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.

Outsourcing Isn’t an Excuse to Abandon the Working Class

Barack Obama and Mitt Romney agree on one thing: Outsourcing is a problem.

Of course, they disagree on who’s to blame. To Obama, it’s private equity firms like Romney’s Bain Capital. To Romney, it’s deficit spending like Obama’s 2009 fiscal stimulus.

(As I pointed out two weeks ago, there’s plenty of evidence that the 2009 stimulus created millions of jobs right here in America. But never mind.)

“Countries around the world are…giving their workers and companies every advantage possible,” says Obama, but “we can win that competition.”

On Romney’s website, you can find the same language. He says our tax code “needs to be more competitive and business friendly.” We need to create a “level playing field for American products in foreign markets.”

This rhetoric is more dangerous than it seems.

It’s true that many of our exports are at a disadvantage. In countries that we trade with, the average manufacturing wage is 65 percent of the American average. In Mexico, manufacturing workers earn 11 percent of what their U.S. counterparts make. In China, they earn 3 percent.

So, the question is: Just how “level” does Mitt Romney want the “playing field” to be?

When it comes to outsourcing, Romney has a solution, but he won’t say it…because you won’t like it: The easiest way to create a “level playing field” is to lower American wages.

The dirty secret about Republican economics is that it’s all about cheap labor.

While most of the industrialized world (and much of the developing world) has experienced rising real wages in the past thirty years, American wages have stagnated.

Union membership has plummeted. The minimum wage has failed to keep up with inflation. Taxes and regulations that previously restricted the rich from siphoning the wealth of the middle class have been eviscerated.

In short, Mitt Romney’s game plan has already been put to the test.

We were told that it was a new era. We were told that we needed to sacrifice our job security, our wage increases, our retirement benefits — all in the name of globalization. We were told that America couldn’t compete with those costs around its neck. We were told that the manufacturing sector was deadweight. We were told that the working class was pulling us down. We were promised a better world filled with high-tech jobs and rapid innovation, low taxes and rising asset prices, cheap imports and even cheaper investments.

We did everything we were told. We gave up our protections and our power. And, in return, we got lower economic growth, higher inequality, productivity growth that went almost entirely to the top 1 percent, and — irony of all ironies — even bigger trade deficits.

All that cheap labor didn’t make us “competitive” after all.

All it did was line corporate coffers with more profits than ever before.

But not everyone made that mistake. According to the conservative Heritage Foundation, U.S. tax revenue is currently 27 percent of GDP. In Denmark, it’s a whopping 49 percent. They have the world’s highest minimum wage and arguably the lowest level of income inequality. Yet their unemployment rate (7.7 percent) is currently lower than ours (8.1 percent), and their economy grew at the same rate as ours from 1979 to 2007.

For another comparison, look at Sweden, where tax revenue is 48 percent of GDP. They consistently battle Denmark for the world’s lowest level of income inequality, yet they’re also ranked as the second most competitive country in the world (after Switzerland). Their unemployment rate (7.8 percent) is also lower than ours, and their economy grew faster than ours from 1979 to 2007.

Needless to say, unions are more prevalent and powerful in both of these countries than in the U.S. But arguably the most heavily unionized country is Germany, where employee representatives sit on corporate boards and have a say in industry-wide decisions. Germany’s unemployment rate (5.6 percent) is way lower than ours, and they boast a large trade surplus.

Clearly, we can raise wages and compete in the global economy at the same time. We don’t need a “level playing field” to beat outsourcing. We just need a proactive government.

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

How to Discover the Truth with Statistics

Regular readers may remember my post, “How to Lie with Statistics,” where I criticized ASU economist Richard Rogerson for misleading the public with bad math. I showed the nonsense in his claim “that raising taxes will turn us into a bunch of lazy old Europeans.”

Since I’m going to be writing about taxes a lot this week, now is a good time to show how a responsible statistician approaches this issue. The following is a summary of two excellent posts by University of Arizona political scientist Lane Kenworthy.   Continue reading “How to Discover the Truth with Statistics”