemployment, budget policies have contributed to the tepid pace of labor-market recovery and stand out as a departure from typical policy responses after recessions. The figure below shows the change in government employment forty-six months after every recession in the United States going back to 1970. (The double-dip recessions of 1980 and 1981, which ended in November 1982, are counted as a single event.) The bars are scaled by the population of the United States in June 2009 so that the magnitudes of employment changes are comparable.

The ongoing recovery, which began when the Great Recession ended in June 2009, dramatically deviates from the usual pattern. In the forty-six months following the end of the five other recent recessions, government employment increased by an average of 1.7 million. During the current recovery, however, government employment has decreased by more than 500,000. Put together, the policy differences have led to 2.2 million fewer jobs today. Such a large contraction of the public-sector during a recovery is unprecedented in recent American economic history.

The April Jobs Gap

As of April, our nation faces a jobs gap of 10.0 million jobs. The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions of job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

To explore the outcomes under various job creation scenarios, you can try out our interactive jobs gap calculator by clicking here. You can also view the jobs gap chart for each state here.

Conclusion

Policymakers are currently faced with the unenviable task of simultaneously increasing employment and addressing America’s long-term budget deficits, but—at a time when the rate of government employment is at a historic low—sequestration threatens to further slow the growth of the public sector and lengthen the time it will take to close America’s jobs gap. Even when ignoring any indirect impacts, a typical policy response to the Great Recession would have led to a jobs gap that is 2.2 million jobs smaller than current gap of about 10.0 million and commensurately reduced the amount of time until the economy returns to full employment.

It is critical to achieve both employment gains and fiscal stability. The textbook approach is for government to continue to support the recovery and credibly enact deficit reduction that will not take hold until the employment crisis has been mitigated substantially. With respect to deficit reduction, The Hamilton Project recently released a collection of fifteen proposals that seek to reduce the deficit while improving efficiency and promoting broad-based economic growth. To see how these proposals could impact the long-term deficit, you can try our interactive budget calculator here. The Hamilton Project also continues to explore policies to boost employment, including a recent discussion paper on improving worker training programs.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Image Source: © Mike Segar / Reuters

Rethinking the Federal Budget: Build Your Own Deficit Reduction Plan

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 12 Apr 2013 11:25:00 -0400

Just over a month ago, The Hamilton Project released a menu of options for achieving responsible deficit reduction while promoting broader economic benefits in a new report, 15 Ways to Rethink the Federal Budget. Through a new interactive feature on The Hamilton Project’s website, you can build your own deficit reduction plan by choosing different combinations of these proposals and see how this package could affect the ten-year budget picture.

Click here to try your hand at rethinking the federal budget »

The proposals address topics ranging from immigration to transportation to tax deductions and were written by leading budget and tax experts from a variety of backgrounds, including academia, the private sector, and a range of NGOs such as the American Enterprise Institute, the Brookings Institution, and Pew Charitable Trusts. Each expert was asked to share his or her proposal for reducing spending or raising revenue in a way that also promotes broad-based economic growth. The individual proposals offer discrete, innovative ideas for achieving budgetary savings and broader economic benefits. However when viewed in combination, they could contribute meaningful deficit reduction and help the country confront its most pressing economic challenges. Of course, a balanced approach to deficit reduction might require other changes but a package of these proposals can serve as a starting point for illustrating what is possible.

The new interactive feature allows you to see the potential budgetary effects of implementing these proposals—either individually or several at a time. Additionally, you can see the total deficit reduction produced by the proposals you select and the Budget Control Act of 2011 (BCA) and the American Taxpayer Relief Act of 2010 (ATRA). The feature also provides a breakdown of what fraction of the deficit reduction comes through increased revenues, decreased spending, and lower interest payments.

It is important to bear in mind that no fiscal policy occurs in a vacuum. While the feature displays the ten-year deficit reduction and projected debt-to-GDP ratio in 2023 given your selection of proposals, these calculations are estimates that do not take into account budgetary interactions or macroeconomic effects that some of the proposals may have.

Michael Greenstone is the director of The Hamilton Project and Adam Looney is its policy director. For more about the Project, visit www.hamiltonproject.org.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

An Evidence-Based Approach to Improving Worker Training Programs

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 05 Apr 2013 09:13:00 -0400

The pace of job gains slowed last month, according to the Bureau of Labor Statistics. In March, the economy added 88,000 jobs, down from the higher-than-expected gains of 148,000 and 268,000 jobs in January and February, and below the average monthly gain of 169,000 per month recorded over the prior 12 months. The unemployment rate was little changed at 7.6 percent and the fraction of the population with a job edged down. Since March 2012, the unemployment rate has declined from 8.2 percent to 7.6 percent, but much of this decline appears to reflect changes in labor force participation--the fraction of the population employed is unchanged over the year. Over the last twelve months, the private sector has added roughly 2 million jobs; in contrast, employment in state, local, and federal governments has declined by more than 75,000.

Reducing unemployment and building the foundation for a more robust job market are just two of the challenges facing policymakers at every level of government. But given today’s austere budget outlook, the resources available to address the nation’s most pressing problems—from recidivism to school readiness to obesity to workforce development—are shrinking. Indeed, continuing to make progress on these social issues necessitates producing more value with each dollar that the government spends. The solution is to take advantage of the tremendous opportunities for using data and evidence to identify the highest-payoff uses of taxpayer dollars.

One area where better use of evidence could significantly improve outcomes for many individuals is workforce training programs. Covering a wide range of fields—from information technology to healthcare to auto repair—these programs offer the prospect of boosting incomes, increasing employment, and improving the nation’s productivity. Too often, though, these benefits go unrealized, largely because prospective trainees have little access to the information and guidance necessary to make well-informed decisions. These lost opportunities are especially poignant in the current environment of elevated unemployment.

In this month’s employment analysis, The Hamilton Project explores how policymakers can better gather and disseminate evidence on worker training programs to help displaced and low-income workers determine which programs can help them find employment and increase their earnings most effectively. We also continue to explore the “jobs gap,” or the number of jobs that the U.S. economy needs to create in order to return to pre-recession employment levels.

The Potential of Training Programs

Education, in some form or another, has always been the key to the American Dream, as the development of new skills—paired with hard work and good fortune—leads Americans to better jobs and increased prosperity. For some, these skills are gained in primary and secondary school and culminate in a four-year college degree. But many others, particularly students pursuing career or technical training, obtain important education and skills at community colleges or through other workforce development programs that can help them secure a good job.

Indeed, for some workers, the benefits of worker training programs are large. The chart below, which draws on cutting-edge research and data systems from Florida, shows that students who complete two-year degrees in high-return fields, or who complete two-year programs that lead to four-year degree programs, earn more than $35,000 per year after graduating. Students who receive certain career-oriented certificates earn similar salaries.

But these positive outcomes are too often the exception rather than the rule. Students who complete low-return programs or who drop out before finishing a degree earn 33 percent less than their counterparts in high-return programs. The median salary for those who complete two-year degrees with low returns is a mere $24,100. As the light green bars in the figure above show, the vast majority of students fall into these lower-earning categories. More than 40 percent take less than a year of credits before leaving school, almost a quarter spend more than a year in community college before dropping out without a degree or certificate, and another 12 percent complete a degree in a field that does not lead to a good-paying job.

What is most concerning about these results is that the qualifications of many of these students are similar across the groups. Many, for example, have comparable high-school GPAs and work experiences. Yet too many end up in programs that they are unlikely to complete, or complete programs that are unlikely to raise their earnings. And furthermore, even more workers who could benefit from training fail to enter programs at all because they are unsure of the potential benefits. The result is that the economic opportunities of training for these workers are not adequately realized.

Developing and disseminating information on the effectiveness of various training programs, and helping prospective students use that information in their decision-making, are important parts of the solution. Today, prospective students make their enrollment decisions without knowing whether they are likely to succeed within a particular program, or whether they are likely to find a good-paying job in that field after completion. Gathering the information necessary to help students make better choices and guiding trainees to more appropriate courses of study could help increase the returns students realize on their investments of time and money.

The March Jobs Gap

As of March, our nation faces a “jobs gap” of 10.1 million jobs. The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions of job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

To explore the outcomes under various job creation scenarios, you can try out our interactive jobs gap calculator by clicking here. You can also view the jobs gap chart for each state here.

Conclusion

Workforce development programs are just one example of how the use of evidence in policymaking can create government programs that more effectively serve the American people. Evidence-based policymaking allows lawmakers, in essence, to do more with less. While this is especially important in today’s era of tight budgets, a key goal of government—regardless of the fiscal climate—is always to achieve the most social good with taxpayer dollars.

To that end, The Hamilton Project, in partnership with Results for America, will host an event and release two new proposals on April 17th focusing on the importance of evidence in policymaking. A new paper by Louis Jacobson and Robert LaLonde provides a roadmap for using evidence to guide students to higher-return training programs that could vastly increase the economic benefits of career and technical education. A second proposal by Jeffrey Liebman discusses how the federal government can adopt strategies for more effective evidence-based policymaking across the board. The event will also feature a roundtable discussion with Senators Rob Portman (R-OH) and Mark Warner (D-VA), Chairman of the President’s Council of Economic Advisers Alan Krueger, and former U.S. Treasury Secretary Robert E. Rubin on the importance of evidence in driving public dollars toward policies that work.

The full agenda for the event can be found here. For more information about the event and new papers, follow us on Twitter @hamiltonproj and join the conversation using #evidenceworks.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Sequestration’s Threat to America’s Most Vulnerable

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 08 Mar 2013 09:23:00 -0500

The labor market continued to improve last month, according to the Bureau of Labor Statistics. In February, the economy added 236,000 jobs and the unemployment rate edged down to 7.7 percent. Over the last twelve months, the private sector has added 2.1 million jobs; in contrast, employment in state, local, and federal governments has declined by more than 100,000 jobs.

Despite this progress, millions of Americans are still experiencing the effects of the Great Recession; indeed, many workers have suffered protracted periods of joblessness or lower wages. A range of government safety-net programs have assisted those Americans who have found themselves struggling in a weak economy. But recent budget cuts, notably the sequestration that went into effect on March 1, threaten to weaken this social safety net even while employment remains far from pre-recession levels.

In this month’s employment analysis, The Hamilton Project looks at current poverty trends in the United States, the important role of government support programs, and how sequestration could damage critical aspects of the safety net in the midst of continued labor-market weakness. We also continue to explore the “jobs gap,” or the number of jobs that the U.S. economy needs to create in order to return to pre-recession employment levels.

A Look at America’s Poverty Rate

According to the official poverty rate as measured by the U.S. Census Bureau, 12.5 percent of Americans lived in poverty in 2007, prior to the start of the Great Recession, a figure only slightly below the poverty rate in 1980. In the wake of the recession, the official poverty rate has increased significantly, reaching 15.1 percent in 2010—its highest level in recent decades—and remained at that elevated level in 2011. At first glance, then, it might appear that the nation has made little progress—or even gone backwards—in fighting the war on poverty, but this official rate doesn’t tell the whole story.

Some experts argue that the official rate is an inaccurate measure of the well-being of low-income Americans because it omits the effects of taxes and many anti-poverty programs that provide valuable support for low-income American families. In a 2008 discussion paper for The Hamilton Project, Rebecca Blank and Mark Greenberg explain why the official poverty rate is flawed and how it could be improved.

Blank and Greenberg advocate using an alternative measure of poverty, developed by the National Academy of Sciences (NAS) in the 1990s. This NAS rate accounts for changes in the costs of goods other than food—notably, health care—and makes different adjustments for family size and inflation. But most importantly, the official poverty rate only considers a family’s pre-tax money income, while the NAS measure also accounts for tax credits and noncash benefits like the earned income tax credit (EITC), child tax credit, housing stipends, energy assistance, and food and nutrition programs like the Supplemental Nutrition Assistance Program (SNAP, formerly food stamps).

The graph below, based on measures from a recent paper by Bruce Meyer and James Sullivan, illustrates the difference between these two poverty metrics.

A frequent criticism of anti-poverty programs is that they incentivize people to work less, which in turn raises the official poverty rate. While certain programs, such as unemployment insurance, may have this effect for some individuals (although evidence suggests that this effect is not very large), Bruce Meyer and Dan Rosenbaum and Nada Eissa and Jeffrey Liebman have shown that other key anti-poverty programs like the EITC actually provide very strong work incentives. While the overall effect of anti-poverty programs on the official poverty rate is, therefore, ambiguous, it is clear that government programs have greatly reduced the more-accurate NAS poverty rate.

The Role of Policy in Alleviating Poverty

The striking fact about the above graph is that, since the 1990s, the NAS poverty rate has fallen significantly and was 3.4 percentage points below the official measure in 2010. In human terms, this means there are more than 10 million fewer people living below the poverty line, according to the NAS rate. Intuitively, this makes sense: the development and expansion of effective anti-poverty programs like the EITC, expansions in health insurance for low-income children and families, and more recent temporary expansions in the safety net during the Great Recession have reduced the number of Americans living in poverty over time. What’s more, the temporary recovery measures that policymakers enacted during the recession cushioned families against the most devastating effects of the weak economy.

Many of the current anti-poverty programs, therefore, are having a very real and positive impact that is not reflected in official poverty statistics. While too many Americans are still living in poverty, even more families would struggle to get by in the absence of support programs that have been enacted and expanded during the past three decades.

Despite the success of these policies in assisting at-risk families, some of these programs will be scaled back significantly as a result of the March 1 sequestration. The Center on Budget and Policy Priorities, for instance, estimates that the extended unemployment benefits that were enacted during the recession kept 3.4 million Americans above the poverty line in 2010 alone. Yet under sequestration, extended unemployment benefits will be cut by almost 10 percent. Other longer-term safety-net programs that have been important in reducing the NAS poverty rate in recent years—including housing vouchers for very low-income Americans and the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC)—will also be reduced. Sequestration, therefore, could have disproportionately negative impacts on those Americans who most need assistance in recovering from the recession.

Recently, The Hamilton Project released 15 Ways to Rethink the Federal Budget, a report including a range of proposals—written by experts from many policy and political backgrounds—for reducing the deficit through pro-growth policies that do not hinder the United States’ recovery efforts. While there has been progress on improving the deficit and labor-market situations over the last few years, it is clear that more work remains to be done to help many American families in their transition back to full employment.

The February Jobs Gap

As of February, our nation faces a “jobs gap” of 10.2 million jobs. The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions of job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

If the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until April 2020 to close the jobs gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate of the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by November 2016. You can also try out our interactive jobs gap calculator by clicking here and view the jobs gap chart for each state here.

Conclusion

Although poverty—by any measure—has increased since the beginning of the recession in 2007, the evidence suggests that many anti-poverty programs enacted during the past several decades and the federal government’s response to the recession have played an important role in keeping many American families above the poverty line. Indeed, while much work remains to be done in supporting low-income families, the nation’s social safety net has been successful over the past few decades in giving many Americans the support they need to get ahead. Sequestration threatens to throw many American families back into poverty during the economic recovery by cutting the very programs that are helping them stay above water.

In the coming months, The Hamilton Project will continue to look at trends in poverty and how the federal government can do more to provide low-income Americans opportunities to become self-sufficient and succeed. From increasing access to post-secondary education to increasing incentives to work, there are many ways for government to reduce poverty in a way that promotes broad economic growth. Pursuing such policies will improve the lives of millions of Americans and strengthen our economy.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Publication: The Hamilton Project

Real Specifics: 15 Ways to Rethink the Federal Budget

Michael Greenstone and Adam Looney — Wed, 20 Feb 2013 00:00:00 -0500

Despite widespread agreement that the federal budget is on an unsustainable path, there is also widespread disagreement about what should be done. The Hamilton Project asked leading experts from a variety of backgrounds—the policy world, academia, and the private sector, and from both sides of the political aisle—to develop and share their ideas for addressing the deficit. The proposals will be released at two events scheduled for February 22 and February 26. In a dialogue previewing those events, Hamilton Project Director Michael Greenstone and Policy Director Adam Looney discuss some of the key ideas offered by the experts.

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Michael Greenstone and Adam Looney: These Authors Have Drafted Policies That Help the Budget and Provide Economic Benefits

Greenstone stresses that the goal of the papers is to move beyond the fights and disagreements between President Obama and Congress and to provide some of the poetry, or some of the details, on how government might run better. The papers will also be featured in a book, 15 Ways to Rethink the Federal Budget, and will take on a wide-ranging set of topics, including immigration, transportation, health care, defense spending, and tax expenditures.

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Michael Greenstone and Adam Looney: These Authors Have Drafted Policies That Help the Budget and Provide Economic Benefits

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15 Ideas for Smart Deficit Reduction

Michael Greenstone and Adam Looney, The Hamilton Project — Wed, 20 Feb 2013 14:36:00 -0500

Few policy debates have been as contentious as the current tug-of-war over the federal budget deficit. Despite widespread agreement that the budget is on an unsustainable path, there is also widespread disagreement about what should be done, and, to complicate matters, this budgetary uncertainty comes at a time when policymakers are still trying to get Americans back to work in the wake of the Great Recession.

In the coming months, policymakers will make important decisions on how to reduce the budget deficit. These decisions pose significant political and economic challenges, but also create a rare window of opportunity for policymakers to decide what kinds of programs and investments our country values, and what sort of society we will create for future generations. Once consensus has been reached about the broad focus of future investments, the devil will be in the details of implementation. And without a doubt, a sound budget strategy will require ideas rooted in evidence, not ideology, if we are to achieve these long-term goals.

To this end, The Hamilton Project asked leading experts from a variety of backgrounds—the policy world, academia, and the private sector, and from both sides of the political aisle—to develop policy proposals that could form a partial menu of options to achieve responsible deficit reduction. These experts include Jonathan Gruber, an MIT professor who was instrumental in shaping health-care reform bills in Massachusetts and nationally; Jeff Liebman, a Harvard professor who previously served as acting Deputy Director at the Office of Management and Budget; Gary Roughead, a retired four-star admiral and former Chief of Naval Operations; Tyler Duvall, former Assistant Secretary of Transportation Policy at the Department of Transportation; Adele Morris of Brookings, who leads the institution’s climate and energy economics initiative; and many others.

The mandate given to the authors was to describe pragmatic, evidenced-based proposals that would both reduce the deficit and also bring broader economic benefits. The resulting fifteen proposals take on a wide-ranging set of topics, including immigration, transportation, health care, defense spending, and tax expenditures, and include options to reduce mandatory and discretionary expenditures, raise revenues, and improve government efficiency.

The opening table of The Hamilton Project’s forthcoming budget book presents the fifteen proposals and their potential impacts on the economy and the deficit over a ten-year period. Viewed individually, the proposals offer specific reforms and evidence-based policy ideas to achieve budgetary savings and broader economic benefits. Taken together, they offer a menu of policies—a mix of tax reforms, changes to major spending programs, and new revenue raisers—that could contribute meaningful deficit reduction and help the country confront its most pressing economic challenges. To preview the budget table, click here.

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Michael Greenstone and Adam Looney: These Authors Have Drafted Policies That Help the Budget and Provide Economic Benefits

The Hamilton Project budget report will be released on February 26th as part of a two-part forum:

Part I: Budgeting for a Modern Military — February 22nd
The first event will feature two proposals for reducing defense spending while preserving national security. The authors of the papers—Retired Admiral and former Chief of Naval Operations Gary Roughead, and former CBO Assistant Director Cindy Williams—will be joined to discuss their ideas by high-level experts including former Deputy Secretary of Defense and former CIA Director John Deutch, former Undersecretary for Defense Michele Flournoy, and former Senate Armed Services Chairman Sam Nunn.

Part II: Addressing Entitlements, Taxation, and Revenues — February 26th
The second event in our series will shift the focus to entitlements, tax reform, and new sources of revenue. Three former CBO directors—Alice Rivlin, Senior Fellow at Brookings, Robert B. Reischauer of The Urban Institute, and Donald Marron of the Tax Policy Center—will set the stage for the day’s discussions around 13 new proposals for reducing the deficit. A diverse group of authors will join the forum for roundtables focusing on an enduring social safety net, innovative approaches to tax reform, and new sources of revenue and efficiency.

For updates on the event, follow us @hamiltonproj and join the conversation using #RethinktheBudget.

Michael Greenstone is the director of The Hamilton Project and Adam Looney is its policy director. For more about the Project, visit www.hamiltonproject.org.

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Michael Greenstone and Adam Looney: These Authors Have Drafted Policies That Help the Budget and Provide Economic Benefits

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Michael Greenstone and Adam Looney, The Hamilton Project

Image Source: © Larry Downing / Reuters

The Benefits of a "Fix it First" Approach to America’s Ailing Infrastructure

Adam Looney — Thu, 14 Feb 2013 09:29:00 -0500

In his recent State of the Union address, President Obama proposed a “Fix-it-First” approach to investing in our nation’s ailing infrastructure. This approach recognizes the value of the well-traveled network of roads and bridges that make up our nation’s existing highway system, and prioritizes the maintenance and rehabilitation of our deteriorating system.

In “Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways," a paper commissioned by The Hamilton Project at Brookings, authors Matthew Kahn and David Levinson argue that the repair, maintenance, rehabilitation, reconstruction, and enhancement of our existing roads and bridges is the best way to maximize the benefits of infrastructure spending. When first constructed decades ago, the interstate highway system led to economic gains by connecting people and businesses. The full benefits of that system has eroded as roads and bridges have deteriorated, contributing to congestion, longer travel times, increased wear and tear on vehicles, and even accidents. A fix-it-first approach would recoup the value we’re missing from using our current system inefficiently. To read the full paper, click here.

Authors

Adam Looney

Not All Cuts Are Created Equal: Why Smart Deficit Reduction Matters

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 01 Feb 2013 12:54:00 -0500

According to the Bureau of Labor Statistics, the economy added 157,000 jobs during the month of January and an average of 200,000 jobs in the prior three months. These new estimates of job gains now reflect the annual “benchmark” revision to the payroll survey, which showed that the level of employment in December last year was about 650,000 jobs higher than previously reported. As a result, estimates of total job creation in 2012 were increased to 181,000 jobs per month, or a cumulative 2.2 million added jobs over the year. The unemployment rate, at 7.9 percent, has remained at roughly the same level since September of last year.

Thus far in 2013, the major economic focus has been on the budget—the “fiscal cliff” in particular—and the effect of the federal deficit on broader economic activity. Indeed, over the past two years, policymakers have made much progress on reducing the budget deficit. As currently legislated under the American Taxpayer Relief Act of 2012 (ATRA), the deficit is projected to fall to a more manageable 2.6 percent of GDP in 2018. However, the deficit is projected to rise thereafter, highlighting that, over the longer term, there is still more work to be done in matching revenues and spending.

In this month’s employment analysis, The Hamilton Project explores how the design of budget cuts could impact economic growth and living standards in the coming years and beyond. We also continue to explore the “jobs gap,” or the number of jobs that the U.S. economy needs to create in order to return to pre-recession employment levels.

The Current Path Toward Deficit Reduction

In the past two years policymakers have enacted $3.5 trillion of deficit reduction set to take place over the next 10 years, with $1.1 trillion of these cuts coming from the sequestration scheduled for March 1. Should all these policies go into effect, the ratio of spending cuts to revenue increases would be more than 4-to-1, and the forecasted deficit in 2018 would be about 2.6 percent of GDP, down from 10.1 percent in 2009 and 7.0 percent in 2012. Indeed, according to the Center on Budget and Policy Priorities (CBPP), if most of these policies take effect, policymakers would need to find as little as $257 billion to stabilize the national debt at a sustainable level by the end of the decade ^[1]. On paper, at least, that suggests policymakers are within reach of resolving the near-term deficit problem.

The problem, however, is that currently scheduled cuts are hugely unpopular with analysts, the public, and most lawmakers. The automatic spending cuts mandated in the Budget Control Act (BCA) of 2011, are scheduled to begin in March 2013 and end in 2021, evenly divided over the nine-year period. The cuts are split between defense spending (with spending on wars exempt) and non-defense discretionary spending, which does not include entitlements like Social Security, Medicare, and Medicaid. This type of indiscriminate cutting has profound implications for our nation’s economic well being.

For example, the figure below shows the effects of the recent budget changes, including the sequester, on non-defense discretionary spending. Under scheduled cuts this category of spending would fall to its lowest level in recent history. Why is this a concern?

In today’s increasingly competitive global economy, many Americans have seen their wages stagnate or even decline over the last several decades, and non-defense discretionary spending includes the public investments that, for generations, have helped improve the lives of Americans and provide economic opportunities of the working and middle classes. Reductions in these spending categories mean less funding for the National Science Foundation, less research into new sources of energy, less training and workforce development, and less spending on education through initiatives such as Pell Grants. This funding provides support to our ailing infrastructure, enables research and development to improve health and foster innovation, and increases access to higher education at a time when we have fallen from second to fifteenth in international college completion rates.

The sequester also threatens to impose deep cuts to defense spending. The new caps would cut non-war defense spending from previously planned levels by about 6 percent this year and about 10 percent from 2014 to 2021. These cuts are particularly challenging because of internal pressures within the military budget in areas where costs are projected to rise faster than inflation. Between 2000 and 2010, the Department of Defense expanded its force by 4 percent, but costs increased by more than 40 percent. Much of this cost growth is driven not by increases in capacity or new investments, but by rising costs in areas such as military personnel and operation and maintenance. Left unaddressed, these growing costs will crowd out spending for military readiness and other vital capabilities.

But there are also short-term concerns about the economic effects of the sequester. The U.S. economy is still weak. As we discuss below, the nation faces a massive jobs gap, and private forecasters suggest that the sequester could subtract 0.7 percentage points from economic growth in 2013. In this respect, the sequester runs counter to the textbook economics solution to this situation, which is to enact sustainable budget consolidation today, but to delay its effect until the economy is on sounder footing.

The January Jobs Gap

As of January, our nation faces a “jobs gap” of 10.3 million jobs (even after incorporating the effects of this month’s positive revisions to employment growth). The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions of job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

If the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until April 2020 to close the jobs gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate of the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by November 2016. Again, these figures do not reflect the anticipated update to the payroll data due in February, which may reduce the actual jobs gap. You can also try out our interactive jobs gap calculator by clicking here and view the jobs gap chart for each state here.

Conclusion

The spending cuts and revenue increases made in the last two years put the nation on a path toward fiscal sustainability, but the real challenge lies in ensuring that deficit reduction is done in a way that preserves the ability of the government to make much-needed public investments and to tackle our long-run economic challenges. Achieving real fiscal balance will require creative thinking about which areas of the budget can be made more efficient and about which areas should be preserved.

To that end, The Hamilton Project asked experts from a variety of backgrounds—the policy world, academia, and the private sector—and from both sides of the political aisle, to provide innovative, pragmatic proposals for lowering the deficit that take into account impacts to the economy at large. The resulting 15 proposals range across budget groups, and include options to reduce mandatory and discretionary spending, to raise revenues, and to improve economic efficiency. The proposals will be featured this month in a two-part budget series.

The first event, “Budgeting for a Modern Military,” will be held on February 22nd and feature two proposals for reducing defense spending while preserving national security. The authors of the papers—Retired Admiral and former Chief of Naval Operations Gary Roughead, and former CBO Assistant Director Cindy Williams—will be joined to discuss their ideas by high-level experts including former Deputy Secretary of Defense and former CIA Director John Deutch, former Undersecretary for Defense Michele Flournoy, and former Senate Armed Services Chairman Sam Nunn.

The second forum, “Addressing Entitlements, Taxation, and Revenues,” will be held on February 26th and feature a diverse group of authors who will present their proposals, which touch on topics as wide-ranging as immigration, transportation, healthcare, and mortgage interest. These proposals provide options for bringing the budget into balance that, in contrast to the sequester, do not compromise the future well-being of Americans by sharply cutting public investments.

For updates on the event, follow us @hamiltonproj and join the conversation using #RethinktheBudget.

^[1] This estimate assumes that the $1.1 trillion sequestration takes effect and the costs of $400 billion of so-called “tax extenders” are paid for, but that scheduled cuts to Medicare physicians (totaling roughly $250 billion) will not take effect and would not be paid for.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Image Source: Medioimages/Photodisc

The Economics of Immigration Reform

Michael Greenstone and Adam Looney, The Hamilton Project — Tue, 29 Jan 2013 17:32:00 -0500

With bipartisan momentum mounting for comprehensive immigration reform, cautious optimism has emerged that 2013 will be the year for action. Most Americans agree that our immigration system is flawed, but there remains a lack of understanding about the real effects that new immigrants have on wages, jobs, budgets, and the U.S. economy in general. Two recent Hamilton Project papers provide important economic context for the issue and a potential path forward.

The Project’s “Ten Economic Facts About Immigration” memo explores some of the questions frequently raised around immigration in the United States and provides facts to address many immigration myths. For example, there is concern in some communities that immigrants will replace American workers and reduce our standards of living. On the contrary, the evidence suggests that immigrants typically boost American workers’ overall standard of living by increasing American wages and lowering prices for consumers. Furthermore, the evidence shows that immigrants and U.S.-born workers do not generally compete for the same work. As the chart below illustrates, immigrants create average wage increases of between 0.1 percent and 0.6 percent for American workers. The greatest academic dispute is around the effect on the wages of Americans with less than a high school diploma, with estimates ranging from slightly positive to a decline of 4.7 percent. All in all, immigrants appear to only modestly impact the wages of U.S.-born workers.

There are many different approaches to comprehensive immigration reform, including several fresh ideas being proposed by the President and congressional leaders. One innovative approach that could provide important principles for lawmakers can be found in a Hamilton Project discussion paper, “Rationalizing U.S. Immigration Policy: Reforms for Simplicity, Fairness, and Economic Growth,” by economist Giovanni Peri of UC Davis. In his proposal, Peri offers an incremental, market-based approach to comprehensive reform. Peri proposes starting with market-based changes to employment-based visas to better link visas with labor-market demand.

The proposed system uses market-based auctions to allocate employment-based permits to employers and visas to immigrants that have the greatest propensity to contribute to economic activity and thus to generate the largest benefits for the U.S. economy. These auctions would also generate revenue for the federal government. Policymakers, in turn, could use that revenue for a host of purposes—to tackle the federal deficit, compensate local communities that deliver social services to immigrants, or to invest in the skills of American workers.

How would Peri’s model work? The essential features of the proposal would be implemented in three steps:

The first step involves a series of incremental phases starting with a pilot program that uses an auction-based system to allocate temporary employment visas.
After a successful pilot with the existing classes of temporary employment visas, the second phase would expand the auction to permanent labor-sponsored visas.
A final phase would provide a reassessment of the balance between employment-based and family-based visas, as well as a broad simplification of complicated rules in the current system such as country quotas.

Employers would have the ability to resell or trade permits, and foreign-born workers would have the flexibility to move between permit-holding employers. The added employee flexibility and employer competition provide a strong element of protection for the workers.

The new system would thus eliminate the cumbersome ex-ante labor verification procedures for employers who intend to hire immigrants. This proposal also recommends improvements in immigration enforcement through the use of technology-based enforcement in the workplace and measures to address the current population of undocumented workers.

To read the full proposal, click here. To read the policy brief, click here.

Regardless of the approach, the potential economic benefits of comprehensive immigration reform are great—for American workers and their families, for employers, and for foreign-born workers seeking opportunities in the United States. The key will be to match, at least to some extent, the flow of immigrants with labor market demand, to help ensure the greatest economic boost for all involved. By adding market forces to the equation, immigration reform offers new promise for the American economy—whether through high-skill or agricultural sectors—that we cannot afford to ignore.

Michael Greenstone is the director of The Hamilton Project and Adam Looney is its policy director. For more about the Project, visit www.hamiltonproject.org.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Image Source: © Keith Bedford / Reuters

The Fiscal Cliff Deal and Our Long-Run Budget Challenge

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 04 Jan 2013 09:30:00 -0500

According to the Bureau of Labor Statistics, the economy added 155,000 jobs during the month of December and an average of 151,000 jobs over the prior three months. The pace of job creation has been remarkably steady for two years—job gains averaged 153,000 per month in both 2011 and 2012. This rate of job creation has gradually chipped away at the unemployment rate, which was unchanged at 7.8 percent in December and has now been below 8 percent for four months. (These figures do not reflect the anticipated annual revision to the payroll data, which will be official in February and is expected to show that the level of employment was about 386,000 jobs higher in March 2012 than previously reported.)

This week marked the passage of the American Taxpayer Relief Act, which averted many of the tax increases and spending cuts that made up the so-called fiscal cliff. By passing that bill, policymakers avoided most of the near-term drag on the economy that would have occurred in the absence of an agreement. In the process, the Act reduced the projected budget deficit over the next decade by 7 percent from $10 trillion to $9.3 trillion.

In this month’s employment analysis, The Hamilton Project explores the projected impacts of the American Taxpayer Relief Act on economic growth and discusses the challenges still ahead with regard to the nation’s long-run deficit. We also continue to explore the “jobs gap,” or the number of jobs that the U.S. economy needs to create in order to return to pre-recession employment levels.

The American Taxpayer Relief Act and the Deficit Outlook

In last month’s employment analysis, The Hamilton Project studied the employment effects of the fiscal cliff, a set of federally legislated tax increases and spending cuts that were scheduled to take effect at the beginning of 2013. The policies that made up the cliff included the expiration of measures aimed at addressing the economic downturn, the expiration of Bush-era tax rates, and the onset of automatic budget cuts. This sudden reduction in government expenditures and spike in taxes could have badly damaged the fragile economy and, according to the Congressional Budget Office (CBO), would have reduced employment by 3.4 million jobs.

As 2012 came to an end, policymakers passed legislation that averted the worst projected impacts of the fiscal cliff on the economy. Income-tax cuts were extended for almost all taxpayers; the Alternative Minimum Tax was permanently patched; emergency unemployment insurance benefits were extended for a year; scheduled cuts to Medicare payments to doctors were averted; and the large automatic cuts in discretionary spending that were scheduled to take place at the beginning of 2013 were delayed by two months. All in all, these changes may have averted roughly 2.6 million of the 3.4 million job losses projected from going over the fiscal cliff.

The immediate budgetary impact of the American Taxpayer Relief Act is an approximately 7 percent reduction in the 10-year deficit. To arrive at this estimate, we contrasted the new legislation with the CBO’s alternative fiscal scenario, which includes a full extension of Bush-era tax rates and an indefinite postponement of the mandated spending cuts scheduled for 2013. According to the CBO’s latest budget outlook, under the alternative fiscal scenario, the nation faced a 10-year budget deficit of about $10 trillion. CBO scoring indicates that the American Taxpayer Relief Act will reduce the budget deficit by a little more than $700 billion over the next decade relative to that scenario. The figure below plots budget deficits under the alternative fiscal scenario before and after the American Taxpayer Relief Act for the coming decade. Despite the modest reduction in deficits under the new law, the debt-to-GDP level is still projected to increase for the foreseeable future.

The textbook solution to the dual problems of continuing near-term economic weakness and long-run budget deficits is to pair short-run economic stimulus with gradual but credible changes to spending and taxes that reduce deficits in the long run. By avoiding some parts of the fiscal cliff today, the American Taxpayer Relief Act is supportive of the first pillar. But much work remains to be done on part two—addressing the longer-run budget challenge. In the coming months, the task for policymakers is to achieve deficit reduction in the long run without drastically cutting essential services or damaging a recovering economy in the short run. This will not be easy from either a political or policy perspective and will require innovative proposals and solutions.

The December Jobs Gap

As of December, our nation faces a “jobs gap” of 11.0 million jobs. The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions of job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

If the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until August 2020 to close the jobs gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate of the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by January 2017. Again, these figures do not reflect the anticipated update to the payroll data due in February, which may reduce the actual jobs gap. You can also try out our interactive jobs gap calculator by clicking here and view the jobs gap chart for each state here.

Conclusion

Compared to going over the fiscal cliff, the American Taxpayer Relief Act will be beneficial for our economic recovery. But the United States still faces a daunting long-run budget outlook, and when policymakers return to Washington this month, they will face a host of budget challenges, including the rapidly approaching debt ceiling.

The Hamilton Project will host a two-part budget event in February that will present innovative policy options that help forge a path forward as the country’s leaders grapple with these longer-run challenges. The first in the series will be held on February 22nd and will focus on ways to create greater efficiency in our nation’s defense budget. Retired Admiral Gary Roughead, former Chief of Naval Operations, and Cindy Williams, former CBO Assistant Director, will present proposals for streamlining the military budget. The second event, on February 26th, will feature the release of fourteen targeted policy proposals for rethinking entitlement spending, tax reform, and how to create new sources of revenue and efficiency. Economists from around the country are participating in this broader discussion, bringing a diversity of perspectives from academia and the private sector, in addition to a range of political views. More information on The Hamilton Project budget events will be available in the near future.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Publication: The Hamilton Project

Image Source: © Joshua Roberts / Reuters

How Long Will it Take to Get to 6.5 Percent Unemployment?

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 14 Dec 2012 11:45:00 -0500

Last week, the Fed announced its intention to keep interest rates at historic lows until the unemployment rate drops below 6.5 percent, so long as projected inflation remains below 2.5 percent. The Fed has now explicitly linked its interest-rate policy with future economic conditions.

But how long it will take to reach 6.5 percent?

In today’s analysis, The Hamilton Project presents a range of estimates of when the unemployment rate will reach the Fed’s benchmark. The chart below shows how long it will take to reach an unemployment rate of 6.5 percent based on different assumptions of monthly job growth.

Predicting when the economy will get back to 6.5 percent unemployment depends on many factors. For example, if monthly job growth averaged 150,000, the unemployment rate would not reach 6.5 percent until 2018. Employment growth—as measured in the household survey—has averaged about 220,000 jobs per month over the past year. Continuing at this pace, it would take about two and a half years to get back to 6.5 percent [1].

While the Federal Reserve has set its benchmark at 6.5 percent, that is significantly higher than the unemployment rate in the year before the start of the Great Recession, which never exceeded 5 percent. Returning to pre-recession normal will necessarily take even longer.

The Hamilton Project’s “jobs gap” calculator allows you to explore how long it will take to return to the pre-recession employment rates, rather than unemployment rates, at various levels of job growth each month. The jobs gap calculator can be found here, and the state-by-state breakdown of the jobs gap, updated each month, can be accessed here.

[1] Because the unemployment rate is defined as the share of the labor force without a job, changes in the labor force—the number of American either working or actively searching for work— have important implications for the unemployment rate. Consequently, these estimates depend critically on assumptions about changes in the labor force. Our calculations use the 2011 estimates from the Congressional Budget Office of labor force participation over the next decade, which are subject to uncertainty; to the extent that the labor force grows more quickly over the next few years, the length of time required to return to 6.5 percent will be longer (and the converse is true if labor force growth is slower).

Michael Greenstone is the director of The Hamilton Project and Adam Looney is its policy director. For more about the Project, visit www.hamiltonproject.org.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

The Impact of Fiscal Cliff Negotiations on American Jobs: The Tradeoff Between Deficit Reduction and Economic Growth

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 07 Dec 2012 10:27:00 -0500

According to today’s employment report, the labor market continued modest improvement in November. The unemployment rate edged down to 7.7 percent and has now remained below 8 percent for three consecutive months. Payroll employment increased by 146,000 jobs, about the same monthly pace recorded over 2012 as a whole, but the gain in employment in the previous two months was revised down by a total of 49,000. According to the Bureau of Labor Statistics, Hurricane Sandy had little effect on employment estimates despite its considerable impact on coastal areas. (These figures do not reflect the anticipated update to the payroll data, which will be official in February and is expected to show that the level of employment was 386,000 jobs higher in March 2012 than previously reported.)

As the year draws to a close, policymakers and the media have their sights fixed on the “fiscal cliff,” the federally mandated set of cuts in spending and increases in taxes scheduled to go into effect at the beginning of 2013. Most economic observers agree that, unchecked, this precipitous drop in government expenditures and spike in taxes could send the economy back into recession. What has not received as much attention is that a given level of deficit reduction can be achieved with very different impacts on employment.

In this month’s jobs analysis, The Hamilton Project focuses on how alternative approaches to confronting the fiscal cliff are projected to impact the nation’s employment situation in the coming year. We also continue to explore the “jobs gap,” or the number of jobs that the U.S. economy needs to create in order to return to pre-recession employment levels.

The Effect of the Fiscal Cliff on Job Growth

A wide range of forecasters, including the Congressional Budget Office (CBO), Moody’s, and Macroeconomic Advisers, project that the wholesale implementation of tax increases and spending cuts scheduled to take place at the year’s end would sharply reduce employment. What does this mean from a practical standpoint? If all the policies that compose the fiscal cliff fully go into effect, the job losses would more than erase all of the gains we have made in returning to full employment, as measured by the jobs gap detailed in the next section, since the start of the recovery.

The CBO recently published estimates of just how many jobs may be lost by the end of 2013, depending on actions policymakers take to resolve the fiscal cliff. For example:

If the automatic cuts to the discretionary defense budget go forward as planned, the nation would have 400,000 fewer jobs this time next year, compared to if the defense budget remains intact.
The mandatory reductions in the nondefense discretionary budget, combined with the restructuring of Medicare payment rates for physicians, would also reduce the number of jobs in the United States by about 400,000 by the end of 2013.

Of course, if cutting spending reduces employment, then avoiding these cuts would result in a greater number of jobs. The chart below provides estimates of how many additional jobs would exist in the United States in the fourth quarter of 2013 if policymakers eliminate various provisions of the mandatory spending cuts and tax increases that are elements of the fiscal cliff.

If lawmakers do away with the defense and non-defense discretionary budget cuts, and extend the Bush-era tax rates—a suite of policies known as the “alternative fiscal scenario”—the country would have about 2.7 million more jobs at the end of next year.

The payroll-tax holiday and extended unemployment insurance (UI) benefits, two policies that were enacted during the recovery, are also set to expire at the end of this year. The former is a temporary reduction in the payroll tax that gives consumers more spending money, which stimulates the economy. The latter extends the period that an unemployed worker can claim unemployment benefits.

If policymakers do not implement the alternative fiscal scenario (either in part or in whole) and do not extend the reduction in the payroll tax and emergency unemployment benefits, the CBO estimates that there would be 3.4 million fewer jobs in the fourth quarter of 2013, one year from now, compared to outcomes under the alternative fiscal scenario.

As the White House and Congress go about the necessary task of reducing the deficit as part of a fiscal cliff deal, there are opportunities to choose approaches that are less harmful to the already weak labor market. The chart below is taken from a recent CBO analysis and shows how many jobs would be saved for every $1 million of mandated spending cuts or tax increases policymakers choose to eliminate as part of a budget deal. For instance:

Every $1 million of the defense budget that is exempted from mandatory cuts preserves, on average, seven jobs.
Every $1 million of income tax increases avoided would preserve three jobs.

When it comes to preserving jobs, not all deficit-reducing policies have the same effect. For example, letting the Bush-era tax rates expire saves about half as many jobs as a dollar-for-dollar reduction to the deficit through eliminating automatic cuts to discretionary spending. With the currently high unemployment rate, near-term employment impacts are a critical consideration in choosing the best way to confront the nation’s structural deficit problems.

The November Jobs Gap

As of November, our nation faces a “jobs gap” of 11.1 million jobs. The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions of job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

If the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until August 2020—a little less than eight years—to close the jobs gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate of the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by December 2016—not for another four years. Again, these figures do not reflect the anticipated update to the payroll data due in February, which may reduce the actual job gap. You can also try out our interactive jobs gap calculator by clicking here and view the jobs gap chart for each state here.

Conclusion

As these last few years have shown, it has taken extraordinary and unprecedented efforts by the President, Congress, and the Federal Reserve Board to steer the economy along the road to recovery in the wake of the Great Recession. Once again, lawmakers are tasked with resolving a crisis, this time one borne of risks associated with large budget deficits and debt, whose resolution will have profound short- and long-term implications for the country. However, with the labor market still weak, the most economically sound approach is to combine credible deficit reduction that takes full effect when the economy is on more sound footing with continued support of the economy in the near term.

If deficit reduction is enacted without also considering its impact on employment, we risk reversing all of the hard-fought gains in the labor market over the past three years. However, by keeping an eye on jobs—in addition to deficits—it is possible to find a balanced approach that advances the nation’s interests on both fronts.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Extending Unemployment Insurance — A Live Web Chat with Adam Looney

Wed, 05 Dec 2012 12:30:00 -0500

Event Information

December 5, 2012
12:30 PM - 1:00 PM EST

Online Chat
The Brookings Institution

Register for the Event
The lame-duck Congress has a long “to-do” list in the final month of the year. Negotiations on a compromise to avoid the fiscal cliff are underway, and lawmakers on both sides of the aisle are also discussing whether or not to extend unemployment insurance for 12 million unemployed Americans before the benefits expire on December 29. What are the economic consequences of failing to extend unemployment benefits? Who will be most affected? What weight should we give to news from the Congressional Budget Office that extending benefits will add more than 300,000 jobs to the economy?

On December 5, The Hamilton Project’s Adam Looney took your questions in a live web chat moderated by Vivyan Tran at POLITICO.

Read a full transcript of the chat below.

12:29 Vivyan Tran: Welcome everyone, let's get started!

12:30 Adam Looney: Hi, thanks for inviting me.

12:31 Comment from Jason: Can you talk about the distinction between what unemployment benefits do for individuals vs. what they do for the economy?

12:35 Adam Looney: In normal times unemployment insurance benefits help workers put food on the table and pay rent in the interval between when they're laid off and when they find a new job. That's obviously an important role right now just by itself. But unemployment benefits tend to get spent quickly and in a weak economy help boost the economy at large. The Congressional Budget Office estimates that each $1 in benefits increases aggregate economic activity by $1.10.

12:35 Comment from Lucille: How much does renewing extended unemployment insurance cost?

12:37 Adam Looney: Completely extending the full emergency unemployment compensation and extended benefits package would cost about $30 billion next year, but extending certain components rather than all would obviously cost a bit less.

12:37 Comment from Cory: Building off Lucille's question, can you discuss the validity of negative effects (other than cost) to extending unemployment insurance? For example, even in this special environment can it discourage employment-seeking?

12:41 Adam Looney: Long-term unemployment is unusually high in this recession, and some have argued that extended benefits are a contributor. Research suggests that increases in the generosity of benefits do have a modest effect on search effort and the duration of unemployment, but the best estimates suggest that extended benefits added only between 0.1 and 0.5 percentage point to the unemployment rate in 2011. So not much. The real culprit is a weak labor market: job openings haven't increased enough to make a big enough dent in the unemployment rolls.

12:42 Comment from Taylor S.: What value is there in letting the unemployment benefits expire overall? Do the costs to the unemployed and their dependents outweigh the benefits in spending cuts?

12:47 Adam Looney: With the economy still on fragile ground, many people experiencing long spells of unemployment, and the job finding rate still very low, unemployment benefits and extended benefits are helping stave off a lot of economic pain in the households of the jobless and are contributing to the broader economy. That was true last year and today, and it's still going to be true January 1st, so the imperative for extending benefits is just as strong.

12:48 Comment from Mark: If the CBO estimates "each $1 in benefits increases aggregate economic activity by $1.10" , what is the downside to not continuing benefits?

12:52 Adam Looney: Well, these benefits do add to the deficit and do have some effects on unemployment durations. The question is: are those concerns the most pressing issues today? And with interest rates low and labor demand weak, it's hard to make that strong a case that those are overriding issues.

12:53 Comment from Cory: Should we think of this as a primary or a secondary element of the current fiscal negotiations? The extra $3 billion (plus $30 billion spent) can seem small in comparison to many of the other figures being thrown around.

12:57 Adam Looney: The debate seems focused on revenues and particularly the high-income tax rates. In comparison to the revenues arising just from letting the high-income tax cuts expire (to say nothing of letting all the rates expire as legislated), extended benefits are indeed small, at least in budget terms. But they do have a disproportionate effect on economic activity on a per-dollar basis. So I think it remains to be seen where the debate resolves, and whether there's a compromise that extends these policies.

12:57 Comment from Anonymous: When was the last time we extended unemployment insurance to this degree?

12:59 Adam Looney: I don't think we ever have. In the 1980s, benefits were available for as many as 55 weeks. (But the recoveries from the 1980s recessions were also much faster, and long-term unemployment never had a chance to rise as high as it did today.)

1:00 Comment from Mark: What is your estimation of the chances benefits will be extended given the fiscal cliff negotiations and if so, would it come as part of a fiscal cliff agreement or would it likely be a separately handled issue?

1:02 Adam Looney: I think if they're going to be extended it would be in a compromise within the broader fiscal cliff discussion. It's hard to see how, if they were left on the table in a fiscal cliff bargain, they would be extended in a separate or stand-alone agreement.

1:02 Vivyan Tran: Thanks for the questions everyone, see you next week.

1:02 Adam Looney: Thank you!

The Importance of Unemployment Insurance for American Families and the Economy

Michael Greenstone and Adam Looney — Tue, 04 Dec 2012 12:22:00 -0500

Among the many spending cuts and tax increases legislated to take effect at the turn of the year, few policies have as direct an effect on those most affected by the Great Recession than the expiration of extended unemployment insurance (UI) benefits. In the first week of January, roughly two million individuals will lose extended benefits with the expiration of legislation that temporarily increased the duration individuals can claim UI. Although these benefits make up only $30 billion of the roughly $500 billion ‘fiscal cliff,’ they have a disproportionate effect on the lives of the unemployed and their families, as well as on the aggregate economy.

Whether to extend unemployment benefits—a decision currently tied up in the greater debate around the federal budget—should be motivated by consideration of the benefits and costs of the program. Advocates of an extension of UI benefits point to the fact that these benefits accrue to unemployed workers and their families and help put food on the table and pay the rent at a time of extraordinary economic weakness; in doing so, these benefits also boost the economy as a whole as UI recipients maintain consumption. Skeptics of an extension point to potential costs arising because beneficiaries may spend less time and effort searching for work, and the impact of funding the extension on the deficit.

Building on previous Hamilton Project work, we show that the evidence continues to suggest that extended benefits provide a sizable boost for workers and the economy, but have little negative effect on work incentives and unemployment.

The Value of UI for Individuals and the Economy

First and foremost, UI benefits help individuals and families by assisting them through times of unemployment without a dramatic change in lifestyle. Research by Jonathan Gruber of MIT shows that individual consumption for those receiving UI benefits falls only one-third as much as it would have in the absence of the program (Gruber 1997). In other words, this means workers losing jobs can still put food on the table for their children and not have to cut back drastically to manage the unemployment spell. To be sure, these families still feel the pain of unemployment, but it is less intense and life-changing than it would otherwise be.

The gains go beyond the families of those directly affected to the greater economy. According to the Congressional Budget Office, each dollar of UI benefits raises aggregate economic activity by $1.10, and each million dollars of UI benefits increases employment by six jobs. Among the components of the ‘fiscal cliff,’ this places UI benefits at the top of the list of policies that have the largest impact on the economy per dollar spent. The reason that there is such a large effect is that families on UI rely on it to maintain necessary spending, thus the money is rapidly spent rather than saved. Absent such benefits, spending would fall sharply, resulting in hardship on not just their families but also on the shops and workers that depend on those consumers for their livelihoods.

Concerns About the Impact of UI on the U.S. Economy

While the benefits to millions of American families are many, the costs of extending UI are likely to be relatively small in the current economy. These potential costs would typically arise because UI skews labor-market decisions, blunting the incentive for those out of work to search for a new job. However, the magnitude of this effect is modest even in normal economic times. For instance, research has shown that few workers actually wait until benefits run out to find a job (Card and Levine 2000; Card, Chetty and Weber 2007), and that the job searching process is ongoing. Data collected on workers who became unemployed during the Great Recession suggest, moreover, that any impacts of benefits on the length of unemployment are, if any, extremely small. Rothstein (2011) finds that extended benefits may have increased the unemployment rate by only about 0.2 percentage points and the long-term share of unemployment by 1.6 percentage points.

In summary, the economic evidence suggests that extended benefits help insure the living standards of unemployed workers and boost economic activity more generally, but have little impact on the duration of unemployment. The main reason why unemployment remains too high and today’s unemployed workers are experiencing unusually long spells of unemployment is the soft economy.

The Unique Importance of UI for Today’s Unemployed Workers

Today’s labor market provides the strongest case for extending UI benefits. It has always been harder to find work the longer you are unemployed, but the situation facing today’s workers is exceptional. No matter how long a worker has been unemployed, the odds that they find a job are far lower than before the Great Recession. Furthermore, the odds of experiencing long-term unemployment are highly related to losing a job in a particularly hard-hit industry, like construction or manufacturing, and are disproportionately concentrated in certain distressed states.

The chart below shows the likelihood of finding a job as measured in the monthly Current Population Survey data. The chart shows the probability of leaving unemployment for employment in each month. These rates are simply at exceptionally low levels. The odds that an unemployed worker found a job each month fell from 28 percent in 2007 to an average of 16 percent during the last three months of 2009. This year, the job finding rate is still 30 percent lower than the average from 1990-2007.

Why is the job-finding rate so low? The basic reason is that job openings remain depressed and there are a lot of unemployed workers competing for those jobs. The job opening rate fell more than 40 percent between 2007 and 2009 and is still almost 20 percent lower than that level now. As a result, the number of unemployed workers per job vacancy surged, as the next chart illustrates.

In 2007, there were 1.6 unemployed workers for each job vacancy; that ratio increased to nearly 6.7 unemployed persons per job opening at the peak of the crisis. Today, there are still more than 3 unemployed workers per job, roughly twice the pre-recession level.

Conclusion

The potential benefits from extending UI benefits are significant. Not only do they help families through what can be an extremely difficult period, but they also provide some of the greatest “bang-for-the-buck” in terms of their impact on the economy. Moreover, the evidence suggests that extended benefits are having at most a small effect on the duration of unemployment. Rather, today’s tough economic situation is the central cause of these lengthy durations of unemployment.

As Congress and the Obama administration negotiate a path past the fiscal cliff, they should keep in mind the evidence that, with the economy still struggling, extended UI benefits help families and the economy in a number of ways that likely outweigh the costs.

Authors

Image Source: Keith Brofsky

New Hamilton Project State-By-State "Jobs Gap" Map

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 16 Nov 2012 13:17:00 -0500

Each month, The Hamilton Project examines the “jobs gap,” which is the number of jobs that the U.S. economy needs to create in order to return to pre-recession employment levels while absorbing the people who enter the labor force each month. As of September, our nation faces a gap of 11.1 million jobs, but the job loss that has occurred since the onset of the Great Recession has not been evenly distributed across the country. The Hamilton Project has created a new web feature that shows the difference in the employment-to-population ratio (in percentage points) in every state between the start of the recession and today. By hovering over a state, you can also see the number of jobs each state would have to add in order to bring its employment-to-population ratio to its pre-recession level.

Visit The Hamilton Project's website to use the web feature to look at a state-by-state breakdown of the “jobs gap.”

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

The Uncomfortable Truth About American Wages

Michael Greenstone and Adam Looney — Tue, 23 Oct 2012 14:25:00 -0400

Job creation has rightly been the central economic issue of the last three years as the United States continues its recovery. But the problems with the job market are not entirely recent. The downturn also exacerbated longer-term challenges in the labor market that are driven by a variety of factors, including technological change, international trade and the decline of unions. Many of these forces have been around since the 19th century, but today, for what may be the first time in American history, we are failing to invest enough in our skills and productivity to stay ahead of these trends, and the impacts of this failure are reflected in the declining wages of many American workers.

Because the role of women in the labor force has changed strikingly over the last 40 years, the problem is most evident in trends in male earnings. And, in fact, there has been a lot of talk about the stagnating wages of American male workers. Using conventional methods of analysis, the data show that the median earnings for prime-age (25-64) working men have declined slightly from 1970 to 2010, falling by 4 percent after adjusting for inflation.

This finding of stagnant wages is unsettling, but also quite misleading. For one thing, this statistic includes only men who have jobs. In 1970, 94 percent of prime-age men worked, but by 2010, that number was only 81 percent. The decline in employment has been accompanied by increases in incarceration rates, higher rates of enrollment in the Social Security Disability Insurance program and more Americans struggling to find work. Because those without jobs are excluded from conventional analyses of Americans’ earnings, the statistics we most commonly see — those that illustrate a trend of wage stagnation — present an overly optimistic picture of the middle class.

When we consider all working-age men, including those who are not working, the real earnings of the median male have actually declined by 19 percent since 1970. This means that the median man in 2010 earned as much as the median man did in 1964 — nearly a half century ago. Men with less education face an even bleaker picture; earnings for the median man with a high school diploma and no further schooling fell by 41 percent from 1970 to 2010.

Women have fared much better over these 40 years, but they started from a lower level, and the same problems faced by their male counterparts are beginning to have an effect. Since 1970, the earnings of the median female worker have increased by 71 percent, and the share of women 25 to 64 who are employed has risen to 71 percent, from 54 percent. But after making significant wage gains over several decades, that progress has slowed and even reversed recently. Since 2000, the earnings of the median woman have fallen by 6 percent.

Though these trends in earnings for American workers — men and women alike — are troubling and have many causes, the data do present some clear guidance for policy makers. Among the most robust findings in economics is that education reduces unemployment and increases earnings. But even with the remarkable capacity for education to produce growth, the rate of educational attainment in the United States has slowed, especially for men. The share of men 25 to 34 with a college degree, for example, has barely increased over the last 30 years. (The trends are much better for women.) The United States, once the world leader in educational attainment, has been surpassed by many countries.

Strengthening our K-12 education system and increasing college-completion rates are, therefore, imperative to improving living standards for future generations. It is also clear that changes in the global economy that generate vast opportunities for the American economy have created difficulties for many Americans; the continued pursuit of pro-growth policies will require the identification of policies that help these workers to remain active participants in the economy. These are difficult tasks, but the last four decades demonstrate that the stakes are high. Our children’s living standards are at risk, and with them the American Dream that each generation can do better than the previous one.

Authors

Publication: New York Times' Economix

Image Source: StockRocket

Regardless of the Cost, College Still Matters

Michael Greenstone and Adam Looney, The Hamilton Project — Fri, 05 Oct 2012 09:00:00 -0400

According to today's employment report, the unemployment rate dropped to 7.8 percent in September, falling below 8 percent for the first time since January 2009. Furthermore, the share of working-age Americans who are employed increased to 58.7 percent, the highest level since May 2010. Employers added 114,000 jobs last month, and an average of more than 145,000 over the past three months, roughly the same pace of job growth experienced over 2011 and 2012. (These figures do not reflect the anticipated update to the payroll data, which will be official in February and is expected to show that the level of employment was 386,000 jobs higher in March 2012 than previously reported.)

As America continues its recovery from the Great Recession, there is an ongoing debate in the media and among policymakers about the value of a college degree in today’s economic climate. One issue that is receiving a significant amount of attention is the rising cost of college. Indeed, tuition has increased by almost 50 percent in the last 30 years, prompting some people to ask whether college is still worth the price of admission.

In this month’s analysis, The Hamilton Project confirms its previous findings that the returns to college attendance are much higher than other investments, such as stocks, bonds, and real estate. We also find that the returns to college have been largely constant over the last 35 years, indicating that the rising tuition costs have been offset by the increased earnings premium for college graduates. Finally, we continue to explore the nation’s “jobs gap,” or the number of jobs that the U.S. economy needs to create in order to return to pre-recession employment levels.

The Value and Cost of a College Degree

In most respects, a college degree has never been more valuable. As highlighted in a recent Hamilton Project piece, recent college graduates earn more money and have an easier time finding employment than their peers who only have a high school diploma. What may be less intuitive is that these gaps have been growing in recent years. As the graph below illustrates, a young college graduate earned about $4,000 more per year in the 1980s, adjusting for inflation, than someone of the same age who did not attend college (averaged across the entire population, not just those in the workforce). Over the last three decades, that figure has climbed to $12,000 per year.

Differences in employment rates between college graduates and non-graduates have not demonstrated as clear of a trend over this period, with one key exception. In recent years—particularly in the aftermath of the Great Recession—college has become an increasingly important determinant of one’s employment status. Today, a college graduate is almost 20 percentage points more likely to be employed than someone with only a high school diploma. This “employment gap” between college and high school graduates is the largest in our nation’s history. What’s more, these figures include all individuals between the ages of 23 and 25, even those college graduates who are not employed because they are pursuing advanced degrees. If these individuals were excluded from the calculations, these differences would likely be even starker.

While the evidence is clear about the lifelong value of more education, skeptics are increasingly pointing to rising tuition costs to claim that college is not as sound of an investment as it once was. And it is true that tuition has increased significantly over the past few decades. In 1980, it cost an average of about $56,000 (adjusting for inflation) to attend a university for four years. This figure includes tuition, fees, and the “opportunity cost,” or income one foregoes to attend school instead of holding a job. (This figure excludes room and board: one must eat and sleep whether she is in college or not.) In 2010, four years of college cost more than $82,000, a nearly 50 percent increase over that 30-year period.

This increase in tuition is based on calculations from the National Center for Education Statistics but it may overstate the rise in the costs of college. First, this rise in tuition does not account for recent increases in financial aid. Thus, while the sticker price of college may have gone up, it is unclear to what extent the cost to students and their families has increased. Indeed, according to the College Board, the actual cost of a four-year degree has remained relatively constant over the last 15 years.

Regardless of the magnitude of the exact increase in tuition, a sole focus on the cost of college is misleading because it only tells half of the story. Specifically, the monetary benefits of a college degree have increased dramatically over the last few decades. An individual who entered college in 1980 could expect to earn about $260,000 more over the course of her life compared to someone who received only a high school diploma. In contrast, for someone starting college in 2010, the expected lifetime increase in earnings relative to a high school graduate was more than $450,000. These estimates are adjusted both for inflation and the fact that most of this additional income will come much later in a graduate’s life, and the calculations are described in more detail here.

Even if we assume that all students actually pay tuition at the published rates, the bottom line is this: while college may be 50 percent more expensive now than it was 30 years ago, the increase to lifetime earnings that a college degree brings is 75 percent higher. In short, the cost of college is growing, but the benefits of college—and, by extension, the cost of not going to college—are growing even faster.

The returns to an investment in a college education, therefore, are high. In a previous post, The Hamilton Project estimated that investing in a four-year degree yields a return of above 15 percent. While this is down slightly from almost 18 percent in the late ’90s, attending college remains one of the best ways one can invest her money. The return to college is more than double the average return over the last 60 years experienced in the stock market (6.8 percent), and more than five times the return to investments in corporate bonds (2.9 percent), gold (2.3 percent), long-term government bonds (2.2 percent), or housing (0.4 percent).

As the graph below demonstrates, the claim that college is no longer a sound investment is not rooted in fact. The rate of return has remained relatively constant over the last three decades. If attending college was a good idea in the ’80s, it’s still a good idea today.

The cost of college can be daunting for many families, but it is precisely because college is such a sound investment that there is an important role for government to ensure that loan programs are plentiful and accessible. The nation and the economy are strengthened when college attendance is determined by students’ abilities, not their families’ financial background. Indeed, it is not just the direct recipients of these loans that benefit from the increased number of Americans who are able to go to college. One recent study showed that even individuals with only a high school diploma earn more when they live in cities populated with more college graduates. More education is not just good for individuals; it’s a good investment for the broader community.

The September Jobs Gap

As of September, our nation faces a “jobs gap” of 11.2 million jobs. The chart below shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions of job growth. The solid line shows the net number of jobs lost since the Great Recession began. The broken lines track how long it will take to close the jobs gap under alternative assumptions about the rate of job creation going forward.

If the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until August 2020—or eight years—to close the jobs gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate of the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by November 2016—not for another four years. Again, these figures do not reflect the anticipated update to the payroll data due in February, which may reduce the actual job gap. You can also try out our interactive jobs gap calculator by clicking here.

Conclusion

While rising student debt and payments to colleges are a cause for concern, we have found that college is still one of the best investments an individual can make. Ensuring that all students have access to this investment requires both a commitment to making it financially feasible at all income levels and a productive K-12 system that prepares students for the next level of education. A recent Hamilton Project event highlighted three new proposals for improving student attainment and achievement in our nation’s K-12 system. In the spring of 2013, The Hamilton Project will hold a forum to discuss policy proposals for improving access to post-secondary education for all Americans.

Authors

Michael Greenstone and Adam Looney, The Hamilton Project

Publication: The Hamilton Project