Reports from the Economic Front

A recent article by economist Rick Wolff highlights one of the many serious challenges facing the country–the growing fiscal crises that are hitting our states and municipalities.  He presents the following table from the work of the Center on Budget and Policy Priorities, which shows the gap between the fifty states’ tax revenues and expenditures during the last (2001) and current (2007-?) recessionary periods.

As the chart makes clear, while a recession generates a budgetary shortfall, the shortfall extends for years after the recession is over.   In particular, the expected shortfall over the next two years will be very large–some $360 billion.   This shortfall will have to be closed through some combination of revenue increases or expenditure cuts.

The CBPP has studied state responses to current budget shortfalls and reports the following:

• 27 states have reduced health benefits for low-income children and families

• 25 states are cutting aid to K-12 schools and other educational programs

• 34 states have cut assistance to state colleges and universities

• 26 states have instituted hiring freezes

• 13 states have announced layoffs

• 22 states have reduced state workers’ wages

With fiscal problems set to grow we need bold action.   If we do nothing budget cuts will only further weaken our economy (by reducing demand)  and worsen living and working conditions for the great majority of citizens.

Oregon is no exception.  In fact, according to a story in the Oregonian, a Pew Center on the States report “names Oregon as one of 10 states at greatest peril of following California over a state budget cliff.  Even though the national economy has started to rebound, Oregon is likely to have a harder time coming up with enough money to pay for schools and other public services — or finding enough places it can cut back its spending — than it did when patching together a balanced budget for 2009-10 said Susan Urahn, managing director of the Pew Center.”

One part of any rational response to this situation has to be increasing revenue by raising taxes on the wealthy and our large corporations.  Oregon is trying to do just that with Measures 66 and 67.  These measures–passed by the legislature but put on the January ballot by opponents–deserve our support.

Obviously significant national action is also needed to address what is a major structural problem.  One obvious response: cut military spending (which continues to grow) and channel some of the savings to state and local governments.

More generally, we need a government-directed, integrated industrial and employment program.  For example, our government owns large holdings in major auto and finance enterprises.  Rather than remain passive owners, we should take control over the firms we own and redirect their activity.  We should start producing mass transit vehicles and require that the banks direct needed funds at reasonable rates to support that production.  And we should direct federal transportation spending to state and local governments so that the new vehicles can be purchased.

We should do the same for the production of needed technology and equipment to develop and expand alternative energy sources like wind and solar power.

At present, federal stimulus money is being used to encourage private firms to retrofit buildings to improve energy efficiency.  Instead, we should encourage the establishment of local publicly owned enterprises to carry out this work, with the profit earned from the work redirected back to local government budgets to support desired social programs.  And all publicly organized production should guarantee living wages and encourage democratic unionization.

Much more could be done—including the cancellation of so called free trade agreements which encourage capital flight and the pitting of workers in one country against another.

The point is that we need a dramatic rethinking and reorganization of how our economy works.  There are plenty of good ideas available—at issue is the political organization and will.

Oregon faces a severe fiscal crisis.  In short, the state is just not taking in enough money to fund all the services needed by people.  In response the 2009 Legislature passed two measures (66 and 67) that will raise $733 million in new revenue in the 2009-11 biennium.  While not a solution to the crisis, this extra money will help reduce cuts in spending on education, health and public safety.  These measures also help produce a more equitable tax structure.

In brief, Measure 66 raises taxes on high income Oregonians—couples earning over $250,000 a year and individuals earning over $125,000 a year.  Measure 67 raises taxes on profitable corporations. (More details on both measures here).

Perhaps not surprisingly, there are those that oppose any tax changes, even ones as important, needed, and justifiable as these.  They succeeded in putting these measures on the January ballot, hoping to get voters to reject them.

One of their arguments is that the tax increases are unfair.  But really what is unfair is the unbalanced nature of our existing tax system (see table below).  For example, as the Oregon Center for Public Policy explains:

Today, low-income Oregonians pay a larger share of their income in state and local taxes than wealthy Oregonians. In fact, the highest-income Oregonians pay the lowest share of their income in state and local taxes. . . . After accounting for the deduction of state income taxes on federal tax returns, the lowest-income Oregonians currently pay 8.7 percent of their income in taxes, the highest share among all income groups. Middle-income Oregonians pay 7.9 percent. The wealthiest 1 percent — households with income in excess of $410,000 and averaging over $1 million — pay only 6.1 percent of their income toward state and local taxes.

The passage of Measure 66 will help move things in a more equitable direction:

The lowest-income Oregonians will still pay the same 8.7 percent of their income in state and local taxes, but the share will increase for those at the highest levels of the income scale. For the wealthiest 1 percent, for example, state and local taxes will increase from 6.1 to 6.6 percent of their income. For the next highest 4 percent of taxpayers, taxes will increase from 7.0 to 7.1 percent of income. These slight changes for those at the top 5 percent of the income scale constitute a small but important step toward making our tax system better based on ability to pay.

Other opponents are calling these measures “job-killer tax increases,” especially Measure 67.  The recently established Oregonians Against Job-Killing Taxes (OAJKT) argues that “Oregon government doesn’t even need the new taxes. They already have the money sitting in bank accounts.”  Their website says that if the measures are defeated “no services have to suffer.”

In a recent Oregonian column, Steve Duin examines those behind the OAJKT effort to overturn Measures 66 and 67.  He concludes as follows:

As Chuck Sheketoff at the Oregon Center for Public Policy noted, these riffs are necessary because only 3 percent of Oregonians will pay higher taxes if Measures 66 and 67 pass. . . .

Tis the season. I’ll end with this. The OAJKT website insists that “the most damaging” tax increase for business would require that a C-corporation with $25 million-$50 million in Oregon sales will now pay a gross sales tax of $30,000.

That’s all? Less than one-tenth of 1 percent? For many companies that, for years, have paid the $10 minimum? Who in the world considers that unreasonable?

A number of economists teaching and working in Oregon have recently published a statement in defense of Measures 66 and 67.   You can read it here.

City budgets are only now feeling the weight of the recession.  Overall city revenues declined in fiscal 2009 for the first time since 2002 (see chart below).

As bad as the last fiscal year was–with overall city revenues down 0.4% while expenses were up 2.5%–the Wall Street Journal reports that “city officials expect steep drops in tax collections in the next two years, making for the worst outlook in the 24 years the [National League of Cities] has been surveying its members. Western cities were particularly downbeat.”

The article goes on to add that “Because employee wages, health care and pensions are a major component of municipal budgets, two-thirds of the cities reported hiring freezes or layoffs.”

It is getting pretty hard to know what policy makers and economists mean when they speak of economic recovery.

There are danger signs pointing to the real possibility of a double dip recession—a short “recovery” followed by another recession.  One of the most important is the terrible labor market conditions (little job creation and short hours and low pay for those with jobs).  Unfortunately, while public employment had helped to offset the collapse in private hiring, a crisis in state government financing is forcing major cutbacks in the public sector as well.

Facing huge budget deficits, states are laying off growing numbers of workers and furloughing even more. This not only makes it difficult for people to get needed services, it also threatens to undermine any (stimulus driven) recovery impulses—you know those famous green shoots.

As the Wall Street Journal reports:

The furloughs, which basically act as salary cuts for state workers, are the latest response to plunges in tax revenue because of the recession. State legislatures have struggled to cover shortfalls that have ballooned to $168 billion, or 24% of their general-fund budgets, for the current fiscal year, which for most began July 1, according to a report released Thursday by the left-leaning Center on Budget Policy Priorities.

State governments have cut some 33,000 jobs over the last year with more to come.  Furloughs, where workers are told to stay home for several days a month without pay—resulting in significant wage cuts—are growing even faster.  Hundreds of thousands of workers are currently affected, more than 200,000 in California alone.  Slashing the public sector may help balance the budget in the short run, but such a strategy only intensifies our long term economic and social problems.

The chart below (taken from the above cited WSJ story) highlights the size of the problem.

There is a new attack on social security.  As you may remember, before the recent collapse of the economy, conservative forces claimed that the social security system was headed for crisis and offered privatization as the solution.

The truth was that there was never a real crisis; it was manufactured.  The health of social security is determined using models to predict economic trends over the next 75 years.  The social security crisis was the result of the assumptions used in the modeling—these assumptions assumed rates of growth that were lower than during the 1930s.  If one made growth assumptions that were more in keeping with historical trends, there was no crisis.  The aim of the conservatives was to push money into the stock market where private interests could make millions managing it.  Thank goodness this privatization push was resisted.

But the same forces are hard at work again.  The Associated Press recently ran a story calling social security a “giant federal Ponzi scheme” that will soon collapse because of a lack of money.  The Washington Post recently warned us that social security is one of “the primary drivers . . . of the nation’s financial problems.”

This is all silly.  Social Security is still running surpluses.  Moreover, even using its conservative assumptions, the social security administration is forced to admit that the current system will have plenty of money to meet all its obligations through 2037.  The Congressional Budget Office puts the date at 2043.

Would you give up a program working as intended because of predictions that SOME 30 YEARS FROM NOW it might not have sufficient money to cover all its promises?

Actually, even if the social security administration’s prediction is accurate, we still don’t face a crisis.   Right now social security taxes are paid on all labor income up to $106,800.  Earnings above that ceiling are not taxed.   Why is this important?  As the Wall Street Journal explained in a recent article titled “Pay of Top Earners Erodes Social Security”:

The data suggest that the payroll tax ceiling hasn’t kept up with the growth in executive pay. As executive pay has increased, the percentage of wages subject to payroll taxes has shrunk, to 83% from 90% in 1982. Compensation that isn’t subject to the portion of payroll tax that funds old-age benefits now represents foregone revenue of $115 billion a year. . . .

Lifting the earnings ceiling could result in higher Social Security benefits payments to higher-income individuals, since benefits are based on a worker’s highest 35 years of earnings. But the additional tax revenue would have decades to earn a return, thus offsetting the cost of the additional payments.

Social Security Administration actuaries estimate removing the earnings ceiling could eliminate the trust fund’s deficit altogether for the next 75 years, or nearly eliminate it if credit toward benefits was provided for the additional taxable earnings.

You are reading that right—even using the most conservative estimates about future economic trends, the social security system would remain fully operational if we just removed the earnings ceiling on the wealthy.

So, what is class power?  One measure of class power is the ability to shape public discussions in such a way that attention is focused on what you want to talk about and away from what you don’t want to talk about.  The rich want social security privatized, not saved.  So the media obligingly give us story after story about the crisis in social security and the need to drastically change the system.

The rich don’t want to talk about the growth in inequality and its negative social consequences.  Thus, simple reforms that would strengthen the system are never discussed (except by publications like the Wall Street Journal which are largely read by an audience that fully understands its class interests).

When will we recognize and promote our own class interest?

On Monday (August 10), Labor Radio–a weekly program that airs on KBOO radio (90.7 FM)–played an interview of me by hosts Deborah Schwartz and Al Bradbury.  We discussed a variety of topics, including the effectiveness of the stimulus, the outlook for the economy, the alleged social security crisis, and the need for structural change in our economy.

You can hear the interview (followed by another that was done by the hosts with Henry Huerta, Campaign Director of the CLEAN Car Wash Campaign, about the unionization efforts of more than ten thousand Los Angeles car washers) at:  http://kboo.fm/node/15826

You can hear an extended (and unaired) version of my interview at: http://kboo.fm/node/15788

The newspapers are full of reports suggesting that the worse may be over—perhaps they are right, but I put little store in reports that rely on economic projections made by the same people that denied we had a bubble economy right up to the moment it popped, and then have been busy ever since telling us that things aren’t too bad.

There is no doubt that the US economy came very close to a complete melt down and that government action has helped break and cushion the fall.  But here is the key point—our economy was not working well for the great majority even during the debt-driven speculative years before the collapse.  With speculative forces now spent and the economic structure unchanged the odds are great that conditions will continue to deteriorate even after our economy does stabilize.

What we have seen so far in terms of economic trends is a slowing of the decline, not a recovery.   We need a new round of stimulus spending to hurry along the recovery.  But even more we need real structural changes—we need changes that will promote livable wages, workplace democracy, full employment, well funded and accountable social programs, and a sustainable and responsive use of our productive resources to satisfy domestic needs not profits.

To appreciate how important the need for structural change is, consider the quality of our last expansion.   The Economic Policy Institute provides some good data for doing this in a very useful report,  “A Feeble Recovery, The Fundamental Economic Weaknesses of the 2001-07 Expansion.”  As the chart below (taken from the report) shows, the last expansion (and full business cycle) ranks among the weakest on almost all counts (the lower the number the better) except one: profits.  And that is why business is not eager to make any real changes.  But remember, our next expansion will not have the “benefit” of the stock and housing bubbles that underpinned our last expansion.   Is a future of worsening economic outcomes really the best we can do?

The following comes from the July 6 Beat the Press blog written by Dean Baker:

The Timing of the Stimulus’ Impact

The economists who missed the housing bubble seem to be having a hard time understanding the timing of the stimulus. While the vast majority of the money has not yet been spent, the economy has already felt the bulk of its impact.

The reason is simply, more than 60 percent of the stimulus takes the form of lower tax rates and higher benefit levels for programs like unemployment insurance. The lower tax rates and higher benefit levels already went effect at the start of the spring. This means that people already have higher take-home pay or government benefit checks. The stimulus will not increase further in future months, which means that there is no reason to expect spending to increase further.

More than a quarter of the remaining stimulus is devoted to state and local government stabilization funds. This spending will limit the cutbacks at the state and local level, but will not lead to additional growth. The remaining funds are projected to be spent out at an $80 billion annual rate over the course of 2010.

Even if we assume that we are starting from zero spending at the moment, this is boost of just over 0.5 percent of GDP. By contrast, the collapse of housing construction trimmed $450 billion or 3.0 percentage points of GDP from annual demand. The decline in consumption due to the loss of bubble wealth is in the range of $600 billion to $800 billion a year.

In other words, the remaining stimulus is an order of magnitude too small to give much of a boost to the economy. Economists who know arithmetic would be aware of this fact.

It is getting harder to sell the “recovery right around the corner” story.  I have been stressing the structural nature of current problems because there is a lot riding on our understanding of what is happening.  If we remain passive, hoping that existing policy is sufficient to nurture the alleged “green shoots” of recovery, we are likely to end up with an economy largely unchanged from the past.  That outcome, while attractive to the few with power and wealth, largely guarantees a future of steadily worsening living and working conditions for the great majority.

So, how bad are things?  As the Financial Post describes:

The U.S. economy has lost the equivalent of every job created in the past nine years.  All job growth since the final year of the dot-com bubble, its recovery from the bust, and the ensuing six years of consumer-driven boom is now gone, leading some economists to fear an outright decline in wages will be next. Others believe the United States is on track for a painful “jobless recovery.”

“This is the only recession since the Great Depression to wipe out all jobs growth from the previous business cycle, a testament both to the enormity of the current crisis and to the extreme weakness of jobs growth over the business cycle from 2000 to 2007,” said Heidi Shierholz, an economist at Washington-based think tank The Economic Policy Institute. . . .

Since the recession began in December 2007, the jobs market has shrunk by 6.5 million positions, pushing the unemployment rate up 4.6 percentage points to 9.5% — the highest rate since 1981. Nine million part-time workers are in want of full-time jobs, and a record 29% of unemployed have been jobless for more than six months. . . .

The employment market’s problems do not end at job losses. Earnings are under pressure. Average hourly earnings rose an annualized 0.7% in the past three months — the smallest gain since records began in 1964. The annual change in hourly earnings slipped to a rise of 2.7% from 3% the previous month.  “Wages will soon be falling outright, a classic deflation signal,” said Ian Shepherdson, the chief U.S. economist at High Frequency Economics.

Compounding problems, average hours worked fell further in June to be down 0.8% to a cyclical low of 33 hours a week. The average workweek has shrunk 8.2% since the start of the recession, placing added pressure on household cash flows. It also means employers will be slow to hire because there is ample room to increase work hours.

The administration needs to be pushed to take much stronger action—its modest stimulus program is not enough to reverse downward pressures and, once its effects dissipate, those pressures are likely to intensify—this could be 1937 all over again.

We need real structural change—in how work is organized and compensated, in how social programs are financed and delivered, and in how the economy is organized and directed.

The recession has cost jobs and income, and thus tax revenue.  Facing huge shortfalls, state governments are preparing to slash social programs and jobs, a response that will only deepen the downturn.

How bad is the problem?  According to a study by the Nelson A. Rockefeller Institute of Government (highlighted in Mish’s Global Economic Trend Analysis):

Total personal income tax collections in January-April 2009 were 26 percent, or about $28.8 billion below the level of a year ago in states for which we have data. In April 2009 alone (April being the month when many states receive the bulk of their balance due or final payments), personal income tax receipts fell by 36.5 percent, or $18.2 billion.

Oregon relies more heavily on personal income taxes (PIT) for revenue then any other state.  Here are some comparison numbers to put Oregon’s problem in perspective:

• 68.5% of Oregon’s Tax Revenue comes from PIT.  First quarter collections were off 27.0%
• 57.2% of Massachusetts’ Tax Revenue comes from PIT. Collections were off 28.5%

• 55.9% of New York’s Tax Revenue comes from PIT. Collections were off 31.8%

• 52.7% of Colorado’s Tax Revenue comes from PIT. Collections were off 25.4%

• 52.4% of Connecticut’s Tax Revenue comes from PIT. Collections were off 25.9%

• 47.5% of California’s’ Tax Revenue comes from PIT. Collections were off 33.8%

The Oregon legislature should be applauded for its recent approval of two bills, one increasing the minimum corporate tax and the other establishing a higher tax rate for individuals making over $125,000 a year or households reporting income over $250,000 a year.  The combination is expected to generate more than $730 million in new revenue, a small but meaningful step in the defense of public services and jobs–and a fairer tax structure.