July 15, 2009

Building the case for more public investment

June’s continued labor market woes and widespread forecasts of worsening unemployment levels have led to a summer of reckoning over whether the federal government has acted aggressively enough to reverse the economic downturn that is leaving more Americans in poverty. Unfortunately, years of bad policy have created an economic situation that will require additional public investment by the federal government.

In Tax Cuts Won’t Create Jobs, published on the EPI Web site, President Lawrence Mishel argued that while tax cuts are increasingly being proposed as an alternative to direct investment, they would not be nearly as effective at spurring job growth. Citing earlier EPI research, Mishel noted that the concept of tax cuts as stimulus has been put to the test -- and failed -- twice in the past six years. Mishel said that consumers spent only about one-third of the $100 billion in personal tax rebates issued by the Bush administration in early 2008. Similarly, a series of tax cuts designed to create jobs in 2003 fell so significantly short of expectations that the economy produced fewer jobs than the worst-case projections suggested would be the result if no action was taken at all.

EPI Policy Analyst Ethan Pollack, meanwhile, took issue with a Chicago Tribune editorial that equated the economic stimulus to a turkey in the oven and argued that it would be best to wait until the first bird was cooked before determining if people were hungry enough for a second one. While the metaphor offered a nice image, Pollack explained why it was flawed:

The problem isn’t that we need stimulus faster, it’s that we now need more of it than we expected. The first round of stimulus was designed for an economy that would peak at 8.8% unemployment by the fourth quarter of 2009. Four months later we’ve hit 9.5% and the trend points toward 10% before summer’s over... To correct the analogy, we’ve already got a turkey cooking, but now 10 hungry friends unexpectedly have shown up for dinner. Why wouldn’t we put another bird in the oven?

Good news for workers
An increase in the federal minimum wage that will take effect July 24 will raise the pay of millions of workers and also help stimulate the economy. The increase is the final in a three-tiered hike that will increase the minimum wage 10.7% to $7.25 per hour. Earlier this year, EPI Policy Analyst Kai Filion calculated that the upcoming increase will generate $5.5 billion in consumer spending over the next 12 months.

Despite that promising research and the fact that the planned increase was legislated long before the current recession began, multiple critics are now suggesting that a wage hike for America’s lowest-paid workers will hurt the economy. Economist Heidi Shierholz and other EPI experts have assembled a body of research that shows why the higher minimum wage is, in fact, good for the economy, good for the country’s poorest workers, and long overdue. Much of that work is summarized in Millions of workers will benefit on the EPI web site. Along with boosting consumer spending, EPI research finds that raising the minimum wage will bring some badly needed income to workers living near the poverty line. An individual earning the new minimum wage of $7.25 per hour working full time would earn an annual income of $14,500, which is still below the federal poverty level for a family of two.

Desperate measures
Meanwhile, Reuters reports that the deepening recession and scant job prospects have given birth to a new trend in which unemployed people looking to acquire new skills or avoid holes in their resumes are working for free. The story quotes EPI Vice President Ross Eisenbrey cautioning that it is illegal for commercial companies to not pay workers.

Also in the news
A story in China’s Xinhua news service about mounting U.S. unemployment quotes Heidi Shierholz forecasting elevated unemployment for years to come. The June unemployment numbers, Shierholz noted, “say we are not getting a quick rebound.” Shierholz was also quoted in a National Public Radio story about the state of the economy. Contrary to the prevailing view among economists that the worst was over, Shierholz said that high unemployment will remain a major drag on the economy. She noted that laid-off workers are staying unemployed for increasingly longer periods and that in June, some 4.4 million workers had been unemployed for six months or more. That figure shatters the old record of 2.6 million long-term unemployed workers, from the early 1980s.

Upcoming events
On July 15, EPI’s Bailout Analysis Project director Nancy Cleeland will moderate The Federal Reserve’s Expanded Role: Is Greater Transparency Needed? The second in a series of forums on the financial crisis, the event will feature a keynote address from Vermont Senator Bernie Sanders. The event will run from 9:30 a.m. to 11:30 a.m. at EPI’s offices.