Piggybacking on my earlier post, this post outlines the five job creation proposals in our new paper, Navigating the fiscal obstacle course, which offers policymakers a realistic blueprint for moderating the pace of deficit reduction to boost growth and employment. These job creation policies are also adopted in a comprehensive federal budget proposal that EPI will release on Friday as part of the Peter G. Peterson Foundation 2012 Solutions Initiative.

FULL ANALYSIS FROM EPI: Budget battles in the lame duck and beyond

Relative to current policy, our paper recommends investing roughly $600 billion over the next decade, mostly over the next three years, in emergency unemployment benefits, aid to state governments, infrastructure investment, investing in teachers and school modernizations, and a one-year targeted tax rebate.1 These are all cost-effective ways to boost demand, and EPI endorsed variations of each of these proposals in our Sept. 2011 paper Putting America back to work: Policies for job creation and stronger economic growth. Note that any purported “resolution” of the fiscal obstacle course (e.g., a “grand bargain”) that omits these or similar proposals for increasing near-term budget deficits relative to current policy unequivocally fails the challenge actually facing policymakers, which is to sustain and accelerate the recovery.

Emergency Unemployment Compensation

We propose restoring the Emergency Unemployment Compensation program to again support up to 99 weeks of benefits in high unemployment states Read more

Yesterday, my colleague Josh Bivens and I released a paper, Navigating the fiscal obstacle course, intended to offer a realistic blueprint—one that accounts for the constraints regrettably imposed by the current political climate—for how policymakers should navigate the so-called “fiscal cliff” of legislated spending reductions and expiring tax cuts scheduled for 2013. At its core, the fiscal cliff reveals the macroeconomic reality that budget deficits closing too quickly—thus public debt accumulating too slowly—will, if left unaddressed deep into 2013, push the U.S. economy into an austerity-induced recession. Contrary to the misplaced but pervasive inside-the-Beltway hand-wringing of recent years about rising public debt, this outlook implies that big budget deficits and rising public debt have been sustaining growth and economic recovery in recent years. The only way for policymakers to successfully navigate the scheduled fiscal restraint is to substantially moderate the pace of deficit reduction while the economy remains depressed—meaning for several years at minimum.

FULL ANALYSIS FROM EPI: Budget battles in the lame duck and beyond

Our recommendations build on our analysis from a recent paper, A fiscal obstacle course, not a cliff, which argued that “cliff” is a terrible metaphor because it implies Read more

Today, the Census Bureau released new data from the Research Supplemental Poverty Measure (SPM) that showed that more Americans are likely in poverty than is reflected by the official federal poverty line. The SPM estimates for 2011 show a poverty rate of 16.1 percent, or roughly 49.7 million people, which is higher than the official poverty rate of 15.1 percent, or 46.6 million people.

First introduced last year, the SPM attempts to make a more holistic appraisal of household well-being by incorporating greater detail on real household expenses and additional resources available to households through government programs. The SPM also takes into account individuals’ residence type (renters, homeowners, homeowners with a mortgage), and regional differences in consumer prices.

With this inclusion of more detailed data on government assistance, the SPM allows for some interesting back-of-the-envelope calculations on the poverty-fighting effects of these programs. Read more

Here’s some reading material for you from items EPI’s research team skimmed through today:

• “Help Wanted: Regulatory Czar with Commitment to Protecting Public Health, Worker and Consumer Safety, and the Environment” (Center for Progressive Reform)
• “Offsetting a Carbon Tax’s Cost on Low-Income Households” (Congressional Budget Office)
• “How to Bridge the Hiring Gap” (New York Times)

The normally-useful Wonkblog potentially leads some readers this past weekend to the wrong by pointing to a recent study on the effects of NAFTA and concluding:

“This is the pattern generally with trade liberalization. All else being equal, all parties tend to benefit, but developing countries benefit most.” [Emphasis added]

If by “parties” they mean “countries,” then this is roughly right. If by “parties” they mean “people,” then this is really wrong.

See here (and here if you really have some time to kill), but the rough story is simply that for the U.S., expansions of trade with poorer trading partners should be expected to raise national income while still lowering wages for most American workers. Even worse, the higher the national gains from trade, the larger the losses are for most American workers.

Lastly, it’s important to note that the vast majority of economic gains from an agreement like NAFTA for poor countries like Mexico could actually be obtained by Mexico unilaterally. That is, most gains come from countries reducing their own tariffs, not in gaining market access abroad. So, Mexico didn’t need NAFTA to achieve these gains—they could have had them on their own.

After serving our country, many of our nation’s veterans come home to low-wage jobs. In fact, of the more than 9 million veterans in the workforce today, over a million would see their wages go up if Congress were to pass the Fair Minimum Wage Act of 2012. The bill, introduced by Iowa Sen. Tom Harkin in the Senate and Calif. Rep. George Miller in the House, would raise the federal minimum wage from $7.25 per hour to $9.80 per hour in three increases of 85 cents, and then index it to inflation.

A few months ago, we released an analysis of the Harkin/Miller bill that showed that more than 28 million workers nationwide would see a wage increase as a result of the legislation (including the parents of more than 21 million children). Of these 28 million affected workers, roughly 1.1 million are veterans (655,000 directly-affected; 417,000 indirectly-affected)1. Here’s a full demographic profile of affected veterans.

The veteran population that would be affected by raising the minimum wage to $9.80 is similar to the overall population of workers who would be affected by the increase, yet there are a few noticeable differencesRead more

Piggybacking on my colleague Josh Bivens’ previous post regarding the unfounded but pervasive political view that any near-term stimulus be conditioned on long-term deficit reduction, I want to clarify that Speaker of the House John Boehner (R-Ohio) isn’t even talking about this “knife-edge” tradeoff between near-term stimulus and long-run deficit reduction—he’s only talking about the misplaced deficit-reduction plunge. Recent reporting (e.g., the New York Times) has described Boehner as striking a “conciliatory” tone in pledging to resolve the so-called “fiscal cliff,” but there’s a huge difference between professed willingness to compromise and talking policies to address the actual economic challenge facing Congress. Here’s Boehner at a press conference on Friday:

“Now, 2013 should be the year we begin to solve our debt through tax reform and entitlement reform, and I’m proposing that we avert the fiscal cliff together in a manner that ensures that 2013 is finally the year that our government comes to grips with the major problems that are facing us … [and later in Q&A:] Clearly the deficit is a drag on our economy.”

As I explained recently, the only way a deficit reduction “grand bargain” could successfully navigate the fiscal obstacle course is Read more

The Congressional Budget Office (CBO) issued a new report yesterday, Economic Effects of Policies Contributing to Fiscal Tightening in 2013, confirming the major findings of a recent EPI report.

But, since they have a much larger megaphone than us, it’s useful to use this to reiterate the main points people should know about in discussions over the “fiscal cliff” or, as we call it (for reasons explained below), the “fiscal obstacle course.”

FULL ANALYSIS FROM EPI: Budget battles in the lame duck and beyond

First, the problem posed by the fiscal obstacle course is that budget deficits are falling too quickly in the next two years, and public debt is not rising quickly enough. This is thankfully becoming a bit clearer in discussions about all of this, but it’s always useful to reiterate. Often the fiscal problem—too often referred to as a looming “crisis”—is (mis)represented as the U.S. economy being poised on some knife-edge, where the (clear and present) danger of overly rapid deficit reduction in the next couple of years must be solved only if the (speculative and not imminent) danger of projected long-run structural budget deficits crowding out private investment (by increasing borrowing costs) is also simultaneously addressed. This idea that the U.S. economy is poised between these two roughly equal dangers is why the assumption is often made that the fiscal obstacle course can only be solved with some “grand bargain” Read more

This piece originally appeared on Huffington Post

The American public has repeatedly indicated that the health of the economy is their biggest concern. An Associated Press election-day exit poll found that 59 percent of voters considered the economy to be the most important issue facing the country while only 15 percent considered the deficit to be the number one issue. And when voters say “the economy” they mean jobs and the rising cost of living.

President Obama’s re-election depended significantly on America’s growing numbers of racial and ethnic minorities. For these groups too, the economy is the number one issue. An October CNN poll found that 44 percent of Latinos considered the economy to be the most important issue. Only 6 percent mentioned the deficit. Immigration reform ranked second at 14 percent. A survey of black voters in battleground states also found that jobs and wages were top issues for blacks.

Obama received an impressive 11 percentage-point gain in his share of the Asian-American electorate in the 2012 election relative to 2008. This increase in Asian votes helped him win the swing state of Virginia. For Asian-American voters as with other groups, the economy is the number one issue. Read more

This post originally appeared in The Century Foundation’s series “What’s Next? TCF Fellows Look Ahead at President Obama’s Second Term.”

With the end of the 2012 election, policymakers’ focus will pivot to the so-called “fiscal cliff” of legislated spending reductions and expiring tax cuts scheduled for 2013, which are projected to induce a recession if they materialize. So what does President Barack Obama’s re-election imply for navigating the “fiscal cliff,” both in terms of his budgetary proposals’ economic impacts and their political viability?

FULL ANALYSIS FROM EPI: Budget battles in the lame duck and beyond

The “fiscal cliff” exposes that the pace of deficit reduction must be moderated to sustain economic recovery. “Cliff,” however, is a terrible metaphor because it implies a false dichotomy; we prefer “obstacle course” as the numerous separable policies should be weighed on their merits. A recent paper I coauthored with my colleague Josh Bivens concluded that the upper-income Bush-era tax cuts and recent estate tax cuts fail any reasonable cost-benefit analysis and should expire; these policies are the least supportive of jobs of all fiscal obstacle course components. Expiration of remaining stimulus measures—notably the payroll tax cut and emergency unemployment benefits—and looming spending cuts from last summer’s debt ceiling deal actually pose the gravest economic drags.Read more

The election results signaled that the implementation of essential financial regulations can go forward, increasing the likelihood of stable and sustained economic growth. Yet despite this fresh indication of support for curbing the excesses of Wall Street (including the  election of Elizabeth Warren, the most powerful consumer advocate in the country and an insightful critic of the financial industry), the lame duck Congress may, under the public radar, act in a contrary fashion. There is some momentum to move forward legislation that would severely hamper financial regulators, over objections by leading regulators at the federal and state level, and without appropriate due diligence about the bill’s effects.

Specifically, one would hope and expect the lame duck Senate to do nothing to compromise the authority of independent agencies like the SEC and the Consumer Financial Protection Bureau as they implement the Dodd-Frank reforms of Wall Street and the financial sector. Nonetheless, as New York Times editorial writer Teresa Tritch warns, the Senate Homeland Security and Government Affairs Committee might quickly take up and approve legislation to diminish the independence of these important agencies and many others, including the Consumer Product Safety Commission and the National Labor Relations Board. Read more

This piece originally appeared on the Huffington Post

Writing in The Washington Post recently, former Sens. Pete Domenici (R-N.M.) and Sam Nunn (D-Ga.) argued that enacting a bipartisan deficit reduction “grand bargain” could be instrumental in addressing the so-called “fiscal cliff” of legislated spending reductions and expiring tax cuts scheduled for the beginning of 2013. A grand bargain could theoretically mitigate the sizable pending fiscal headwinds, but a deal could also close deficits too quickly, pushing the economy into an austerity-induced recession. Nothing in their op-ed or the two grand bargains it references demonstrates how such a compromise could successfully clear the “fiscal cliff.”

FULL ANALYSIS FROM EPI: Budget battles in the lame duck and beyond

At its core the “fiscal cliff” represents the macroeconomic reality that budget deficits closing too quickly—and public debt accumulating too slowly—will push the U.S. economy back into recession. The scheduled spending cuts and tax increases comprising the legislated fiscal tightening are separable policies, all with varying budgetary costs and a wide range of economic impacts; we decomposed these à la carte in our recent paper, A fiscal obstacle course, not a cliff. “Cliff” is a terrible metaphor, as it implies a binary choice, whereas each policy should be weighed on its economic impacts and budgetary costs. Government spending cuts are more economically damaging than tax increases, particularly for upper-income households and businesses, but tax increases will drag on growth to varying degrees. Collectively, the legislated fiscal tightening would shave 3.7 percentage points from real GDP growth, and the U.S. would experience a 2.9-percent contraction in the first half of 2013, pushing unemployment back above 9 percentRead more

The New York Times has reported that the nonpartisan Congressional Research Service (CRS) has withdrawn a September report (though it can be found on the Senate Democratic Policy Committee site) that examined the relationship between top tax rates and economic outcomes. CRS made the decision in response to objections raised by Senate Minority Leader Mitch McConnell (R-Ky.) and other GOP senators about the reports “tone and … its findings.”

We’ll leave arguments about tone aside for a moment and focus on the research quality of the report and whether or not the GOP objections have any basis. Spoiler alert: they don’t. The report mostly just confirms what a rich economic literature already has shown: Raising marginal tax rates on the highest incomes just doesn’t have much impact at all on aggregate economic indicators, though it does have considerable impact on inequality.

This is shown in the report through a wide range of descriptive data and scatter plots that show very little obvious relationship between top tax rates and aggregate economic indicators, but which show striking relationships between falling top tax rates in recent decades and the share of overall income accruing to the top 1 percent of households. It then tests to see if these simple two-way relationships hold in a multivariate regression. They do.

So what are the allegedly substantive objections raised by GOP senators to this report? Read more

The Center for Immigration Studies issued an alarming-sounding report yesterday that, at first glance, seemed to indicate that immigrants have gotten most of the jobs during the recovery from the Great Recession. In fact, the great majority of jobs gained back since the recession have gone to natives, but clever cherry-picking of the comparison dates by CIS could trick a reader into believing otherwise.

The following figure from the CIS report tells the story:

Employment declined from 2009, when President Obama took office, to early 2010, continuing the employment shrinkage that began in 2007 and escalated in 2008. Natives, who make up 84 percent of the workforce, took the brunt of the recession’s job losses. Read more

Here’s some of the interesting content that EPI’s research team browsed through today:

• “Nonpartisan Tax Report Withdrawn After GOP Protest” (New York Times)
• “With paychecks, size matters” (Los Angeles Times)
• “Mexico is now a top producer of engineers, but where are jobs?” (Washington Post)
• “Wary of Future, Professionals Leave China in Record Numbers” (New York Times)

Suzy Khimm wrote an excellent post (during a hurricane, no less) earlier this week on the incoherence of those screaming about the alleged dangers of mounting public debt while also fretting about the “fiscal cliff.” To reiterate her point and be very clear (again) on this: The danger of going over the “fiscal cliff” (bad metaphor, by the way) is that budget deficits will fall, not rise, too quickly. This is very confusing to far too many economic commentators and policymakers because they have been trained to a near-Pavlovian degree to think the federal budget deficit is always too high and rising too quickly.

FULL ANALYSIS FROM EPI: Budget battles in the lame duck and beyond

This failure to realize that there should be much more to consider when making fiscal policy than “deficit BAD” has been a big problem in dealing with the Great Recession and its aftermath (see this blog post for an extended take on this).

So, I applaud Khimm’s campaign to spread the word that if you’re worrying about the “fiscal cliff,” then you’re a Keynesian, period. Read more

Here’s some thought-provoking content that EPI’s research team enjoyed reading today:

• “A Big Storm Requires Big Government” (New York Times)
• “Mitt Romney’s voodoo spending cuts” (Wonkblog)
• “Scoop Dupes” (Paul Krugman)

President Obama and Secretary of Education Arne Duncan claim that the poor achievement of African-American students is the “civil rights issue of our time.” Yet there is little chance that the achievement gap between white and black students will be narrowed significantly, as long as large numbers of disadvantaged children are concentrated in racially segregated and economically bereft urban neighborhoods. In these (to use William Julius Wilson’s term) “truly disadvantaged” neighborhoods, teachers are overwhelmed by the impediments to learning that children bring to school, and that reinforce each other in racially and economically isolated classrooms. None of this can change substantially until metropolitan areas are residentially desegregated.

An investigation by Nikole Hannah-Jones for ProPublica, “Living Apart: How the Government Betrayed a Landmark Civil Rights Law,” published this week, demonstrates that the Obama administration and its predecessors have done little to promote residential integration.

Specifically, Hannah-Jones exposes the contempt with which the federal government, for 45 years, has ignored its obligation under the 1968 Fair Housing Act to “affirmatively further” the goal of racial desegregation. Read more

A recent blog post by the Heritage Foundation’s Derek Scissors claims that my estimates of the number of jobs lost due to growing trade deficits with China “are demonstrably wrong.” Scissors then fails to demonstrate how they’re wrong.

That’s because he can’t. The economic models used in our report (Scott 2012, 9, Appendix and note 15) are the gold standard for research on the employment effects of trade, and “all but identical models” have been used in similar studies by the Federal Reserve Bank of New York, by Martin Bailey and Robert Lawrence of the Brookings Institution, and in a U.S. Commerce Department study that represents the work of more than 20 government economists including the chief economists from that agency and the Office of the U.S. Trade Representative.

At its core, our model is based on a straightforward application of Keynesian economics and national income accounting, which show that exports stimulate the domestic economy while imports reduce demand for domestic products. Scissors (and many others before him, such as Dan Griswold at Cato and the U.S. China Business Council) claims that imports are good for the economy, in part because they are correlated with growth. But this assertion ignores two fundamental questionsRead more

It’s hard to improve upon Dean Baker’s response to Robert Samuelson’s deeply confused column about government jobs, but I’ll just add briefly here.

It’s entirely clear that the whole discussion over “government creating jobs” sparked by President Obama’s closing statement in the second presidential debate is really about the role of public-sector hiring or cutbacks as something that either cushions or exacerbates the current problem of chronically high unemployment rates.

This debate just can’t be about anything else, because it would just be too silly. And it surely can’t really be about what Samuelson spends most of his column doing: wondering whether or not government jobs are really jobs.

Government jobs are jobs, period. Nothing about the fact that they require “money to support [them]” or that public hiring can lead to “substituting public-sector workers for private-sector workers” changes this. As Baker notes, private-sector jobs “require money” to support them, and, there are plenty of times when rising private employment in one sector drives declining private employment in another. This all just seems too obvious to need pointing out.

No, the issue is whether or not cutbacks to public-sector employment when the economy has lots of productive slack lead to net economy-wide job loss, and just how much. The answers to this are “they do,” and, “a lot.” Around 2.3 million is our estimate, cited by the New York Times.

Samuelson notes that government spending during times of economic slumps can boost net job creation, but then notes that the idea of fiscal stimulus is “fiercely debated” and says he doesn’t “intend to settle this debate either.”

That’s too bad, and I wonder why not? After all, that particular debate (i.e., is contractionary fiscal policy really contractionary?) really isn’t particularly hard.

But then again, I didn’t think that it was so hard to recognize what a “job” is, either.

The impact of each presidential election on the makeup of the Supreme Court receives plenty of media attention and is analyzed extensively by experts and court watchers—and deservedly so. During the vice presidential debate, Vice President Biden predicted that the next president is likely to appoint “one or two” justices to the nation’s highest court. Although this prediction may have spooked a few of the Supreme Court justices, given that they would either have to die or retire to open a seat on the court, the election’s impact on the judiciary is a crucial consideration. Lifetime appointments for Supreme Court nominees mean they are sometimes the most enduring legacy of a president’s administration. Given that the Supreme Court is currently comprised of five conservative and four moderately progressive justices, the next administration could realistically tip the ideological balance of the court.

Some of the Supreme Court’s decisions in the past few terms, on Citizens United, the Affordable Care Act, and Arizona’s SB1070 immigration law, for example, were monumental decisions that will impact the everyday lives of citizens, and even the framework of American democracy. But the mainstream media, for the most part, have paid little attention to the potential impact of the election on federal regulationsRead more

Here’s some reading material for you from items EPI’s research team skimmed through today:

• “More People Eschew Jobless Benefits Than Scam System” (Wall Street Journal)
• “Protecting the Child Tax Credit at the Fiscal Cliff” (TaxVox)
• “Starting salaries: How can women catch up with the guys?” (Washington Post)
• “The Dark Side of Bipartisanship” (New York Times)

Here’s a sampling of links that EPI’s research team found insightful today:

• “The Ten Biggest Differences between the Romney and Obama Tax Plans” (TaxVox)
• “The Economic Consequences of Mr. Osborne” (Paul Krugman)
• “Labor unions, liberal groups fear lame-duck betrayal by Obama” (The Hill)
• “Americans don’t want ‘grand bargain’” (Politico)
• “Report Details Massive Chemical Investments in Lobbying and Campaigns” (ENews Park Forest)

My colleague Josh Bivens and I recently published a briefing paper analyzing the near-term macroeconomic impacts of the Obama and Romney budget proposals based on prevailing actionable evidence. (Short summary of findings here.) Our verdict was that Obama’s budget plans would lead to increased employment of 1.1 million jobs in 2013, relative to current policy, whereas Romney’s proposals would lead to small job gains of 87,000 in 2013 if all his proposed tax cuts were deficit-financed, but lead to job losses of 608,000 in 2013 if only some of his tax cuts were deficit-financed.

This latter estimate assumed Romney’s proposed 20 percent reduction in individual income tax rates and alternative minimum tax (AMT) elimination would be revenue-neutral, whereas his earlier proposals—notably cutting the corporate tax rate and eliminating the corporate AMT, taxes on foreign profits, the estate tax, and Affordable Care Act taxes—would be deficit-financed. While regressive tax cuts are really inefficient at boosting growth, enough money plowed into inefficient tax cuts will modestly boost demand and, short of “base-broadening,” (none of which has been concretely specified) Romney is proposing a lot of costly tax cuts. Read more

Paul Krugman and others have recently claimed that Chinese currency manipulation is “an issue whose time has passed.” There are two fundamental problems with these arguments. First, China’s global trade surplus appears to be perhaps three to four times larger than has previously been reported. Second, productivity in China is growing much faster than in the United States and other developed countries and therefore, China’s exchange rate likely needs to appreciate at least 3 to 5 percent per year just to keep its trade surplus from growing. On the first issue—what the size of the Chinese current account surplus and its recent movement tell us about the need for currency realignment—it’s worth noting that most of the decline in China’s global trade surplus since 2008 is explained by the great recession and the sluggish recovery, especially in Europe. However, the U.S. bilateral deficit with China has increased by a third since it bottomed-out in 2009, which has slowed the U.S. recovery.

Further, China’s trade data likely understates its global trade surplus by a significant amount, a problem that has been ignored by officials in the United States, the International Monetary Fund and other international agencies. The IMF relies on self-reported data from each member country. Analysis of trade data from the United Nations shows that China is massively under-reporting its exports. Read more

A number of commenters declare that currency management by our trading partners is an issue “whose time has passed.” At the risk of violating Brad DeLong’s wise rules (Paraphrased: “Mistakes are avoided if you follow two rules: (1) Remember that Paul Krugman is right, and (2) If your analysis leads you to conclude that Paul Krugman is wrong, refer to rule No. 1”), I’m not convinced by claims—even Krugman’s—that this is a dead issue.

Look at one key piece of evidence Krugman presents: the real (inflation-adjusted) appreciation of the yuan in the last year. But, as Krugman himself has said in previous writings on this:

“Notice that I didn’t mention the value of the renminbi at all in this account [ed: of China’s currency management]. … You want to keep your eye on the ball: it’s the artificial capital exports that are the driving force here.

We know that the renminbi is grossly undervalued … on a PPE (proof of the pudding is in the eating) basis: the current value of the renminbi is consistent with massive artificial capital export, and that’s that.” [Edited for clarity; I’m pretty sure I haven’t done any (much?) damage to his argument].

So, have the artificial capital exports from China continued? Read more

Every once in a while, someone will write a column so densely packed with deception and misinformation that it truly astonishes me. Last week, U.S. News and World Report published such a column about government regulation of business by John Allison of the Cato Institute. I feel compelled to respond.

Let’s start with Allison’s use of a thoroughly discredited study that estimated the annual cost of regulation to be $1.75 trillion in 2008. This report, by Nicole and Mark Crain of Lafayette College, has been shown to be based on flimsy data, a flawed methodology based on a misuse of polling data, and an equally discredited estimate of the costs of OSHA regulation whose original data are untraceable. The Small Business Administration funded the research, but the Chairman of the Council of Economic Advisers has condemned it:

“The Council of Economic Advisers has looked at those claims and the $1.75 trillion figure is utterly erroneous. In fact, their [Crain and Crain’s] own data (which come from the World Bank) show that countries with smarter regulations have higher standards of living, and the United States has one of the best regulatory systems in the world.” Read more

Sen. Chuck Schumer (D-NY) recently made headlines in declaring that marginal income tax rate reductions are a terrible starting point for tax reform—they shouldn’t be a priority, period—and that the dual objectives of the Tax Reform Act of 1986 are completely inappropriate today. The 1986 reform, the last comprehensive “cleaning” of the tax code, is often touted as the model for tax reform, which Schumer attributes more to coalescing political bipartisanship than policy specifics. The ’86 framework of base-broadening, rate reductions, and distributional neutrality was recently adopted by two prominent tax proposals Schumer is now urging Democrats to reject—reforms proposed by Fiscal Commission Co-Chairs Alan Simpson and Erskine Bowles, as well as the Gang of Six (although both of these proposals would raise revenue, unlike the ’86 reforms). And Schumer is absolutely right about both the premise and conclusion of his argument. Here’s his take in a recent interview with Ezra Klein:

Klein: “The core of your argument is that tax reform in 2012 is proceeding atop a mistaken analogy to tax reform in 1986. So why isn’t 2012 like 1986?”

Schumer: “It’s not like 1986 for two reasons. Read more

As a follow-up to my earlier post, another issue likely to be raised in tonight’s debate is the issue of federal budget deficits that force us to “borrow from China.” Is this a real problem, and will it hurt if China suddenly decides to stop lending us money?

No and no.

First, rising budget deficits since the Great Recession began have actually been more than financed by rising domestic savings of U.S. households and businesses. In fact, the huge spike in private savings that began in 2007 (see the chart below) is the reason for the Great Recession: households and businesses stopped spending in 2008 and the economy cratered thereafter, cushioned a bit by the rise in government deficits. So, we have not relied on rising borrowing from China to finance the increased budget deficits in recent years, instead the rise in domestic savings has been more than sufficient to cover these.

But what happens if China turns off the spigot and stops trying to buy U.S. Treasuries and other dollar-denominated assets?

This would have two effects. First, the decline in available savings that can be borrowed by American households, businesses, and governments would decline. In normal times, this could bid-up interest rates. Think of interest rates as the price of loanable funds—as the supply of loanable funds falls, the price should be expected (all else equal) to rise. But we’re not in normal times. Instead, the American economy remains characterized by a huge excess of savings over demand for new loans, meaning that there’s no upward pressure on interest rates. Absent this upward pressure on interest rates, no damage would be done if China stopped plowing money into buying dollar-denominated assets.

Second, if China did stop buying U.S. assets, the value of its currency would increase vis-à-vis the dollar, and this would spur U.S. exports, both to China as well as to third-country markets.

So, in regards to China buying the U.S. government’s debt, it’s not only nothing to worry about, it would be better for the U.S. economy if they stopped.

Tonight’s presidential debate will mostly focus on issues out of my wheelhouse, but there are a couple of international economic issues that will come up that people should be prepared for. This post tackles one (currency management by our trading partners, particularly China) and a subsequent post will tackle the other (alleged reliance of the U.S. on China to buy our public debt).

The primary reason why the United States ran large (and generally-growing) trade deficits over the past 15 years was that the value of the U.S. dollar was too expensive. This expensive dollar prices our exports out of too many global markets. The source of this too-expensive dollar has actually varied over that time, but over the past decade it has been clearly driven by the policy of foreign governments buying hundreds of billions of dollars of dollar-denominated assets, hence increasing the demand for dollars, which pushes up the price of dollars on world markets.

In the late 1990s and early 2000s, it was largely private investors demanding dollars to buy into the U.S. stock market, and to find a safe haven for their investments in the fallout Read more