With Watt defeated in the Senate, ‘principal forgiveness off the table’

Image Credit: Runder (Flickr) CC

Image Credit: Runder (Flickr) CC

Rep. Mel Watt failed to get the 60 Senate votes needed to clear the way for him to become the new FHFA director. Jaret Seiberg of the Guggenheim Washington Research Group is out with a research note on what it means, including these two points:

Principal Forgiveness Off Table. Acting FHFA Director Ed DeMarco has seen principal forgiveness as a last resort tool, noting that principal forbearance offers the same benefits with more potential upside for taxpayers. So we see little chance for principal forgiveness modifications even if the principal forgiveness tax break is extended beyond Dec. 31, 2013.

HARP Expansion Unlikely. We also see little chance that the HARP program will be extended to loans originated after June 2009. If DeMarco was inclined to make this change, he already would have acted.

Follow James Pethokoukis on Twitter at @JimPethokoukis

Pethokoukis, Economics, U.S. Economy

Hey, Americans are working really hard!

Image Credit: shutterstock

Image Credit: shutterstock

Check this out: Since the end of the Great Recession, Americans are working longer weeks than before, even though paid working hours per week are still at or below their pre-recession levels. JP Morgan economist Mike Feroli explains the discrepancy and what it means for US economic growth:

The average workweek has increased in the recovery, even though workers may not be getting paid for staying late or showing up early. The workweek can’t increase forever, at least it can’t go beyond 168 hours. A leveling off of the workweek at current levels would remove a source of output growth, and measured productivity growth would come down.

Added to that, if the labor market improves and hiring rates pick up, the fear factor that is keeping workers in their offices nights and weekends may dissipate, and a “take this job and shove it” mentality would pull measured productivity growth even further down.

In either case, measured productivity growth will face some headwinds going forward, which means that for a given amount of GDP growth we will need to see a disproportionate increase in hours worked, which will continue to push the unemployment rate lower.

So more economic growth would mean more hiring if manpower can be cost effectively replaced with machine power.

Follow James Pethokoukis on Twitter at @JimPethokoukis

Economics, Energy and the Environment, Pethokoukis

The role of geoengineering in dealing with climate change


In his new book, climate scientist David Keith offers A Case for Climate Engineering. (I wrote a bit about solar radiation management recently.) He advocates spraying sulfate aerosols into the atmosphere where the particles would then reflect sunlight back into space. A bit less sunlight hitting the planet would help offset global warming from carbon emissions. Here is a bit from a Boston Review chat with Keith on how SRM pairs with reducing carbon emissions:

Geoengineering without emissions reductions just digs a deeper hole. Emissions reductions are a necessary part of any sensible climate policy.

It is possible to make big progress cutting emissions if we implement policies that include a significant price on carbon emissions and strong incentives for clean energy innovation. But while it is in our power to end the phony war on carbon and begin serious work to drive emissions toward zero, it would be extraordinarily hard to bring emissions near to zero in less than half a century, and even if we did, substantial climate risk would remain from the carbon that has accumulated in the atmosphere, carbon that will keep changing the climate for centuries to come.

Solar geoengineering provides a means—risky and uncertain—to limit climate change in the near term, risks that fall on vulnerable ecosystems and vulnerable human populations. But solar geoengineering can do nothing to limit the very long-term risks associated with carbon buildup in the atmosphere. Thus there is a sense in which emissions reductions and solar geoengineering are complementary.

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Economics, Monetary Policy, Pethokoukis

More on whether the US needs more inflation


Boston College economist Peter Ireland offers his take on a recent New York Times piece suggesting the US economy could use more inflation:

What observers in the Times are seeing, indirectly, is that contrary to popular opinion, Federal Reserve monetary policy has not been inflationary or excessively stimulative in recent years. As I explain in more detail elsewhere, since 2005 the Federal Reserve has failed to allow for sufficient growth in broad measures of money supply. This slow money growth, and the unexpectedly slow inflation that it brought with it, probably contributed, first in 2008 to the severity of the recession and more recently to the sluggishness of the recovery.

But modern macroeconomics tells us the solution to the woes cited by commentators in the Times lies not so much in creating more inflation—say, by raising the rate that is targeted—as it does in creating more stable, predictable inflation that comes closer to the two percent target that the Fed, much to its credit, has already announced.

Given that Ireland also concedes “that higher inflation can, at least temporarily, work to increase economic growth and decrease unemployment,” I am disappointed that his bottom line is merely a reembrace of a 2% inflation target. Why not a simple, transparent monetary rule that takes into account both sides of the Fed’s dual mandate … like … I dunno .. targeting the level of nominal GDPRight now that would mean more inflation, but less in other periods. That way inflation expectation stay anchored but you get a growth fillip during tough times.

Follow James Pethokoukis on Twitter at @JimPethokoukis

Pethokoukis, Economics, U.S. Economy

Here is why and how more inflation could help the US economy


A recent New York Times story explored the idea that the US economy could use more inflation right now. It is certainly hard to find even a whisp these days. It’s the kind of argument you might expect to hear from liberal economists. But even center-right economist Kenneth Rogoff argued that a few years of 6% inflation would be helpful. So is being pro-inflation now a thing?

Over at RealClearMarkets, Diana Furchgott-Roth responds with a typical list of conservative objections. Bloomberg/National Review writer Ramesh Ponnuru kinda-sorta agrees with the NYT and Rogoff, but thinks instead of focusing on inflation per se, Fed policymakers should target the level of NGDP. Doing that might mean inflation would occasionally rise about the Fed’s 2% target. Ponnuru:

The arguments for higher inflation are actually better arguments for higher nominal spending. People consume and invest more when they expect higher inflation, but also when they expect higher rates of real economic growth. In other words, it’s higher expectations of nominal spending that stimulate them.

In a recent podcast, I asked economist David Beckworth about how to think about inflation and economic growth:

Well, inflation, yes, can be double-edged sword.  And ideally, yeah, we would like to see all the Fed’s actions translate into higher real growth, not inflation.  But even if we had a little higher inflation, it wouldn’t be the end of the world.  It might even be a palliative to some extent and for several reasons.  Number one, if you think back to the housing boom, even before the housing boom, if people take out these 30-year, 15-year, 30-year mortgages and they take them out with a certain expected level of dollar income growth – and implicit in that is a certain level of inflation that’s going to persist for the next 15 years or 30 years of that mortgage.  And what happened is in 2000 – late 2000, late 2001, we actually had deflation.  So we had a sharp drop in the dollar incomes of most Americans.  And so people had taken out what we call nominal debt with fixed interest rates.  And when you take out nominal debt or debt in current dollar terms and there’s deflation or a drop in your dollar income, it makes that debt burden go up.  We call it an increase in the real debt burden.

A little higher inflation that kind of corrected for the misses in the past would actually put us back on path where we thought we would be originally.  So to some extent, a temporary bout of higher inflation wouldn’t be the end of the world.

Now, I’m not at all for a higher inflation target.  We can talk about this later, but I wouldn’t be opposed to inflation temporarily accelerating as part of an adjustment to a nominal GDP level target.  But a little higher inflation would certainly help debt burdens.  You know some New Keynesians would also point out higher inflation would also cause the real inflation.  So nominal – the interest rates that we observe, we call them nominal interest rates.  They’re in dollar terms.  But if you adjust for inflation, we call them real interest rates.  And those ultimately are the determining factor whether a firm borrows, whether households are taking out debt, so forth. So a little higher inflation would lower that real interest rate, it might stimulate some activity.  But again, I wouldn’t focus so much on the inflation effect as I would at kind of the monetary stabilizing effects.  Is the demand for money and money supply being brought in line.

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Pethokoukis, Economics, U.S. Economy

No Fed Octaper. And maybe not one in December, either.

Credit: The Wall Street Journal

Credit: The Wall Street Journal

Expected news but good news. Reuters:

The Federal Reserve extended its support for a slowing U.S. economy on Wednesday, saying it will keep buying $85 billion in bonds per month for the time being.

“Available data suggest that household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months,” the Fed’s policy-setting Federal Open Market Committee said. “Fiscal policy is restraining economic growth.”

The labor market has shown “some” further improvement, the Fed said, despite some recent weakening in the figures. It dropped a reference to a “tightening of financial conditions observed in recent months” from its list of risks to the outlook.

Esther George, president of the Kansas City Federal Reserve Bank, dissented against the decision as she has at every FOMC meeting this year, favoring a modest reduction in the pace of bond purchases.

Again, QE would be more effective — you might even get more oomph with smaller bond buys — if accompanied by an NGDP level target. But better than a year of fiscal austerity accompanied by Fed tightening. And with job growth actually decelerating over the past year — including a disappointing ADP report day — the Fed might be on hold until sometime in 2014.

Follow James Pethokoukis on Twitter at @JimPethokoukis

Economics, Entitlements, Pethokoukis

Pethokoukis Podcast: A Q&A with Andrew Biggs on Social Security reform

Photo Credit: Shutterstock

Photo Credit: Shutterstock

Is there a way to save Social Security without raising taxes — and make it better? There is, and it has nothing to do with privatization or personal accounts. We discuss that solution in my latest Ricochet Money & Politics Podcast with guest Andrew Biggs of the American Enterprise Institute. Before joining AEI, Biggs was the principal deputy commissioner of the Social Security Administration, where he oversaw SSA’s policy research efforts. In 2005, as an associate director of the Bush White House National Economic Council, he worked on Social Security reform. In addition to discussing his pro-growth Social Security reform plan, Biggs explains why changing inflation measures, popular with Republicans, is a poor way to fix entitlements.

Among Biggs’s writings:

The Chained CPI: A Bad Deal All Around - National Review

Here are edited highlights of our chat:

You have a lot of ideas about how to reform Social Security. But partially privatizing Social Security through personal accounts isn’t one of them. There was lots of talk about this in the 1990s and early 2000s, but not any more. What happened to that idea? 

You’ve had two strands of thinking about Social Security reform that haven’t always been productive. One thinks only about the financing of the program.  That says, this program is going broke, but otherwise, there’s nothing to worry about. All we have to do is find some combination of tax increases and benefit cuts to keep it going.

The problem there is you’re not saying, Why do we have a Social Security program? How well is it fulfilling its goals? You’re taking for granted that the system is doing what it should. The reality is the system doesn’t accomplish its goals effectively. As a social insurance program for the poor, it’s a haphazard level of protection. Some low earners do well from the system; others do badly.  It’s like an insurance policy that may or may not pay off when you need it. At the same time, it discourages saving and labor force participation. It encourages early retirement.

For a lot of folks, personal accounts are philosophical goals.  You want people to have greater control over their income and to help their wealth.

President Bush called this “the ownership society.” The problem was back in 2005 when he put a lot of political capital into Social Security reform, that ownership goal appealed to about a third of the population. The rest asked, what will these accounts do? They’ll keep the government from spending the Social Security surplus. They’ll build savings on an individual and economic level. But Social Security’s financing is already running big deficits, where do you find the money to fund these carve-out accounts?

When the personal accounts were proposed in the mid-1990s through to when President Bush pushed them around 2005, Social Security was running surpluses equal to around 2 percent of payroll, collecting a 12 percent tax, but the cost to the system is only 10 percent of your wages, leaving extra money. The government takes that money, spends it, and credits it to the Social Security Trust Fund. There’s no saving going on.  People proposed personal accounts funded at around 2 percent of the payroll. You could take that money, put it into the account, and save it to pay benefits in the future.

The surpluses that funded the accounts have mostly turned into deficits partly due to an aging population, but partly due to the weakness of the economy, fewer people are working and paying taxes. Letting people take some money out for a personal account, at least in the short-term, makes that deficit worse. Transition costs come about where you have to come up with the extra money to fund these accounts.

OK, let’s get to your plan, which you outlined in National Affairs. Here is something you wrote in that piece

What Republicans need is a compelling vision for Social Security reform, one that is consistent with principles of limited government and individual responsibility.  By articulating the case for a strong Social Security program, highlighting the ways in which the current system falls short, and outlining broad policy changes to make Social Security effective and financially sustainable, reformers can begin to develop a constructive, conservative approach to preserving and improving Social Security.

So what is that approach?

The folks who think we just have a financing problem say, Social Security is the greatest anti-poverty program ever invented and we just need more money for it. Today we spend over $700 billion each year on Social Security benefits, yet 9-10 percent of seniors in America are living in poverty. You could give every retiree in America a poverty level benefit for half the cost of the current Social Security program.

Social Security for middle-class people is a forced saving program with no saving. From the individual level, you’re paying money in today and getting money back later, but at the macro level, it’s simply a transfer from the young to the old. It weakens the economy.

My solution is if you want middle and upper class people to save for retirement, tell them to save for retirement.  Say everybody has to sign up for a 401(k) with their employer. Their employer has to match their contributions.  That’s going to go a long way towards solving this problem because if everybody’s saving, then Social Security’s job is easier.

Among low-income people, some do well, some don’t. What I propose is give every person a flat poverty level benefit coming from the government.

Not just low-income Americans, but everybody would get this benefit? 

The benefit would be paid irrespective of your earnings and labor force participation. It’s a universal retirement benefit. New Zealand and a few other countries have the universal pension. The idea is, We’re going to pay you these benefits, so you’re not going to starve. This is going to take the place of sort of the redistributive end of Social Security, also take the place of a number of welfare programs like Supplemental Security Income.

Nobody will get a benefit below the poverty line. The poverty rate among seniors should go from 9 percent to 0 percent.  But nobody will get a benefit above the poverty line.  If you want more than that, you have to save for it. That’s where these individual-based accounts come in.

If you put the two benefits together, this poverty-level benefit, plus the individual accounts, the result is near what Social Security promised to pay, but can’t afford. It’s a more reliable system for low-income folks and it’s more affordable on the tax end.

It’s more conducive to saving because people do real saving or real investment, it’s more conducive to work because people see their money going to their own account. It’s a way of aligning the incentives to build the economy.

And how would it alter the financial trajectory of the system?

In the short-term, costs for Social Security will rise because we have retirees and baby boomers shifting into the system at the rate of 10,000 per day.

The new system would be phased in so that somebody entering the workforce today would retire under that new system. In 40 years, the system won’t cost 16 or 18 percent of wages as is currently projected, but around 10 percent of pay. You would also have your individual account.

Why not just raise taxes? Many folks on the left reject any real means testing, and really don’t trust folks on the right to reform Social Security?

There’s natural skepticism there.  Because Republicans have often treated Social Security as a budget problem to be solved by cutting spending rather than treating it as a program that they want to fix.

We have to get more credibility with people. There’s the fixation with some people of sticking it to the rich. The problem is that the idea of raising taxes and eliminating the cap on the Social Security payroll tax isn’t going to sell.

Now, the Social Security tax is 12 percent of your wages of the first $110,000 that you earn. If you’re above that, you no longer pay the payroll tax. Bill Clinton’s justification is that high-income people pay higher income tax rates, making up for the fact that this payroll tax is capped.

The problem with eliminating the payroll tax ceiling is the 12 percent increase in the marginal tax rate that affected people are going to pay.

Due to changes passed by President Obama, probably the top current tax rate on earned income is around 40 percent. You add 12 percentage points there and your top marginal tax rate at the federal level is 52 percent. This would be before we’ve done anything to fix Medicare and Medicaid, which everybody on the left say is a bigger problem than Social Security.

They would also like to fix those plans by raising taxes.

I’d have more sympathy for fixing Social Security by raising taxes if they didn’t want to fix Medicare and Medicaid by raising taxes too. Social Security is the logical place where we can substitute individual saving for government benefits.  It’s harder to do on the Medicare and Medicaid end because they’re big integrated insurance programs and it’s illegal to supplement your doctor. But if you cut my Social Security benefits, I’m going to save more on my own, on a 401(k) or an IRA.

And I would guess that one other criticism is that what you’re describing will sort of cut into popular support among middle class and upper income Americans for the plan that it seems. By just having this kind of low universal benefit, you’re turning it into more of a welfare program.

I had a conversation with a top economic adviser to President Obama.  He made this argument. If you take this approach, it’s going to weaken support for Social Security among high-income people because they won’t feel they get much out of it.  His solution is massive tax increases on high-income people. For that view to make sense, you either have to think that high-income people care a lot about their benefits and don’t care about their taxes. Or the high-income people are just really bad at math.

Medicaid –the idea because it’s a program for the poor, it’s easier to cut.  Medicaid is growing just as fast as Medicare is and Medicare is a program for the rich. The general liberal view is a program for the poor is a poor program, since the 1930s.  We need to wrap all Americans into these programs because otherwise higher and middle-income people won’t support it.

It’s a really cynical view of people.

It’s doubly cynical in the sense that middle and high-income Americans wouldn’t support these programs if they understood what was going on.  We live in a democracy, you should let them make those choices.

Back when you had 15 workers for each retiree, we can give good benefits to every retiree, rich and poor alike, with low tax rates.  When you have two workers supporting each beneficiary, you can’t. Let’s focus the government resources on the people who need it the most, the truly poor, and give them a good benefit, better than today’s benefit. Middle and high-income folks would just set them up to save more on their own because they can. They could be saving more on their own.  One reason they don’t, though, is because these benefits come from Social Security.

Let me float an idea, which may or may not be compatible with your plan.  It’s the idea of Universal 401(k) plans. Let me describe a version outlined by Tyler Cowen:

The core idea is simple.  The federal government will create tax-free retirement accounts for lower income Americans, supplementing private accounts where they already exist, and matching personal contribution to those accounts.  The amount of the match depends on the income of the family and how much they save.  Just as the earned income tax credit pays poor people to work, the universal 401(k) plan would pay poor people to save.  And there’s an obvious way to pay for these plans, where every dollar spent on the universal 401(k) plan, the federal government could spend $1 less on Medicare and Social Security benefits.

What do you think of that idea?

I’m generally in favor. Adding on individual accounts is broadly consistent with that. What you want to do is get low-income people to participate because middle and high-income folks are going to save regardless. The use of matches in trying to induce them, I’m skeptical. It’s not that effective.  A lot of folks won’t participate even with a generous match rate. The idea of automatic enrollment in the accounts will be effective in getting people. If you want to have the employer match or even the government match, you can do it.  A match itself isn’t going to be sufficient.

For middle and upper-income Americans, if the Social Security benefit went down, wouldn’t they save more. Isn’t it just sort of an offset, one for the other?

There was a paper done by a well-known economist that looked at the decline in national saving in the U.S. since World War II. Everybody has complained we don’t save as much anymore, they look at the data and they attribute a lot of that decline to the rise of entitlement programs, the rise of Social Security, Medicare, and Medicaid.

These programs are shifting money from working-age people to older people who save less. Part of the decline in American savings, across all income groups, is that Social Security, Medicare and Medicaid are substituting for those savings, but they’re not real substitutes because the money you put in your 401k gets invested in capital, in building industry, and doing research, making the economy more productive. These transfer programs don’t do that.

You have to think about the effects that these programs are having down the road. If you’re giving a high income person a government benefit, they’re rationally going to save less as a result.

Now, my preferred savings plan is having kids.  I have a big family, and all the kids have been told they’re going to have to give me 10 percent pre-tax income when they get older.  That is my savings plan.

You have to find a way to enforce it.

Well, guilt, tremendous guilt.  That’s the lever here I’m using.  Do we have any good feel for what the impact is sort of – you know, my situation aside – the impact on Social Security and other kinds of retirement programs on fertility rates?

People in the past would have kids would be to help support them in retirement. You didn’t have stocks and bonds and mutual funds so you invested in human capital instead, your kids. You had lots of kids and you’d hope they were going to be able to support you later.

The problem is that the financing of programs like Social Security and Medicare is sensitive to the fertility rate. A higher birth rate means these programs become easier to support with more people paying into them. Social Security undermines its own financing.  It encourages people to work less so they’re paying less into the system.  It encourages them to save less, so the economy is less productive.  It encourages people not to have kids, with fewer new people paying into the future.

I’ve proposed the idea of a lower payroll tax for families with kids. The idea is to make the system fairer to acknowledge the contributions that parents make, what their kids are doing for Social Security.

And how would you pay for that?  If someone like me is paying less, then that’s a shortfall.  So who’s paying more?

I’ve gauged this with fairly conservative assumptions.  You have a small increase in the payroll tax rate overall (the rate would go up from 12 percent to 13 percent.) and then a rebate from that for each child you have.

If you have even a modest increase in fertility rates, that would improve Social Security’s financing sufficient that you wouldn’t need to have the payroll tax rate increase at all.

One item that constantly gets mentioned in budget talks is chain weighted CPI. How would that affect entitlements and is it a good idea to change sort of the inflation metric or the inflation measure that we’re using when we figure entitlement benefits.

The chain weighted CPI debate is over how you measure inflation and how you build that measure of inflation into the cost-of-living adjustment (COLA) that’s paid to Social Security.

The consumer price index overstates inflation because it doesn’t account for the way that people change their buying habits in response to changing prices.  For instance, if the price of apples goes up and oranges goes down, I’m going to buy more oranges and fewer apples.  The current CPI assumes I’m going to keep buying apples no matter how expensive they get.  When you account for this upper level substitution bias, you generally get a lower rate of measure inflation.

The chain CPI – which accounts for this change in buying habits – is a better measure of inflation. Switching makes the COLAs smaller and saves us enough to cut 15 or 20 percent of the Social Security deficit.  This is the Washington policy wonks’ favorite thing.

You don’t like it though.  You don’t like this idea.

MR. BIGGS:  Inflation adjustments of benefits in retirement is valuable to people, the policy elements of Social Security that actually work well. You don’t get inflation protection from your 401k, only from Social Security.

I’ve argued for a higher COLA for Social Security, one that goes not just with inflation but goes about a percentage point higher and rises with wages. You’d get an extra increase on top of inflation for your Social Security benefits, making up for not getting inflation adjustments for your 401k or traditional pension benefit. That’s going to be coupled with lower benefits early in life. When you retire, the advantage there is the lower initial benefit encourages people to keep working.

By having a higher COLA, you have lower benefits early in retirement.  When you’re 62, you really should be working longer but when you’re 72, when you can’t go back to work, your benefits are going to be higher.

The chain CPI is not about fixing Social Security. It’s about generating money for the budget up front because it cuts benefits quickly.

It has an impact on taxes as well, fairly significant the further out you go, right?

The income tax brackets are also indexed to the consumer price index. If you use a chain CPI, you’re going to increase people’s tax rates because more of their income will fall into these higher tax brackets.

It’s a regressive tax increase because if you’re a high-income person, most of your income is in the top tax bracket anyway. It can’t get worse for you. If you’re a lower middle-income person, it’s going to raise your taxes more.

The chain CPI is a combination of cutting benefits for the vulnerable Social Security beneficiaries, the 90-year-old person, coupled with a regressive tax increase on working people –it doesn’t appeal to me.

So it’s a fairly significant tax increase over the decades.

You get a real bracket creep, where, at least in decent times, people’s incomes grow faster than inflation. Since the tax brackets are indexed only to inflation, more income falls into higher tax brackets so the average tax rate rises.

Even if we had made the Bush tax cuts permanent and indexed the alternative minimum tax for inflation, the Congressional Budget Office projects that tax receipts relative to GDP would rise at record levels within 10 years.

If you add the chain CPI, you’re exacerbating this trend, with record levels of taxes. Again, you want to say, what kind of Social Security program do we want?  Similarly, what kind of tax system do we want to have?

Follow James Pethokoukis on Twitter at @JimPethokoukis

Pethokoukis, Economics, Taxes and Spending, U.S. Economy

Sure, Obama’s ‘cash for clunkers’ stimulus cost $1.4 million a job — but, you know, cars

Credit: Brookings

Credit: Brookings

Before there was the clunker Obamacare website, there was the “cash for clunkers” Obama White House stimulus program. Actually, there were two motivations behind the program. First, give the economy a fillip. Second, improve the fuel efficiency of the US auto fleet to reduce carbon emissions. Nearly 700,000 clunkers were traded in between July 1, 2009 and August 24, 2009. Participants received a voucher for either $3,500 or $4,500, depending on the difference in fuel economy between the trade-in vehicle and the new vehicle. A new Brookings study renders a harsh judgment on the program:

Our evaluation of the evidence suggests that the $2.85 billion in vouchers provided by the program had a small and short-lived impact on gross domestic product, essentially shifting roughly a few billion dollars forward from the subsequent two quarters following the program. The implied cost per job created due to the program was much higher than what was estimated for alternative fiscal stimulus programs. …

On the environmental side, the cost per ton of carbon dioxide reduced due to the program was higher than what would be achieved through a more cost-effective policy such as a carbon tax or cap-and-trade, but was comparable (or indeed lower) than what is achieved through some of the less cost-effective environmental policies, such as the tax subsidy for electric vehicles.  … In the event of a future economic recession, we would not recommend repeating the CARS program.

Brookings found that the small employment increase in the $2.85 billion program came at higher “implied cost per job created” —  $1.4 million — than other fiscal stimulus programs (see above chart), as measured by Congressional Budget Office models.

Now cash-for-clunkers wasn’t the only Obama stimulus programs that didn’t quite work as expected.

A 2010 Federal Reserve-sponsored study found that design of the 2009 Making Work Pay tax credit — money was doled out a bit at a time instead of a lump sum – led to “a substantially lower rate of spending than the one-time payments” of the 2008 Bush stimulus.

– A new paper Macro Fiscal Policy in Economic Unions: States as Agents by Gerald Carlino and Robert Inman analyzed the economic impact of the $800 American Recovery and Reinvestment Act and found that reallocating nearly $100 billion in direct government purchases “to federal tax relief and all intergovernmental project aid to welfare assistance would have improved estimated income growth from ARRA funding by about 30 percent.”

– I would also add that the Obama stimulus failed to a) bring the unemployment rate down to 5% in 2013 (vs. a real jobless rate of 9-10%) or b) ignite a mini-boom of quarter after quarter of 4%- GDP growth as the White House predicted.

Follow James Pethokoukis on Twitter at @JimPethokoukis

Economics, Entitlements, Pethokoukis, U.S. Economy

Time for the American right to declare peace on the US welfare state

Image Credit: shutterstock

Image Credit: shutterstock

Are we better off today than we were six years ago? Apparently not. The US Census Bureau finds the pretax income of the median US family nearly 10% lower today — four years into a supposed economic recovery — than at the Great Recession’s start.

Except that alarming statistic on “market income” is deceptive. The federal government’s income definition misses a lot of stuff such as food stamps, subsidized school lunches, Medicare, Medicaid, and Earned Income Tax Credit benefits. Add in all that, factor for taxes, and you’ll find, as e21 economist Scott Winship has, middle-income buying power is essentially back at its 2007 peak — which was an all-time high. “In short, while the middle class—and especially the poor—saw declines in market income after 2007, the safety net appears to have performed just as we would hope, mitigating the losses experienced by households,” Winship concludes.

And while the recovery’s glacial pace, both in terms of GDP and jobs, is unacceptable, the safety net’s performance is encouraging. The pain from the Great Recession, as bad it was, would have been far worse for middle- and low-income Americans if we were still in a sort of 1920s, Coolidgean world that many on the right these days seem to long for. As Arthur Brooks, AEI’s president, puts it:

One of the things, in my view, that we get wrong in the free enterprise movement is this war against the social safety net, which is just insane. The government social safety net for the truly indigent is one of the greatest achievements of our society. And we somehow want to zero out food stamps or something, it’s nuts to want to be doing something like that. We have to declare peace on the safety net.

Now declaring peace isn’t the same thing as surrendering to the status quo. As currently structured, the US safety net is financially unsustainable and retards economic growth too much, promotes dependency over work, and discourages family formation. If there are any limits on the welfare state’s expansion, the left only speaks of them sotto voce if at all. But the welfare state needs thoughtful and thorough reform. And that doesn’t mean just slapping arbitrary spending caps on federal programs and block granting them back to the states. Rather, it means restructuring programs so they are both better targeted towards those who truly need help and give a lift to those trying to get on or stay on the ladder of economic opportunity. Oh, and making programs affordable. We cannot redistribute more wealth than we create, after all.

Two examples: first, Social Security. Putting aside the New Deal program’s demographic-driven fiscal challenges, it doesn’t work so well in giving all seniors a decent standard of living. As AEI’s Andrew Biggs points out, we spend over $700 billion each year on Social Security benefits, yet 9-10% of seniors in America are living in poverty. In theory, we could give every retiree in America a poverty level benefit for half the cost of the current Social Security program. Biggs would combine such means testing — via a flat poverty-level benefit — with universal savings accounts where workers would be enrolled automatically in an employer-sponsored retirement account and contribute at least 1.5% of pay, matched dollar for dollar by their employers.

Then there’s the Earned Income Tax Credit, an effective anti-poverty program for working parents but one that is also overly complex and creates a marriage penalty. Economist Edward Glaeser would alter the EITC by making it a clear and transparent wage subsidy to all workers making less than $9 an hour. (Along similar lines, AEI’s Michael Strain has advocated allowing firms to hire the long-term unemployed at less than the current minimum wage and supplementing their income with an EITC-like payment.) Management consultant Oren Cass, a domestic policy adviser for the Romney presidential campaign, would use the payroll tax system to create a direct-to-worker wage subsidy. Cass: “The effect in many ways would mirror a substantial increase in the minimum wage. But whereas a price control would to tend to decrease the size of the labor force, a subsidy would tend to increase it.”

There are lots of other center-right ideas out there: expanding the child tax credit, providing lump-sum bonus payments to unemployed workers who find a job, relocation vouchers to the long-term unemployed in high-unemployment areas, premium-support Medicare reform, expanding healthcare access through tax credits and well-funded high-risk pools. Given the aging of America and the strong possibility that technology will seriously thin the middle part of the US labor market, we will have to spend more on a (work-encouraging, wage-subsidizing) safety net in the future than in the past. And tax more and smarter to support it, such as through an efficient, pro-growth progressive consumption tax.

At the same time, the liberal left will have to acknowledge that we cannot tax our way to non-means tested, universal welfare state solvency — certainly not by just dinging the top 2%. Democrats must “finally come clean, 80 years after launching the New Deal, about the cost and consequences of their ambitions, ” writes political scientist William Voegeli. They will need to concede the safety net needs to be modernized and better focused – — and that federal spending isn’t going anywhere near 30% of GDP or higher (the current trajectory) vs. about 20% historically.

There will be no Grand Bargain until both sides in Washington and their supporters across America accept these political and policy realities, as well as the nature of the economic challenges facing 21st century America. The safety net isn’t going away, nor should it, but it will need to look a different tomorrow than it does today.

Follow James Pethokoukis on Twitter at @JimPethokoukis

Pethokoukis, Economics, U.S. Economy

Strong families as pro-growth, supply-side economics

Image Credit: Shutterstock

Image Credit: Shutterstock

American children from low-income families appear to have less relative economic mobility than counterparts in five in Scandinavia and the UK, according to a recent study: “Whereas 42 percent of American sons whose fathers had earnings in the bottom quintile had low earnings themselves, the comparable percentages ranged from 25 percent to 30 percent in Denmark, Finland, Sweden, Norway, and the United Kingdom.”

Now I don’t what the “right” percentage is, the but the US could do better. And stronger families could be a key part in boosting mobility. AEI’s Brad Wilcox:

 In fact, the opportunity story begins with our families-in particularly, with our parents. As the Nobel-prize-winning economist James Heckman recently noted, “the family into which a child is born plays a powerful role in determining lifetime opportunities.” My own research using individual-level data from the Add Health dataset for the Home Economics Project, a new joint initiative between the American Enterprise Institute and the Institute for Family Studies, indicates that adolescents raised in intact, married homes are significantly more likely to succeed educationally and financially. The benefits are greatest for less privileged homes-that is, where their mother did not have a college degree.

Read the whole piece. And here are a couple of questions I emailed Brad along with his reponses:

Why do you think there are more disrupted families at the lower end of the income scale than the top end?

Today, marriage is less common and much more fragile among poor and working-class Americans. This is partly because of economics, especially the fact that working-class and poor men are less likely to be employed full-time and earning a decent wage. This reduces their “marriageability”, and increases the economic stresses facing them and their families.

By contrast, more affluent men have access to better-paying jobs that make them more attractive as husbands, and reduce the level of economic stress in their lives. Affluent couples also have shared assets, such as homes, that make them more reluctant to divorce.

But it’s also about policy. Many of our means-tested policies, such as Food Stamps, unintentionally penalize marriage. So some public policies get the incentives wrong. And, finally , there are important cultural/social differences at work. We are social creatures. Lower-income Americans live in communities where single parenthood is more common; affluent Americans live in communities where intact, married families are more common. So, insofar as people are shaped by the social cues in their environment, they are more likely to see nonmarital childbearing as acceptable or unacceptable.

Here is what Charles Murray wrote in Coming Apart

But, for practical purposes, understanding why the new lower class got started isn’t especially important. Once the deterioration was under way, a self-reinforcing loop took hold as traditionally powerful social norms broke down. Because the process has become self-reinforcing, repealing the reforms of the 1960s (something that’s not going to happen) would change the trends slowly at best. … Meanwhile, the formation of the new upper class has been driven by forces that are nobody’s fault and resist manipulation. The economic value of brains in the marketplace will continue to increase no matter what, and the most successful of each generation will tend to marry each other no matter what. As a result, the most successful Americans will continue to trend toward consolidation and isolation as a class. Changes in marginal tax rates on the wealthy won’t make a difference. Increasing scholarships for working-class children won’t make a difference.

How optimistic are you about the impact of policy?

In the last five decades, we have seen dramatic shifts in behavior related to drunk driving, smoking, and teen pregnancy. If elites started talking the talk that they walk in private when it comes to marriage, and began to support public messaging around marriage and fatherhood in schools, the popular culture, and our nation’s businesses, we could make real progress on these family issues. I also think we need to advance public policy reforms–like improving vocational education, expanding the child tax credit, and eliminating the marriage penalty in our transfer policies–that would strengthen the economic foundations of family life in poor and working class communities.

Follow James Pethokoukis on Twitter at @JimPethokoukis