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.

Do the Math: People Don’t Choose to Be Poor or Unemployed

Long-Term Unemployment HistoryGod, I wish I were poor.

And unemployed. That’s the good life. Poor and unemployed.

I mean, just look at all the cool stuff you get. Medicaid and welfare. Food stamps and unemployment insurance. And don’t forget public housing.

This stuff is so awesome that it’s like a “hammock that lulls able-bodied people to lives of dependency and complacency, that drains them of their will and their incentive to make the most of their lives.” That’s what Paul Ryan says, at least, and as the Chairman of the House Budget Committee, he’s supposed to know these things, right?

According to Ryan and his fellow Republicans, if I have unemployment insurance, I’ll never want to work again. Senator Rand Paul says it will cause me “to become part of this perpetual unemployed group.” With an average benefit of $269 per week, I’ll be living on Easy Street.

This is a common belief. There’s an email making the rounds from a 54-year-old consulting engineer who makes $60,000 a year and has to pay $482 a month for health insurance under Obamacare, but that’s not his biggest complaint. He’s really upset that his 61-year-old girlfriend who makes $18,000 a year only has to pay $1 a month for health insurance.

He thinks she has it so easy that she can afford to pay more, but he’s wrong.

On average, Americans earning $18,000 a year pay more than $3,000 in taxes, so she really only has $15,000 leftover to pay her expenses. She lives in Monterey, CA, where the average rent and utilities add up to $15,000 a year. So, after paying taxes, rent, and utilities, she’s completely broke. She doesn’t have money for food, let alone health insurance.

The consulting engineer thinks people will choose her lifestyle over his. “Heck, why study engineering when I can be a schlub for $20K per year?” he asks. (Nice way to talk about your girlfriend, by the way.) To which I’d like to reply: If being a “schlub” is so attractive, why don’t you do it? Why don’t you quit your engineering job and join the “$20K per year” club?

For that matter, why don’t we all quit our jobs right now and start collecting unemployment insurance? How far do you honestly think we can stretch $269 a week?

I’ll tell you how far: It would cover less than half of the basic necessities for the average American family.

That’s why unemployment makes you more likely to have to borrow money from a friend, withdraw money from your retirement savings, and have trouble paying your medical bills, rent, and mortgage. It makes you more likely to have a stroke or heart attack, lose self-respect, have difficulty sleeping, and seek professional help for anxiety and depression. It makes you more likely to kill yourself, kill others, and drink yourself to death.

And if you’ve been unemployed for more than a few months, most employers won’t even look at your résumé. It doesn’t matter how qualified you are. It’s like you don’t exist anymore.

The last time it was this bad, with long-term unemployment close to 3 percent of the workforce, was the peak of the 1980-81 recession. Back then, the federal government kept extended unemployment insurance in place for almost two more years, until the long-term unemployment rate fell close to 1 percent. In fact, that’s been standard operating procedure for every recession in the modern era, including 1990-91 and 2001. But now, with long-term unemployment as high as it’s been since World War II, Republicans have killed the emergency unemployment insurance program, and they’re fighting Democrats’ efforts to restore it.

They don’t seem to care that there are 2.9 applicants for every job opening. They don’t seem to care that people on unemployment insurance actually spend more time searching for work than their fellow unemployed who are ineligible for benefits. They’re sticking to their story.

On the 50th anniversary of the War on Poverty, many Americans are still operating under the assumption that people choose to be poor and unemployed, that they’d rather be lazy than rich, that they can afford the basic necessities of life. But the numbers tell a different story.

I don’t wish I were poor. Or unemployed. And I sure don’t wish it on anyone else. If you did the math, neither would you.

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

The Federal Government Didn’t Lose the War on Poverty. It Retreated.

U.S. Poverty Rate, 1959 to 2009

In 1904, half the population of New York City lived below the poverty line.

Half. Can you imagine? The poor were so numerous that they nearly outnumbered everyone else.

Today, less than 20 percent of New Yorkers live in poverty. That’s still a serious problem, but it’s a far cry from 50 percent.

Clearly, we did something right.

But in today’s political arena, we don’t talk about what we did right. We talk about what we’re doing wrong. We spend so much time talking about our problems and failures that we seem to have forgotten our nation’s great victories.

This historical amnesia is a dangerous mistake. It poisons our hearts with pessimism. It blinds us to the lessons and solutions we need. Most New Yorkers have no idea how prevalent poverty used to be — or how their predecessors made it go away.

And they’re not the only ones. “We have spent $15 trillion from the federal government fighting poverty,” said Rep. Paul Ryan on Fox News last month, “and look at where we are, the highest poverty rates in a generation, 15 percent of Americans live in poverty.”

Ryan is speaking on behalf of millions of Americans who believe that the War on Poverty was a failure, when in fact it’s one of the greatest success stories in our nation’s history.

If Ryan thinks 15 percent is high, he should go back a hundred years when the poverty rate was three times that. Back then, the government didn’t officially measure poverty, but historians have reconstructed close approximations based on the cost of living and the distribution of household income in those days. Thanks to their calculations, we now know that 44 to 45 percent of Americans lived in poverty in the early 1910s.

A generation later, after the Great Depression and World War II, the poverty rate had fallen to 22 percent.

Can you imagine? They cut the poverty rate in half — from 44 percent to 22 percent — in only a couple decades.

As far as wars go, that’s an astonishing victory. It should be celebrated alongside Gettysburg and Normandy. It should be commemorated and committed to our children’s memories. It should be studied by our civilian leaders in the same way that battlefield strategy is studied by our military leaders.

On this particular battlefield, the strategy that paid off was the New Deal, President Franklin D. Roosevelt’s ambitious series of programs that created jobs for the unemployed, Social Security for the elderly, regulation for the bankers, a minimum wage for the workers, and legal protections for the labor unions.

But the war was not over. One in five Americans still lived below the poverty line. And so, on January 8, 1964, President Lyndon B. Johnson stood before Congress and made it official: “This administration today, here and now, declares unconditional war on poverty.”

Congress proceeded to embark on the Great Society, patching the holes left in Roosevelt’s New Deal. They expanded health insurance with Medicare for the elderly and Medicaid for the poor. They increased Social Security benefits and education funding for poor school districts. They established civil rights and a permanent food stamp program. They invested in urban redevelopment, rural development, and public transportation.

A decade later, the poverty rate bottomed out at 11 percent.

For the second time in half a century, the United States had cut the poverty rate in half — from 22 percent to 11 percent. And just as before, this extraordinary victory faded from our memories, and the policies that spawned it faded from our favor. We allowed labor laws to go unenforced, public investment to decline, and the minimum wage to stagnate even as the cost of living soared. We deregulated banking, and we stopped trying to get enough jobs for the unemployed or enough education funding for poor school districts.

So it’s no surprise that the poverty rate rose to 15 percent during the Great Recession. A century of progress has been forgotten.

Eliminating that final 15 percent is one of the great tasks before us in the 21st century. As we craft new solutions, let us not forget to preserve the old ones — and to honor the memory of those who worked so hard to give us so much.

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

Why President Obama Is Right to Focus on Inequality

Real Household Income, 1967 to 2012

In his recent speech at Knox College, President Obama renewed the nation’s focus on income inequality, drawing criticism from the right for pandering to the usual Democratic interest groups instead of addressing real economic issues like jobs and growth. This reaction stems from a misunderstanding of recent history that is sadly prevalent among the American public. To set the record straight, let’s take a trip back in time…

Three decades ago, we awoke to Ronald Reagan’s “Morning in America.”

It was 1983, and our economy had been through the deepest recession since the Great Depression. Reagan had slashed tax rates and broken the unions. In return, we were promised a bright future with faster economic growth for all.

At first glance, it looks like the Gipper delivered on his promise.

From 1983 to 2013, our economy’s output more than doubled, even after adjusting for inflation. The average worker today is 85 percent more productive than their predecessors were when Reagan took office. Taxes take a much smaller bite out of our income than they did in Reagan’s day, and American businesses are more profitable than ever before.

If the story ends there, it’s not hard to see why Republicans still believe in the power of Reaganomics.

But, as in every good story, there’s a twist. In this case, the twist is inequality, a politically charged word that Republicans rarely speak of. And for good reason: It invalidates their entire belief system.

The aggregate data leads you to believe that everyone’s income doubled, but that’s so far from the truth that it’s nearly criminal to foist that story on the public.

In fact, since 1983, the only incomes that have doubled after inflation are the incomes of the richest 0.1 percent of Americans. That’s one-tenth of the infamous “One Percent.” For the other 99.9 percent of Americans, inflation-adjusted incomes have grown by less than 20 percent.

But that’s a high threshold. In order to be a member of the top 0.1 percent, you have to earn over $1.5 million. What if we set the bar at a more reasonable level? Let’s exclude everyone making over $110,000. That’s a pretty good cutoff for what we consider to be “rich,” and it still leaves us with 90 percent of Americans earning less than that. These are the people who were supposed to enjoy the benefits of Reagan’s “trickle-down economics.” How much didthey gain since 1983?

Nothing.

For the 90 percent of Americans earning less than six figures, there has been absolutely zero income growth after inflation in the last three decades.

Sit back and contemplate that fact for a moment. During a period when the economy doubled in size, the total income earned by 90 percent of Americans didn’t increase by a single penny. All the gains went to the richest 10 percent.

Of course, the size of the economy is not directly comparable to the incomes of individual households. The economy grows when the population grows, even if individual incomes don’t grow. Also, the individual statistics don’t include taxes and transfers like Social Security and unemployment insurance. However, none of these facts change the big picture: After three decades of strong economic growth, the average American’s paycheck has barely budged.

You have to ask yourself: What’s the point? Why do we work so hard to make the economy grow if none of it is going into our pockets?

It hardly seems fair, but that’s not the only problem. Inequality isn’t just the by-product of a broken system; it’s a cause of the brokenness as well.

A growing economy is like a growing child. It needs to be fed often and well. The more an economy produces, the more its citizens must consume. If most Americans aren’t earning more money, they can’t afford all that extra consumption. So they borrow more than they should, but all that borrowing requires growing paychecks to repay the loans. When debt outstrips income, they default, and the economy comes crashing down.

That’s what President Obama meant when he said this crisis has been three decades in the making. That’s why it has become his highest priority. All our economic problems — high unemployment, weak economic growth, excessive debt and financial instability — have the same root cause: Most people aren’t earning enough money — and it’s not because the economy isn’t producing it. It’s because a tiny portion of the population is siphoning too much of it for themselves.

It’s not just a matter of politics, as the President’s critics would have you believe. It’s a matter of basic economics. “Morning in America” has only been bright for a select few. For most Americans, it’s been as dark as night.

The Reaganomics experiment has failed. It’s time for all of us to see the light.

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This op-ed was originally published in today’s Huffington Post.