On Jobs, the U.S. Is Turning Into Europe

Hide your kids, and hide your wives. Economists’ worse fears have come true: The United States has been slowly turning into Europe.

CATHERINE RAMPELL

Dollars to doughnuts.

One of many reasons blamed for (Western) Europe’s stagnant growth in recent decades has been that so many European adults are not working, and are effectively not employable because they have been out of jobs for so long. The United States, on the other hand, has had a much higher share of its population in gainful employment. In fact, between 1980 and 2000, the percent of adults working was on average about 10 percentage points higher in the United States than in Europe.

Dollars to doughnuts.

But that gap is closing, according to a new paper from the Federal Reserve Bank of New York. A chart is worth a thousand words:

The gap had been narrowing even before the Great Recession, largely as a result of social and economic policy changes in Western Europe. For example, the authors note, in the mid-2000s Germany and Italy deregulated markets for temporary hiring, which enabled more people to find jobs. Reductions to Europe’s traditionally generous pensions have also encouraged workers to work later in life.

Meanwhile, in the decade before the financial crisis, employment growth in the United States was relatively weak. In particular, while more women were joining labor markets in Europe — perhaps partly because of policy incentives, and partly because of changing cultural norms — more women were dropping out of the labor market in the United States. Here are the employment-to-population ratios for women that resulted:

The trends were slightly different for male workers. In both the United States and Europe, the share of men working generally dropped over the last decade. But the decline was bigger in the United States.

Finally, the recession nearly closed the gap between employment-rates in Europe in the United States.

But while an extraordinarily generous safety net may have held back growth in Europe in the decades before the recession, the authors suggest that it paradoxically helped protect Europe from the huge job losses that the United States experienced during the Great Recession. They write:

The employment rate fell by only 1 percentage point in Europe, despite an output decline of almost 4 percent. In contrast, output decreased less dramatically in the United States (by 2.5 percent), but the country lost many more jobs — the employment rate declined 4.0 percentage points. This difference is likely due in part to European restrictions on firing workers and programs that encourage work sharing, most notably in Germany (see, for example, a recent analysis by the Federal Reserve Bank of Cleveland).

It’s not clear whether the gap between employment-population ratios in the United States and Europe will continue to shrink. Certainly it does not help that the United States has been accumulating a huge underclass of long-term unemployed workers. As we’ve noted before, the longer people are out of work, the harder it is to find them a new job.

Which is exactly the experience Europe had seen, and that the United States hadn’t learned from, in decades past.

Are the Bush Tax Cuts the Root of Our Fiscal Problem?

Bruce Bartlett held senior policy roles in the administrations of Ronald Reagan and George H.W. Bush and served on the staffs of Representatives Jack Kemp and Ron Paul.

Whether revenue should play any role in deficit reduction is at the root of the fiscal impasse between Congressional Republicans and President Obama. One factor underlying the hard-line Republican position that taxes must not be increased by even $1 is their assertion that the Bush tax cuts played no role in creating our deficit problem.

Today’s Economist

Perspectives from expert contributors.

In a previous post, I noted that federal taxes as a share of gross domestic product were at their lowest level in generations. The Congressional Budget Office expects revenue to be just 14.8 percent of G.D.P. this year; the last year it was lower was 1950, when revenue amounted to 14.4 percent of G.D.P.

Perspectives from expert contributors.

But revenue has been below 15 percent of G.D.P. since 2009, and the last time we had three years in a row when revenue as a share of G.D.P. was that low was 1941 to 1943.

Revenue has averaged 18 percent of G.D.P. since 1970 and a little more than that in the postwar era. At a similar stage in previous business cycles, two years past the trough, revenue was considerably higher: 18 percent of G.D.P. in 1977 after the 1973-75 recession; 17.3 percent of G.D.P. in 1984 after the 1981-82 recession, and 17.5 percent of G.D.P. in 1993 after the 1990-91 recession. Revenue was markedly lower, however, at this point after the 2001 recession and was just 16.2 percent of G.D.P. in 2003.

The reason, of course, is that taxes were cut in 2001, 2002, 2003, 2004 and 2006.

It would have been one thing if the Bush tax cuts had at least bought the country a higher rate of economic growth, even temporarily. They did not. Real G.D.P. growth peaked at just 3.6 percent in 2004 before fading rapidly. Even before the crisis hit, real G.D.P. was growing less than 2 percent a year.

By contrast, after the 1982 and 1993 tax increases, growth was much more robust. Real G.D.P. rose 7.2 percent in 1984 and continued to rise at more than 3 percent a year for the balance of the 1980s.

Real G.D.P. growth was 4.1 percent in 1994 despite widespread predictions by opponents of the 1993 tax increase that it would bring on another recession. Real growth averaged 4 percent for the balance of the 1990s. By contrast, real G.D.P. growth in the nonrecession years of the 2000s averaged just 2.7 percent a year — barely above the postwar average.

Few people remember that a major justification for the 2001 tax cut was to intentionally slash the budget surplus. President Bush said this repeatedly during the 2000 campaign, and it was reiterated in his February 2001 budget document.

In this regard, at least, the Bush-era tax cuts were highly successful. According to a recent C.B.O. report, they reduced revenue by at least $2.9 trillion below what it otherwise would have been between 2001 and 2011. Slower-than-expected growth reduced revenue by another $3.5 trillion.

Spending was $5.6 trillion higher than the C.B.O. anticipated for a total fiscal turnaround of $12 trillion. That is how a $6 trillion projected surplus turned into a cumulative deficit of $6 trillion.

These figures are conservative insofar as revenue is concerned, because the higher interest payments required by the deficits created by the Bush tax cuts are allocated to spending. If one allocates the interest cost proportionally, the Bush tax cuts were responsible for increasing the debt by $3.2 trillion — 27 percent of the fiscal deterioration since 2001.

These facts notwithstanding, it has become a Republican talking point that the Bush tax cuts did not, in fact, reduce revenue at all — something the Bush administration itself never asserted.

Last year, Mitch McConnell of Kentucky, the Senate minority leader, said: “There’s no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue because of the vibrancy of these tax cuts in the economy.”

On June 10, former Minnesota Gov. Tim Pawlenty said, “Keep in mind, whether it be the Bush tax cuts, the Reagan tax cuts or other tax cuts, they always produce an increase in revenue.”

On July 10, Senator Jeff Sessions of Alabama said of the Bush tax cuts, “The revenue went up every single year after those tax cuts were put in.”

And on July 15, Representative Trent Franks of Arizona said, “Even the much-maligned Bush tax cuts brought in an additional $100 billion a year to government coffers.”

It is hard to know where these totally erroneous ideas come from. Federal revenue fell in 2001 from 2000, again in 2002 from 2001 and again in 2003 from 2002. Revenue did not get back to its 2000 level until 2005. More important, revenue as a share of G.D.P. was lower every year of the Bush presidency than it was in 2000.

What will happen at the end of next year when the Bush tax cuts expire is already a matter of intense budget negotiations. Perhaps the whole point of the apparent Republican disinformation effort to deny that the Bush tax cuts reduced federal revenue is to make the reverse argument next year — allowing them to expire will not raise revenue.

Discriminating Against the Unemployed

As I wrote in an article today, there are many job ads on sites like CareerBuilder.com and Monster.com stating that employers will accept applications only from people who already have jobs or who very recently had jobs.

CATHERINE RAMPELL

Dollars to doughnuts.

This second condition I find particularly interesting, and not just because it might strike some as unfair. It’s interesting because it may actually favor workers who are less qualified.

Dollars to doughnuts.

If you think about it, people who were laid off recently may be, on average, worse candidates than people who were laid off a while ago.

After all, people who have been out of work for two years or longer are people who were laid off during the recession. That means many of them were workers whose jobs were eliminated simply because their businesses were doing badly, not because they were personally incompetent. And their first year or so of unemployment occurred as businesses were still cutting jobs, not adding them, so almost no matter how qualified they were, they were stuck in a holding pattern.

But more recently, layoffs have been near historic lows and there has been (some) job growth. That means the people laid off in the last few months are much more likely to have lost their jobs because they were poor workers rather than victims of the business cycle.

Of course, employers may have concerns that longer durations of unemployment actually cause workers’ skills to atrophy, regardless of what their skills were before they were laid off. But for many lower-skilled jobs, or jobs in industries that are not terribly technologically dynamic, this should not be a huge concern.

None of this is to say that employers should be discriminating against workers for any reason, legal or otherwise. But if they’re going to discriminate against workers because they’re unemployed, and especially unemployed long term, they should at least take the time to figure out whether current job status even correlates with worker quality.

Answering Questions on the Mortgage Crisis

4:04 p.m. | Updated

Gretchen Morgenson, the Fair Game columnist for Sunday Business, answered questions posed online today about her new book on the mortgage crisis, “Reckless Endangerment,” written with Joshua Rosner. The session was held on Quora, a site devoted to curating knowledge collaboratively by compiling questions and answers. It is the second of three weekly question-and-answer sessions on Quora featuring Times reporters.

Here are a few of the questions that she answered:

What did “too big to fail” mean, in the context of Freddie Mac and Fannie Mae? In the aftermath of the 2008 housing crisis, have we solved that problem now with new rules or systems?

Is the Dodd-Frank Act a good law? What impact will it have on the economy?

How much did we pay to bail out Freddie Mac and Fannie Mae? Are taxpayers getting that money back?

You can also read answers from last week’s session with Diana B. Henriques, a Times reporter and author of “The Wizard of Lies: Bernie Madoff and the Death of Trust.”

An Inconvenient Precedent for the Debt Crisis

CATHERINE RAMPELL

Dollars to doughnuts.

Last night, President Obama and the House speaker, John Boehner, gave dueling speeches on how to fix the deficit. One line from Mr. Boehner’s speech confused me:

Dollars to doughnuts.

Here’s what we got for that spending binge: a massive health care bill that most Americans never asked for. A ‘stimulus’ bill that was more effective in producing material for late-night comedians than it was in producing jobs. And a national debt that has gotten so out of hand it has sparked a crisis without precedent in my lifetime or yours.

The wording is a little ambiguous, but it appears that the “crisis without precedent in my lifetime or yours” refers to the current stalemate over the debt ceiling and the resulting threat of default.

With all due respect to Mr. Boehner, there is a precedent for this, and it was in his lifetime.

Mr. Boehner was born in 1949. In 1979 there was a showdown over raising the debt ceiling, and the country came within hours (not days) of defaulting on its obligations. In fact it actually did temporarily default on some of its obligations, although that seems to have been because of technical difficulties because discussions ran so close to the wire.

Brady Dennis of The Washington Post wrote a nice summary of this event earlier this month:

Congress had been playing a game of chicken with the debt limit, raising it to $830 billion — compared with today’s $14.3 trillion — only after Treasury Secretary W. Michael Blumenthal warned that the country was hours away from the first default in its history.

That last-minute approval, combined with a flood of investor demand for Treasury bills and a series of technical glitches in processing the backlog of paperwork, resulted in thousands of late payments to holders of Treasury bills that were maturing that April and May.

“You hear a lot of people say, ‘The government never defaulted.’ The truth is, yeah, they did. … It might have been small, it might have been inadvertent, but it happened,” said Terry Zivney, a finance professor at Ball State University who co-authored a paper on the episode titled “The Day the United States Defaulted on Treasury Bills.”

Conspiracy Theories About Republicans and the Economy

In the last few days, several readers, economists and radio hosts have asked me whether I buy the most cynical interpretation of the debt crisis stalemate: maybe Republicans are reluctant to raise the debt ceiling, or are calling for austerity measures that could slow the recovery, because they actually want the economy to do badly. That way voters will demand a change in political leadership, and vote more Republicans into office in 2012.

CATHERINE RAMPELL

Dollars to doughnuts.

I’m no political scientist, but that sounds a little too Machiavellian even for the most hardhearted of politicians.

Dollars to doughnuts.

But more important, I’m also reluctant to believe this conspiracy theory because the conspiracy isn’t necessary. That is, the economy is likely to be in bad shape in November 2012 no matter what happens with the debt talks.

As of January, the Congressional Budget Office projected that unemployment in the fourth quarter of 2012 would be 8.2 percent. Macroeconomic Advisers, another respected forecaster, recently published a similar outlook.

Of course, there are many outcomes to these debt negotiations that would make the economy even worse off than the current projections show. But really, there’s no need to paint the lily.