The Anatomy of a Keynesian Recovery

Almost two and a half years since the recession officially ended, we are finally observing a modest recovery in the job market.  Even if we discount the 42,000 new holiday season jobs for “couriers and messengers,” there is clearly some jobs growth in key sectors of the economy.  Unfortunately, aside for the fact that the recovery is languid and underwhelming by historical standards, it is also unwholesome.  Our economic recovery is similar to a computer that is repaired from a serious virus; it functions adequately but is never the same.  In other words, we are reaping the benefits of a government-managed Keynesian recovery.

During 2008-2009, instead of letting the economy settle and enjoy a robust recovery through the perennial business cycle, the Bush and Obama administrations engaged in fiscal stimulus, monetary stimulus, housing stimulus, bailouts, and takeovers of major industries.  Perforce, our economy, as much is it will inevitably recover, will be fundamentally weaker than it was prior to the recession.  Historically, we have always come out of recessions in a stronger position than prior to the economic downturn, but not this time.

Nothing is more emblematic of our permanently damaged economy than the interminable shrinkage of our labor force.  Our labor force is roughly 850,000 smaller than it was when the recession ended in middle of 2009, even though the civilian population of working age people has increased by roughly 4 million.  At this point in the Reagan recovery, the labor force had expanded by 4 million.

The labor force participation rate has steadily declined from 65.7% in mid-2009 to 64.0%, even as unemployment has eased.  During that same period, almost another 200,000 people gave up looking for work.  If the participation rate were back to its recent average, the U3 unemployment rate would be well over 11%.  This is not even accounting for the U6 number of underemployed and part-time workers, which is still astronomically high (15.2%).  Overall, 23.7 million are either out of work or underemployed.

Oh, and what about the fact that the Black unemployment rate has climbed another 0.8% to 15.8% over the past three months?  Is this good news?  Or is it more soft bigotry of low expectations?

More Problems With Senate Extenders Package

The Senate-passed payroll tax cut extenders package was already on the ropes with House Republicans over the weekend.  The bill (HR 3630) offers a pathetic two-month extension of the payroll tax cut.  In addition, it extends long-term unemployment benefits for the ninth time, along with the annual Medicare doc fix.  The bill gutted all House-passed reforms to medicare and unemployment insurance, while offsetting the cost through phantom revenue increases generated through Freddie and Fannie.  Reliance on these fees for spending offsets will actually make it more difficult to close down these harmful entities.

Today, we are discovering two more problems with the Senate package:

1) Earlier today, Senators Brown, Heller, and Lugar blasted House Republicans for holding up the short-term deal.  “There is no reason to hold up the short-term extension while a more comprehensive deal is being worked out,”cried Heller.  Well, here is a good reason.

Aside for the obvious vices of a two-month payroll tax extension, this tenuous law will make life difficult for providers of payroll processing services.  Section 101 of the legislation establishes a new Social Security Taxable Wage limit of $18,350.  All wages in excess of $18,350 for January and February will be taxed at the old rate of 6.2%.  This provision was inserted in order to preclude those with high incomes from meeting their full payroll tax obligation during the first two months.  Such an eventuality would create a disparity in which middle-income earners, who would still incur a payroll tax liability after February, would pay a higher rate (6.2%) on the rest of their income than high-income earners would have to pay.  Many high-income earners receive large bonuses at the beginning of the year, and Democrats were not about to let them take advantage of this short-term payroll tax cut.

Now, the National Payroll Reporting Consortium (NPRC), a trade association representing payroll processing companies, is charging that this provision is untenable.  Such a drastic change would force payroll processors to implement significant changes to their program software.  In a letter sent to the chairmen of the tax-writing committees obtained by Jake Tapper, NPRC's president warns that there is not enough time to implement these changes before January.

A full 12-month extension would obviate the need for this wage limit, thereby sparing payroll processors the two-month headache.  Unfortunately, Senator Brown excoriated House Republicans for fighting the Senate bill, calling their "plan to scuttle the deal to help middle-class families" "irresponsible and wrong."  The only thing irresponsible and wrong was his vote for an inane two-month extension.

House Must Decouple Payroll Tax Cut From Broader ‘Extenders’ Package

“The Senate action was akin to grounding into a triple play for Team GOP, yet the underlying bill passed with unanimous consent.”

Over the weekend, Mitch McConnell and Senate Republicans obviated the superior leverage of House Republicans by passing a two-month extension of the payroll tax cut, along with a clean extension (no reforms and offsets) of doc fix and unemployment benefits.

In a premature capitulation, they agreed (89-10) to amend the House extenders bill by eliminating most of the spending offsets, all of the UI reforms and the policy riders, with the exception of the Keystone pipeline provision.  They will fill in the $33 billion two-month gaping budget hole with nebulous revenue increases from higher Freddie/Fannie mortgages over ten years.  To the extent that those revenues will be actualized, this deal will indeed make it harder to shut down these officious venture-socialist enterprises.  The Senate action was akin to grounding into a triple play for Team GOP, yet the underlying bill passed with unanimous consent.

Yes – we can already see the ecstatic pronouncements emanating from the McConnell Republican echo chamber.  “We got the pipeline,” they will exclaim.  But here is the problem: the ship already sailed on that.  This issue was such a political liability for Obama that, despite his rhetoric, it was a foregone conclusion he would be forced to cave on it.  He was not going to allow this to become an albatross around his neck during the election.  Accordingly, the White House is lending enthusiastic support to McConnell's Senate-passed extension.  Besides, due to loopholes in the Keystone provision, the administration is already balking at compliance with the language of the bill.

This is all about understanding your leverage; something that has been lost on GOP leaders throughout the year.  And speaking of leverage, this capitulation has totally undermined the superior leverage of House Republicans.

Until Saturday, the House was the only body that had proposed a workable solution to preempt a tax increase on every American worker.  The Democrats had been on the run for the entire week.  Sadly, in his last act of the year, McConnell, in what appears to be a unilateral move, has launched a drive-by preemptive assault on the House-passed proposal.  Was he in such a rush to get home?

Now House Republicans are incensed, and for good reason.

The GOP Payroll Tax Cut/UI Extension Proposal

“will they finally hold the line on their own promises this time, or will they pass all the extensions without the reforms, riders, and spending offsets? This package must be the final offer.”

Earlier today, House Republican leaders unveiled their package deal to extend the payroll tax and unemployment benefits for another year and to continue Medicare ‘doc fix’ for another two years.

While bipartisan passage of the payroll tax cut and doc fix were a forgone conclusion, the real issues for conservatives were the UI extension and the spending cuts.  Unfortunately, they are acquiescing to another extension, albeit with some reforms.
The major reforms include mandatory drug testing and participation in reemployment services as a condition for receiving benefits.  Those receiving the 99 weeks of UI will gradually be reduced to 79, and then finally 59 weeks.  Also, states would be authorized to use some of the funds for job training programs.  The UI component of the bill falls short of transformational reform, but at least it precludes 99 weeks from becoming the standard duration of payments.

In order to ameliorate yet another welfare extension for conservative members, two more sweeteners were added: 1) A law to force Obama’s hand on the Keystone Pipeline 2) A provision that would keep illegal immigrants from receiving the refundable portion of the Child Tax Credit, by requiring that recipients provide a valid SSN.  This would save $10 billion over 10 years, according the GOP sources [more background on that issue here].  The bill also has a provision to reduce Clean Air Act regulations for industrial boilers.

The proposal, which includes the aforementioned three extensions, will cost about $200 billion.  Republicans say they will pay for it with the following reforms, many of which were adopted from the Senate Republican proposal:

Don't Conflate Super-Long Unemployment Extension With Payroll Tax Cut

The outcome of the impending payroll tax imbroglio seems to be clear.  With Republicans offering spending offsets and Democrats demanding tax increases, my safe premonition is that, for better or worse, the simple tax cut extension will pass, albeit without either "offset" plan.  Due to some divisions among conservatives, such an outcome seems to be intractable at this point.

At this point, we must focus on unemployment benefits with a unified message.  My concern is that all of the proposed GOP packages conflate the passage of the payroll tax cut with UI extension.  We all know that Democrats will abjure all Republican proposals to pay for the package, most notably, cuts to the federal workforce.  The only thing this package will do is telegraph a public message to Democrats and the voters that Republicans agree to the premise of extending unemployment benefits.

As the clock winds down toward Christmas break, and Democrats balk at spending offsets, Republicans will once again be forced to acquiesce to yet another aspect of Obama's Santa Claus stimulus package.  Worse, conservatives who want to support the tax cut will be forced to vote for a package of unprecedented UI benefits – without any offsets or structural reforms to the program.  By voting for the full package, conservatives will be going on record as supporting UI extension.  Then, the offsets will be jettisoned from the deal by Democrats, forcing conservatives into a no-win situation on the last day of the session.

At the very least, the GOP proposal for UI must be decoupled from the payroll tax bill.


Earlier this week, we laid out the case why Republicans should oppose the entire premise of a 99-week UI extension, irrespective of spending offsets.  They must make it clear to Democrats that they will not pass an extension unless consequential structural reforms are made to the program.  Any serious reform must restructure the program to resemble the insurance plan that originally characterized the program, instead of a new mandatory unfunded liability that resembles more of a European style welfare plan.  Reforms that focus on pocket change from the few millionaires or prisoners who collect UI are non-sequiturs.

Republicans should pass a standalone UI reform bill, and make it clear to Democrats that it is their bottom line.  Then they should go home.

As the program is currently constituted, it must not be extended.  Conservatives understand that we won't come away with everything from the end-of-year legislative fights.  Nonetheless, we should not walk into a trap of bundling tax cuts with the creation of a defacto permanent entitlement program.

We Need Employment Benefits, Not Another Permanent Welfare Program

Force Democrats to pay unemployment reparations from their own coffers 

Here we go again.  After a full year of grandstanding against another extension of unemployment benefits, some Republicans are ready to cave.

“do we believe in free-market doctrine, which suggests that extended UI hurts the economy, or the Keynesian multiplier, which suggests that UI helps the economy?”

If you ever wondered why it is so hard to cut spending, and more importantly, to downsize government, look no further than the fight over extending unemployment benefits.

Despite a year full of political parlance concerning budget austerity, many have forgotten that we have only cut $6.67 billion from the FY 2011 $1.049 trillion discretionary budget authority.  Even this miniscule cut might be cancelled out by up to $11 billion in emergency disaster spending, which is not subject to the spending caps.  Moreover, after just one year of cuts, discretionary spending will steadily rise during each subsequent year, albeit at a slower rate than originally proposed by Obama.

But there is a more salient observation that must be publicized.  These miniscule cuts, including the faux baseline cuts, are only applied to 28% of the budget – the part that is funded through the congressional appropriations process.  The other parts of the budget are virtually unscathed, even from baseline cuts.  To that end, even as we cut a few billion from baseline discretionary spending, we will still add hundreds of billions more in mandatory spending for each subsequent year.

These mandatory programs have created such inveterate dependency constituencies that nobody wants to touch them with a ten-foot pole.  Even if we exclude Social Security, Medicare, and veteran’s benefits, there are still almost $800 billion in other mandatory programs, most of which is spent on welfare.  This has become the fastest growing part of the budget, yet it will remain completely fortified from any budget control mechanisms.

The Unemployment Insurance (UI) program has been one of the biggest drivers of increased ‘other mandatory spending’.  Over the past two years, due to unprecedented 99 weeks of unemployment benefits and bankrupt state unemployment programs, the UI program has cost between $130-160 billion per year, rapidly becoming the fourth largest expenditure (behind Medicaid) in the budget.

Are we prepared to eschew free-market principles, and permanently enshrine UI as part of the entitlement state?

How Good are the New Unemployment Numbers?

The much anticipated November jobs number have been posted.  Here is a rundown of some of the highlights:

• Jobs created in November:  The net increase in new jobs this month was 120,000.  There were 140,000 jobs added to the private sector, while the public sector shed 20,000.  The U3 unemployment number dropped from 9.0% to 8.6%.  In more good news, September’s numbers were revised up to 210,000 from 158,000, while October’s jobs numbers were boasted by 20,000 to a total of 100,000.  Also, the U6 number, which counts discouraged workers, dropped to 15.6 percent from 16.2 percent, its lowest level since March 2009.
• Types of Jobs:  The largest share of new jobs came from the retail industry, which saw a 50,000 spike.  On the other hand, manufacturing only gained 2,000, while construction shed another 12,000 jobs.  This might be an indication that a lot of these jobs are temporary increases for the Christmas shopping season.  Another related point is that the sharpest drop in unemployment was amongst those with little or no college education.
• Size of civilian labor force:  So why is this, at best, a mediocre jobs report?  Well, if you shrink the size of the pool, the unemployment rate will actually go down.  While a net-120,000 jobs were added in November, the civilian labor force shrunk by 315,000.  In October, the civilian labor force stood at 154.198 million.  Now, there are only 153.883 in the labor force.  Moreover, the Civilian noninstitutional population grew by 172,000, yet there are now 487,000 more people not in the labor force than there were in October.  Consequently, the labor participation number dropped from 64.2% to 64.0%.  This, along with the upward revisions from the past two months, has caused the U3 rate to drop by .4%.
• Duration of unemployment: The average (mean) duration of unemployment is 40.9 weeks, a record high. By comparison, the average duration was 19.9 weeks in January 2009.
• Comparison to January 2009-Obama’s inauguration date:  In January 2009, the labor force stood at 154.185.  This means that a net 302,000 people have left the labor force since Obama was inaugurated.  Concurrently, the size of the working age population grew over 5.7 million from 234.739 million at the time Obama was sworn in.  Also, in January 2009, 142.201 million were employed, over 1.62 million more than today.   So we have a larger population, a smaller workforce (resulting from discouraged workers), and more unemployed.  As AEI’s James Pethokoukis points out, if the labor force was the same size as when Obama took office, the U3 rate would be 11%.

Illegal Aliens Receive $4.2 Billion in Additional Child Tax Credits

What happened to the balanced approach toward revenue?

 

Throughout the entire debt ceiling imbroglio, Democrats incessantly regurgitated the talking point about the need for “a balanced approach.”  They were so uniform and synchronized that they sounded like the sheep in Animal Farm.  Ironically, their idea of a balanced approach was singularly focused upon Oil Company and corporate tax deductions, which are negligible compared to the crushing debt.  The targeted oil tax deductions would have brought in $2 billion in annual revenue, while the cancellation of the corporate jet depreciation deduction would have saved only $3 billion over 10 years!

Well, it turns out that illegal aliens, most of which pay zero in net taxes, enjoyed $4.2 billion from the Additional Child Tax Credit (ACTC) last year.  That’s more than the annual revenue from the selected oil tax deductions and corporate jet deductions combined!

Yesterday, the Treasury Inspector General for Tax Collection released a shocking report detailing how illegal aliens are able to utilize a filing loophole to obtain billions in ACTC funds.  The Earned Income Tax Credit (EITC) and ACTC (unlike the base child tax credit) are totally refundable and can award the recipient with a negative tax balance.  Appropriations for the EITC in FY 2010 were $54.7 billion and $28.3 billion for the ACTC.  While EITC appropriations are protected from illegals (those who don’t engage in identity theft) because they are only awarded to those who provide a valid Social Security number, the same cannot be said for the ACTC.

Here is the punchline of the Inspector’s report:

Say No to Baucus Trade Deal

 Didn't we all play mock Senate in middle school?

While Obama has spent the past two years pandering to leftist dictators in Latin America, he has also impeded ratification of free trade agreements with our allies.  Along with Democrat leaders in Congress, Obama has refused to approve the 5-year-old trade pacts with Columbia, Panama, and South Korea unless Republicans agree to renew a trade subsidy program known as Trade Adjustment Assistance (TAA).  Yesterday, Senator Max Baucus (D-MT) announced that he had secured a novel compromise with House Ways and Means Chairman Dave Camp (R-Mich.) and the president.  Drum roll.... He will agree to fast track the trade agreements if ...Republicans agree to renew the TAA program!  Wow, who needed two years' worth of negotiations?

The Trade Adjustment Assistance, which expired in February, is nothing more than a welfare program that is subjectively doled out to anyone who offers a dubious claim that they lost a job due to trade agreements.  Like many other programs, the TAA was drastically expanded under the stimulus bill to include all sorts of workers at a cost of over $1 billion, and has been used as a slush fund for special interests.  Keep in mind that this program is totally independent from the unemployment benefits that are already being offered for an unprecedented 99-week period.  The TAA grants some unemployed workers assistance for up to three years.  The continuation of this program until 2013, as proposed by Baucus, would only serve to perpetuate unemployment the same way that hyper long-term unemployment benefits do.  Besides, like all federal jobs programs, studies show that TAA has failed to boost long-term success for the unemployed.

Baucus plans to pair the TAA reauthorization with the South Korean trade implementation bill and hold a "mock markup" of all three bills at the Senate Finance Committee on Thursday to hash out the details of the compromise.  Under the Trade Act of 1974, in order to fast-track trade agreements, Congress cannot amend or filibuster the implementation law for the agreement, even in committee.  The whole point was to preempt poison pills from protectionists by forcing an up or down vote on the final trade agreement.

Consequently, Baucus cannot hold a real markup to work out amendments and compromises.  Instead, he is scheduling a backdoor wheeling and dealing session being dubbed as a mock markup.  Presumably, a mock markup is the most productive thing this Senate can do, being that they failed to produce a budget for almost 800 days, have not passed a single important piece of legislation this session, and plan to lighten their "burden" of 'advise and consent' on presidential appointees.