We Are Young

There are many conflicting opinions and studies regarding the effect that the minimum wage (MW) has on employment, particularly the employment of teens who often work at jobs that pay MW.  Some studies show an increase in employment of teenage workers after the MW is increased.  Some show a decrease, some show no change.  A 2006 paper by two economists at the University of California reviewed early studies of MW prior to 1982 and those after 1990.  Methodologies, correlations and conclusions in one study are criticized in another study.  Reading just the first six pages of the 150 page paper will give you a sense of the arguments.

How many people does the MW affect?  Is it only those making the MW or does it also include those making just above MW?  What is the effect on the local economy as well as local employment?  Whatever you want to claim about MW, you can probably find a study in this area that will backup your claim.  What we can know for certain is that the MW has declined in real dollars over the past 50 years.  Using MW data  from the Dept of Labor and a CPI calculator from the Bureau of Labor Statistics, I have graphed the minimum wage in both current dollars and real inflation-adjusted dollars.

From 1963 to 2012, the MW has fallen 17%.  The unemployment rate for teens aged 16 – 19 stays stubbornly near 25%.

The unemployment rate for those aged 20 – 24 years has been steadily declining since late 2010 but has ticked up in the past few months.

Low wages and high unemployment breed a sense of futility in young people entering the work force.  During the late sixties and early seventies, the prospect of being drafted into the Vietnam War prompted many high school male graduates to go to college to gain a student deferment from the war.  Almost fifty years later, this generation of high school graduates – both men and women – feel the pressure of having to go to college to escape the bleak job prospects of this labor market.  As I wrote last week, older people are continuing to hold onto jobs, making it doubly difficult for young people entering the labor market supply chain.  Few young people can comprehend the multi-decade generational employment mechanism.  In our late teens and early twenties, we first step on the slow moving employment escalator, gaining experience, knowledge and judgment as we work for relatively low wages.  During our working years we build our skills and the amount of money our labor can command.  For too many young people waiting to step on this job escalator, the escalator is broken.  Each year more young people gather at the base of the escalator and wait. 

Labor Report – August Doldrums

This past Friday, the Bureau of Labor Statistics (BLS) released their monthly report for August and the employment gains of 96,000 were below the already muted expectations of 120,000 jobs gained.  Many economists estimate that it takes 150,000 jobs per month just to keep up with population growth.  On the day before the BLS report, the large payroll processing company, ADP, released their estimate of 201,000 private job gains in August, leading some to speculate that total job gains for the month would be above 150,000.  As you can see below, the BLS and ADP counts of private employment closely track each other. (Click to enlarge charts in a separate tab)

On Thursday afternoon before the Friday morning release of the BLS report, the White House is notified of the numbers.  The disappointing numbers may have led President Obama to tone down the rhetoric of his speech that evening at the Democratic National Convention.  He did not seem to have the “fire in the belly” when he delivered his acceptance speech.  The unemployment rate ticked down from 8.3% to 8.1% because 368,000 dropped out of the work force and are no longer counted as unemployed.  Some of this number retired, either voluntarily or involuntarily.  Some have simply become discouraged.  Some have gone back to school.  The average number of weeks of unemployment is still at high levels. 

Some of this is due to changes in BLS reporting since Obama took office.  Before January 2011, the BLS allowed a maxiumum of 2 years, or 104 weeks in their survey.  Starting in 2011, the BLS allows a maximum of five years, or 260 weeks.  Since a small number of unemployed forces the average number higher, the BLS recommends using the mean for comparison. (BLS Source

Most of Europe is in recession; growth in South America, China and India have slowed.  Several strong economic reports in the winter and spring of this year led many to think that the U.S. economy might be less tethered to this global malaise.  The stock market rose over 10% in the first few months of 2012; then China reported contracting manufacturing and real estate sectors, and European leaders showed their continued inability to resolve the fiscal and monetary policy challenges that threaten to crack the European Union.  We realized that we were not immune to the global financial flu and the stock market fell 10% in May, wiping out the gains of the winter and spring. The monthly employment gains dropped during the summer.

Recent employment and industrial reports have showed that our growth, while still positive, is struggling.  Private job growth has been hampered by the layoffs of government workers, as the chart below shows.

The shedding of government jobs halted this past month as Federal employees actually gained about 3,000.  Those on the left have criticized the Republican House for aggravating job losses in state and local governments by blocking any further federal aid to the states.  A comparison with the first term of the Reagan administration shows a similar decline in government employment during the 1981 – 1982 recession.  However, following the end of the recession, government employment increased in the last two years of his first term and helped Reagan get elected to a second term.  The Democratic House was kinder to Reagan than the current Republican House is to Obama.

The slow growth of the past several months has fueled speculation that the Federal Reserve will once again come to the rescue with a bond buying program.  Since the beginning of June, the stock market has “melted up” on very low volume.  Once again, it is at the peak reached earlier this year and in 2007 before the recession began.

The uninspiring lack of job growth among what I call the core labor force, those aged 25 – 54, is a predictor of a sluggish economy in the near future.  These workers buy a lot of stuff. No jobs, no stuff.

The larger group of adult workers, those aged 25 plus, continues to show gains, indicating that older workers are continuing to keep and get jobs.  The old are simply not making way for the young.  Severe declines in house values and the loss of value in their retirement funds has forced many older workers to continue working longer than they may have planned.  Older workers do no buy a lot of stuff.

During the 2010 elections, Republican candidates for the House promised that job programs would be first priority.  We have been waiting two years.  Both houses of Congress have historically low voter approval ratings yet the burden of the sluggish job growth continues to fall on the President’s shoulders.  Politicians on the Republican side of this dysfunctional Congress point to the President as the cause of the muddle through labor market; they know most voters can’t remember what they learned in civics class in grade school and don’t understand that it is Congress, not the President, that initiates legislation.  It is Congress, both Democrats and Republicans in the House and Senate, that is responsible for the lack of job growth.  Who elected these men and women to the Congress?  Look in the mirror.  That’s who’s responsible for the slow job growth. 

Tax Cuts and Us

Until the end of the year, we will hear and read a lot about the expiration of the Bush tax cuts.  For those who want to extend all the Bush tax cuts, you will hear stuff like this: “The non-partisan Congressional Budget Office (CBO) has predicted a recession in 2013 if the Bush tax cuts are allowed to expire.”  As with most political claims, this is slightly true.  Remember that politicians are little more than magicians practicing a logical sleight of hand in order to convince you of some claim.  What the CBO actually said in a May 2012 report was “if the fiscal policies currently in place are continued in coming years, the revenues collected by the federal government will fall far short of federal spending, putting the budget on an unsustainable path.” (Source)  In the next sentence, the CBO cautions “On the other hand, immediate spending cuts or tax increases would represent an added drag on the weak economic expansion.”  Is there room for compromise in this dysfunctional Congress?

While many politicians are aware of the difficult trade-offs, they dare not mention that to voters, who, they presume, are stupid.  On Fox News, MSNBC and other media, we will continue to hear simplified versions of a complex debate because – well, we’re just too dumb to pay attention to complex arguments that involve math.  If you are like most voters, many politicians reason, you have already stopped reading this because it has too many adjectives, verbs and commas.

The CBO does its best to estimate the long term impact on the federal budget and economic activity as a result of a paticular policy. To illustrate just how difficult this task is, let’s look at a July 2007 letter from the CBO to the Congressional Budget Committee projecting “For 2008 through 2011, CBO’s baseline budget projections show deficits of $113 billion, $134 billion, $157 billion, and $35 billion, respectively.”  Deficits were actually $458 billion, $1,413 billion, $1,293 billion and $1,300 billion.  Actual deficits were almost ten times what the CBO projected!  Knowing that ten year projections are almost pure fantasy, Congress continues this practice.  Each party uses the CBO estimates to support or attack a particular policy. 

The CBO projects a recession in 2013 if ALL tax policies were allowed to expire, including the Bush tax cuts.  “These include the Bush tax cuts, the alternative minimum tax (AMT) patch, the temporary payroll tax cut, and other temporary expiring provisions, many of which are commonly referred to as “tax extenders.” (Source)   The Congressional Joint Committee On Taxation (JCT) has a complete seven page (!!!) list of “temporary” tax cuts that are due to expire at the end of this year. 

What is the bottom line for the individual taxpayer if ALL the fiscal policies, including the Bush tax cuts, were allowed to expire?  In a 2012 report by the Congressional Research Service, they cite estimates by the Tax Policy Center that, in 2010, “the Bush tax cuts resulted in the lowest 20% of taxpayers seeing their income rise by 0.5%, while the top 20% saw their after-tax incomes rise by 4.9% and the top 1% saw their income rise by 6.6%”. (Source).  What will be the impact on most taxpayers if the Bush tax cuts expire?  Some but certainly not as dire as some politicans predict.  But that is not how politicians get votes.  To get us to the polls, politicians and their pundit lackeys who appear on TV and radio talk shows try to breed fear in voters.  The media is happy to oblige; fear makes for better ratings.

Based on estimates from the Tax Policy Center and the IRS, below is a comparison of what 2012 tax rates would be with and without the effect of what are commonly called the Bush tax cuts. (Source) This is just a “what if” scenario since the Bush tax cuts are still in effect for the 2012 tax year, but it does give us a good guesstimate of the effect of letting the tax cuts expire.

Using that data, I have projected what the effective tax rate on adjusted gross income would be for 2013 if the tax cuts are allowed to lapse.  It includes the tax brackets that includes the majority of tax payers.

The couple making $40K in adjusted gross income would pay $645 more in Federal income taxes.  The couple making $80K would pay $2225 more; the couple making $120K would pay $6669 more.  Those in the top 20% would see tax increases of $16K and more.  It is understandable that taxpayers with income in the millions would want to keep their gravy train going.  They need government mostly to protect their property rights; everything else, all the regulations and social support programs, is just wasted tax money.  Most of the rest of us don’t like paying taxes either.  We could step up to the plate and pay down some of the debt that we have run up; or maybe we should just let our kids figure it out.

Spending and Revenue

This Labor Day weekend is the eye in the storm of the Republican and Democratic conventions.  As we listen to all the rhetoric and half-truths (at best) coming out of both conventions, it might be best to take a long term view of government spending.  The two biggest components of federal spending are defense and what is called human resource spending, which includes federal Education and Training Programs, Medicare, Medicaid, Social Security, various social safety net programs and veterans’s benefits (functions 500 – 700 described here ).  Data is from the Office of Management and Budget (Source), Table 3.1, Outlays by Function and Super-function.

The 70 year average (1940 – 2011) of total government spending is 20.6% of GDP.  The 30 year average from 1981 to 2011 is 21.2%.  During the Obama administration, spending has increased to 24.1% of GDP.  Each 1% of GDP is about $150 billion at current levels of GDP. (Click to enlarge in separate tab)

Defense spending has doubled in the past decade.

This spending figure includes only active defense spending.  Outlays for Veterans benefits, education and job training for vets are included under the Human Resources superfunction.  Housing benefits for veterans are included under another superfunction, Physical Resources.  The total outlay is estimated at over a trillion dollars and that figure has been acknowledged by Senator John McCain, a long time supporter of strong defense spending.

As a percent of GDP, however, active defense spending has remained below 5%. Putting this increase in spending in historical perspective puts the lie to the contention by some liberals that our budget problems are mostly due to defense spending.

Human Resource spending includes Social Security payments, which comes out of current taxes and a trust fund surplus of $2.7 trillion (Source).  Since most Social Security payments come out of a tax that has been dedicated to those payments, I have deducted them from total Human Resource spending to get a more accurate picture of the trend in spending on the social safety net. 

When financial conservatives on both sides of the aisle warn of this upward trend, this is what they are talking about.

What too many Republicans won’t acknowledge is that we have had and continue to have a severe revenue problem.

Since I listen to and read a lot of “conservative” media each day, I repeatedly hear the mantra that Reagan lowered tax rates and revenues increased.  This is the justification for pushing for continued tax cuts. Reagan and a Democratic Congress lowered tax rates.  The president signs bills that are passed by the Congress.  This is not a one man show.  Total revenues, including Social Security and Medicare taxes, did increase because Social Security taxes were increased 12% during the Reagan years (Source).  When we look at tax revenues without Social Security taxes, revenues as a percent of GDP fell, just as anyone would expect when tax rates are reduced.  Since WW2, tax rates have been gradually reduced, and, as expected, tax revenues as a percentage of the economy have fallen.  There is no magic formula here.  Lower tax rates = lower revenue.

In this ongoing battle of ideologies, there are three real issues.  Should we spend more than 5% of GDP on active defense spending?  Should we spend more than 10% of GDP on social safety programs (excluding Social Security)?  Can we expect to ever live within our means if we collect only 10% of GDP in income and excise taxes?  We can not do all three.