The Ryan Budget Is an Affront to Economics and American History

A few years ago, when the unemployment rate was near its peak, two Swedish economists, Stefan Eriksson and Dan-Olof Rooth, conducted an experiment. They wanted to find out just how hard it was to get a job if you’d been unemployed for a long time. They sent 8,466 fictitious job applications to employers across Sweden. They varied the number of months that each “applicant” had been unemployed. For some, it was a matter of days. For others, several months. Then they waited for the employers to call them back for interviews.

Overall, one out of every four job “applicants” received an interview. Unsurprisingly, it was higher for high-skill jobs and lower for low-skill jobs. What was more significant was the effect of unemployment on the fictitious resumes.

Eriksson and Rooth found that unemployment didn’t matter if it lasted less than six months. Applicants who had been unemployed for the past six months were just as likely to receive an interview as applicants who just quit their job yesterday. If they had been unemployed for nine months or more, however, they were 20 percent less likely to get an interview, even if they had the same work experience, education, and other qualifications as everyone else.

In the United States right now, over 3 million people have been looking for work for nine months or more — and that doesn’t include the millions more who gave up searching because they couldn’t find anything.

Eriksson and Rooth have mostly confirmed what we already knew, but their experiment adds more specific and more reliable evidence to the overwhelming conclusion that these people need our help. Fortunately, another paper, published alongside Eriksson and Rooth’s, proves that we can help them.

While Eriksson and Rooth were sending out job applications, Emi Nakamura and Jón Steinsson were reading military procurement forms.

Both economists at Columbia University, Nakamura and Steinsson were trying to figure out what effect the federal government has on the economy when it increases its spending. They found a database at the Pentagon that summed up all large military purchases in every state in the U.S. from 1966 to 2006. It wasn’t exactly an experiment, but it was close enough.

The danger in estimating the effects of government spending is that it’s hard to tell whether states had faster economic growth because they received more funding — or whether they received more funding because they happened to enjoy faster economic growth. With military purchases, Nakamura and Steinsson knew they didn’t have that problem. States don’t receive military contracts based on the state of their economy. The two are usually independent.

Nakamura and Steinsson compared military spending in each state with subsequent economic growth over the course of four decades, and they found that a 1 percent increase in government purchases resulted in a 1.5 percent increase in income per person in that state.

Then they calculated the effect on the national economy. When the Federal Reserve couldn’t lower interest rates any further — the situation we’re in now, known as the “zero lower bound” — Nakamura and Steinsson found that a 1 percent increase in government purchases resulted in at least a 1.7 percent increase in national income per person.

In other words, the federal government can stimulate the economy and create jobs, and the resulting increase in income will far exceed any cost to the taxpayers.

Budget ProposalsLike Eriksson and Rooth, Nakamura and Steinsson aren’t telling us something we don’t know, but they are giving us another valuable piece of evidence that our government is headed in the wrong direction.

At a time when the long-term unemployed need more support, our government is giving them less. The leadership of both parties have agreed to shrink the federal budget drastically over the coming decade, and now Paul Ryan, the Republican chair of the House Budget Committee, has issued a new proposal that will cut the budget even further, to the point where most programs that support the unemployed will be half the size that they were during the Reagan administration, relative to the size of the economy.

This is a cruel, counterproductive path we are on, and that is not a statement of mere opinion. It is the inescapable conclusion of data-driven, cutting-edge economic research based on real-world evidence and the accumulated lessons of American history.

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This op-ed was published in today’s South Florida Sun-Sentinel and Huffington Post.

An Open Letter to the One Percent

Back Cover of "Letter to the One Percent"Congratulations. You are the richest class of human beings in the history of the world. Collectively, you own 26 percent of this nation’s wealth. Add in the next richest 5 percent of Americans, and you have more money than everyone else combined. Nowhere else in the world would you be able to earn so much and give back so little.

You worked hard for that money. No one can deny that. You have been rewarded for your talent, your intelligence, your risk-taking, your creativity, and your good fortune. The notion that you should change a system that has worked so well must seem downright stupid.

But, as the philosopher Amartya Sen reminds us, “What we can see is not independent of where we stand in relation to what we are trying to see.”

From where you’re standing, things must look pretty good. In the world you live in, economic growth is strong. Unemployment is brief, rare, and softened by ample savings. Health insurance is affordable. Education is among the best in the world. Food, shelter, and transportation are never hard to come by. And retirement will surely be comfortable.

It’s not perfect. You may get fired. You may lose money. You may experience stress and sacrifice and sorrow. But you will not struggle to survive. You will not be denied the American Dream.

So it’s only natural that you believe this path is open to everyone. But this could not be further from the truth.

In the world outside the One Percent, economic growth is sluggish — and has been so, on average, for more than thirty years. For most Americans, in fact, it has been nonexistent. Unemployment is a common and devastating threat. Retirement is an uphill battle. Education is a crapshoot. Food, shelter, and transportation strain the budget. And until recently, health insurance was a luxury afforded to some but not nearly all.

You’ve read these complaints before. You’ve heard the voices shouting outside your office windows. You’ve seen the faces protesting on your television screens. But, in all likelihood, you haven’t seen the world through their eyes. And that makes all the difference.

Adam Smith, the father of modern economics, taught that we cannot know what is the right thing to do until we have looked at a situation through the eyes of an “impartial spectator.”

“In solitude,” wrote Smith, “we are apt to feel too strongly whatever relates to ourselves… The conversation of a friend brings us to a better, that of a stranger to still a better temper. The man within the breast, the abstract and ideal spectator of our sentiments and conduct, requires often to be awakened and put in mind of his duty.”

That duty is great, for you wield immense power.

A few years ago, the political scientist Larry Bartels studied the voting record of U.S. Senators on issues where the rich, the middle class, and the poor disagreed. He found that the Senators sided with the rich 50 percent more often than they sided with the middle class, and they always sided with the rich and the middle class over the poor.

In a sense, they’re protecting their own. After all, the average legislator is six times richer than the average citizen.

They also have more reasons and more opportunities to hear what you have to say. Corporations, which you own and run, spend significantly more money lobbying and have significantly more high-level government allies than their opponents. The result is that corporations win lobbying battles far more often than unions or citizen groups.

You have an obligation to use that influence responsibly. Since the 1970s, you have failed in that duty. By tilting the playing field away from the 99 Percent, you siphoned an increasing share of the nation’s resources, until the country was drowning in debt, struggling to keep up, and unable to fuel the recovery it so desperately needed. Once you had climbed the ladder of success, you pulled up the ladder so no one could come up after you.

I don’t believe you did so with malicious intent. After all, many of you are my friends and colleagues. Rather, I believe you were practicing what the late economist John Kenneth Galbraith called “innocent fraud.”

“It is innocent,” explained Galbraith, “because most who employ it are without conscious guilt. It is fraud because it is quietly in the service of special interest.”

As opposed to general interest, the interest of all Americans. There is a way to become rich without impoverishing everyone else — and we as Americans celebrate that sort of success — but that’s not what has happened in recent years.

To be clear: It is not your accumulation of wealth per se that lies at the root of our problems. It is the manner in which that wealth was accumulated: through the systematic demolition of the tax code, regulations, public spending, and labor market institutions that created the greatest prosperity the world has ever seen.

The good news is, all that wealth gives you the ability to undo the damage. You are the most powerful citizens of the most powerful country in the world. Your country needs you. You have the influence, the means, and the brainpower to turn this economy around, but you must know the facts. You must hear the cold, hard truth.

No, I’m not trying to start a class war. Quite the opposite. I’m asking you to end the class war. I’m asking you to construct an economy where everyone benefits, rather than the few at the expense of the many.

“There’s class warfare, all right,” said Warren Buffett in 2006, “but it’s my class, the rich class, that’s making war, and we’re winning.”

You probably don’t see it that way. “War” is a strong word. But that’s because it’s not your standard of living that’s been under near-constant attack for thirty-plus years. Your piece of the pie has been growing. Your voices have been heard. And that’s why you’re the ones who have to step up.

Nothing less than what Sen calls “the freedom to determine the nature of our lives” is at stake. That’s something that you have and most of the 99 Percent doesn’t. That kind of freedom only comes with a good job with good benefits in a growing economy where good schools and a safe neighborhood in a clean environment create real opportunity. Not only is that kind of freedom at the heart of the American Dream; it’s also our natural birthright as human beings. Yet it’s been slipping out of reach for more and more Americans with each passing year.

Things can get worse. Let us hope they do not. Of course, it’s one thing to hope; it’s quite another to act. But act you must. In my new book Letter to the One Percent, I explain why. To learn more, visit www.LetterToTheOnePercent.com.

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This op-ed is an excerpt from my new book Letter to the One Percent, published this month by Lulu Press, Inc.

Even the Shutdown Can’t Kill Old Republican Fallacies

Annualized Growth in Real GDP per Capita, by President

Old fallacies die hard.

You would think, for instance, that Americans wouldn’t trust Republicans anymore. Poll after poll has shown that the American public holds them responsible for the government shutdown — and the American public hated the shutdown. Their approval rating plummeted to 21 percent, while President Obama’s held steady at 42 percent.

And yet, according to a Pew Research survey released at the end of the shutdown, Americans still believe that Republicans do a “better job dealing with the economy” than Democrats.

Clearly, it will take more than a two-week shutdown to kill the myth that simply won’t die.

And it is a myth. Since the government started collecting economic data around World War II, we have accumulated plenty of evidence to measure each party’s success at “dealing with the economy” — and none of it makes Republicans look good.

In their book Presimetrics: What the Facts Tell Us About How the Presidents Measure Up on the Issues We Care About, economist Mike Kimel and journalist Michael E. Kanell use this data to calculate the performance of the economy under every president from Dwight D. Eisenhower to George W. Bush. Here’s what they found…

Real GDP per capita. The most basic measure of economic success is the growth of output per person, adjusted for inflation. The fastest growth came in the Kennedy/Johnson years, when “real GDP per capita” grew 3.48 percent per year. The second-fastest came in the Clinton years, a strong 2.49 percent per year. Compare those numbers to laggards like Eisenhower and Bush Sr., who oversaw annual growth of 1.11 percent and 0.93 percent, respectively. When you add up all the Democratic years and all the Republican years, you find that the economy grew 2.82 percent per year under Democratic presidents and 1.54 percent under Republicans.

You may say, “What about the Great Depression? Aren’t they cherry-picking numbers by excluding the biggest economic event of the 20th century?” Actually, if you add Hoover, Roosevelt, and Truman, the Democrats’ average score goes up, and the Republicans’ goes down.

Another common criticism is that presidents inherit the problems of their predecessors. Should we really hold them responsible for the beginning of their term, when the economy’s fate is decided largely by the last guy’s policies? Fair enough. Let’s exclude the first year of each president’s term and recalculate the numbers. Guess what? Again, the Democrats’ score goes up, and the Republicans’ goes down.

Employment-to-population ratio. Instead of focusing on output, we could focus on jobs. Is the economy creating enough jobs to employ the same percentage of the population? Under Democrats, the employment-to-population ratio increased. Under Republicans, it decreased.

Real average weekly earnings. Often, economic growth doesn’t translate into the average American’s pocketbook. Why not look at weekly wages? Okay. Under Democrats, average weekly earnings, adjusted for inflation, increased. Under Republicans, they decreased.

Real median income. But wages only tell part of the story. Maybe Americans work more hours or get more income from investments. Let’s look at the average household — the “median” — and see how their inflation-adjusted income changed: Under Democrats, it increased much faster than it did under Republicans.

Real net average disposable income. But Democrats are known for raising taxes (and, indeed, Kimel and Kanell find that the tax burden went higher under Democrats than Republicans). What if all that income growth winds up in the government’s pocket, negating the gains? Let’s measure average income after taxes: Still, the Democrats oversaw much faster income growth than Republicans!

Poverty rate. Under Democrats, the poverty rate decreased. Under Republicans, it increased.

Real adjusted S&P 500. The stock market grew much faster during Democratic administrations than it did during Republican presidencies.

Value of the dollar. Under Democrats, the dollar appreciated, as foreigners invested more in us. Under Republicans, the dollar depreciated, as foreigners invested less.

Of course, the picture is incomplete. Someday, we will add the completed Obama presidency to the list, and the numbers will change. But already GDP growth under Obama is faster than it was under George W. Bush, and it’s only improving. The stock market is surging up, and the shutdown confirmed what the data has proven: Republicans do not do a “better job dealing with the economy.”

The longer we believe that fallacy, the more shutdowns and recessions we will invite.

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This op-ed was published in the South Florida Sun-Sentinel.

What to Read on Rick Perry and the “Texas Miracle”

State Growth Rates: How Was Your Recession? — Ryan Avent

Perry’s Growth Failure in Texas — Dean Baker

A Short Course in Miracles — Paul Krugman

Yes, Texas has added more jobs — but it has to, to keep up with population growth. And bear in mind that if you lose your job in Texas, there isn’t much of a safety net.

The Texas Omen — Paul Krugman

[The] Texas budget gap is worse than New York’s, about as bad as California’s, but not quite up to New Jersey levels.

Among the states, Texas ranks near the bottom in education spending per pupil, while leading the nation in the percentage of residents without health insurance.

Behind the Population Shift — Edward L. Glaeser

If economic productivity — created by low regulations or anything else — was causing the growth of Texas,…then [it] should have high per capita productivity and wages.

Low incomes and productivity in [Texas] strongly suggest that [its] expansion is not driven by outsize economic success.

More on the Texas Story — Paul Krugman

What could be causing that? [There] are two, not mutually exclusive stories: immigration and high birth rates among immigrants, leading to rapid population growth; and workers moving to Texas despite low wages because of cheap housing and a generally low cost of living.