Today sees the rise of two key studies that reveal some fundamental truths about how an economy works, which are best looked at together. First, the CBO studied the question of how full employment would reduce the deficit. “Full employment” is defined here as a projection of what would happen if there wasn’t an “underutilization of capital and labor resources in the economy.” That’s pretty bloodless wonk-speak, but it means that the economy would be working to produce maximum output without idle labor sitting around collecting unemployment check. The unemployment rate they cite as the “full employment” rate is 5.2%. CBO estimates that the deficit would be 1/3 lower in 2012 as a result. This would result from an increase in tax revenue from higher employment, as well as a reduction in those qualifying for unemployment insurance and other social services. The report was requested by Rep. Chris Van Hollen, a member of the Super Committee.
CBO calculated its estimate of the portion of the deficit attributable to those “cyclical” factors, about $340 billion, using the same methodology that the agency uses to estimate the so-called automatic stabilizers—the automatic responses of revenues and outlays to changes in real (inflation-adjusted) output and unemployment. Specifically, CBO estimated what taxable income would be if output equaled its potential; under those circumstances, taxable income (as measured in the national income and product accounts maintained by the Department of Commerce’s Bureau of Economic Analysis) would exceed the taxable income currently projected by about $850 billion (or by about 7½ percent). CBO translated that difference into an estimate of how much higher revenues would be in the absence of cyclical factors.
I think it’s almost certainly true that CBO is under-representing this, and the evidence can be seen from when we had a full-employment economy, or nearly so, in the late 1990s. Deficits turned into large surpluses well beyond CBO’s projections as a result. CBO was quick to highlight that it didn’t take into account inflation and interest rate increases that could come from full employment, both things that could expand the deficit. But it did not highlight this evidence from the late 1990s.
A good companion to this is a study on income inequality, showing it to be a major drain on economic growth.
“Countries where income was more equally distributed tended to have longer growth spells,” says economist Andrew Berg, whose study appears in the current issue of Finance & Development, the quarterly magazine of the International Monetary Fund. Comparing six major economic variables across the world’s economies, Berg found that equality of incomes was the most important factor in preventing a major downturn.
In their study, Berg and coauthor Jonathan Ostry were less interested in looking at how to spark economic growth than how to sustain it. “Getting growth going is not that difficult; it’s keeping it going that is hard,” Berg explains. For example, the bailouts and stimulus pulled the US economy out of recession but haven’t been enough to fuel a steady recovery. Berg’s research suggests that sky-high income inequality in the United States could be partly to blame.
In other words, we’re not going to lower the unemployment rate – and subsequently reduce out deficit – until we end this extreme income inequality that has grown to stratospheric rates over time. Rich people wanting to keep their tax cuts is impoverishing the rest of the country. It’s no accident that the highest two points of stratification of the distribution of wealth in America can be seen in 1928 and 2007, one year before both the Great Depression and the Great Recession.




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You better factor spending into that equation. Unless “rich” is redefined to about the $200k per year range, the numbers will never add up. Never.
thanks dday.
what? the fed has no more money to give to banks? must be time for a tax holiday!
These guys really do drink our milkshake.
The report was requested by Rep. Chris Van Hollen, a member of the Super Committee.
Chris is Dem Leadership that point should be mentioned in the article.
First do you have any numbers to back that up and yes whats wrong with $200k a year as rich? Jon McCain can’t even remember how many houses he had back in the Presidential election. If you forget how many homes you have you just might be too rich.
While I agree that full employment is necessary, it’s scary to see that the Osterity Administration has defined 5.2% unemployment (which doesn’t count the 99ers, or the discouraged, or those stuck on part-time work) as “full employment”. Is this the zenith of our ambitions? Really? I mean, the rate was below that for 8 of 11 years as recently as 1997-2007.
Get UI down to 2% or so, and then I’ll talk about “full employment”.
How did we get this report? Has anyone asked Chris why he hid the report? Forget Weinner’s Weinner Chris should resign over this!
Great points how much more revenue would we have if the 99ers, or the discouraged, or those stuck on part-time work) as “full employment” had jobs that best used their talents no computer programers flipping burgers for example, no waitresses with college degrees.
I want Chris’s head….
Which it would, as there’s ahem, *less* need for social services when we have full employment (which would be 2 %, I concur).
On what planet is that where it is not?
-stewartm
Didn’t Chris talk to FDL once and answered our questions? I think I want him to answer our questions again. I expect this shit from the GOP, he should resign or switch parties.
I would consider being in the top 3% rich.
You need to compare yourself to the 97% below, not the 2% above.
I have to take issue with part of this, inflation will reduce the deficit since money paying back debt will be cheaper
if i owe 1 million dollars today, made that purchase and pay back the 1 million when inflation has decreased the value to half, it is that much easier paying the debt with the revenue seen at the inflated rate
So if we had taxed the rich, ended both wars and kept on borrowing money and used that money to create jobs we would not have needed to cut SS and Medicare?
What would the National debt look like I wonder?
Right more revenue from taxes thanks to full employment means more money to pay down the debt…our problem would be the Dollar would get strong and that would hurt exports.
I can live with the problems of a strong dollar and being able to buy gas without it emptying my wallet. We export entertainment and farm goods mostly so I don’t see a problem in fact I am cool with GM building cars in China for the Chinese American cars should be built 100% here.
Tom Friedman is wrong about globalization creating jobs in America.
America the land of the free should not have factories in China that have suicide nets outside the factory windows like Apple does in China. More Americans could buy ipods if we made them here.
Why give tax breaks to companies that outsource jobs when we create slave plantations overseas and have huge unemployment in America?
A strong dollar would also reduce wage inflation a painter in the burbs would not need an extra $10 for gas to do a job in the city.
I’m going to print and laminate these charts. Thank you, David.
This is off task, but I can’t help myself. Violence (of all kinds) increase as income gaps widen. There’s an international study I can’t remember/ reference right now, but I first heard Mike Davis mention it during an interview with Moyers about a year ago (a conversation mostly about his last book).
Rafe is exceptionally ignorant on things economic. He proves this day after day, despite his best efforts to be a ‘reasonable’ troll. Rafe, get any reference book on the distribution of income: look at the Lorenz Curve, teach yourself some facts, or go back to masturbating in your hole in Tel Aviv.
Any attempt to revive the dying oligarchical empirical monetarist system that creates unpayable debt is both senseless and immoral. The way forward is to embrace the US Constitutional principles of economic propsrity penned by Alexander Hamilton and start with Article 1 Section 8, that states that Congress shall utter credit. And by this it means that cthe CREDIT SYSTEM is the difference between life and death. The War of Independence was fought precisely to get out of the grip of the oligarchical British Empire, and the bankers that had a grip on the finances of the new world gradually coming into being in North America.
OUr system is for the furtherance of the REAL ECONOMY, that is HUMAN ECONOMY, not what we are being brainwashed to think of it as FISCAL ECONOMY. Real economy is about productivity per head per square kilometer.
That entails higher and higher energy flux density resources so that production methods can be powered and scientifically developed and enginerred to benefit the citizens of the sovreign nation in it’s entirety.
To create better living conditions and higher living standards, to increase the educational facilities and hospitals, to maintain adequate police forces and firefighting capabilities, and to concentrate on science drivers such as NASA so that we can research the galactic forces that are causing the current influx of extreme natural phenomenen, tornados, earthquakes, floods, droughts, fires and famines that are more severe and more so each month. Worrying about deficits and reducing costs on health programmes for the poor, the elderly and the young is simply pathetic.
Of course all of these people should be taken care of. Of course there should be full employment. On top of that people should not be being swindled out of their homes and have the President take the side of the banks who perpetrated the crime. We have to pass the RETURN TO PRUDENT BANKING ACT introduced by Marcy Kaptur D Ohio to reinstate the Glass Steagall standard, to separate the speculator banks from the commericial banks, and shut down the bailouts and the payment of gambling debts of the banksters and hedge funders. That was never the right thing to do, and the more bailouts and handouts they come with, the worse the situation becomes because the greed of these people in insatiable. The moral posture of these people is such that they are become like cannibals, they are willing to kill and eat the population of the planet in order to survive. Their monetarist system is a disaster and they won’t stop like heroin addicts, they want more and more and more and it takes more and more for them to get a high and meantime they are dying on the vine, but can’t stop taking it. THIS IS THE HEIGHT OF REPULSIVE BEHAVIOR, and why the US citizens are being asked to bankroll the so called “elite’s” addiction is beyond comprehension. Call it what it is, MADNESS.
We have to get a grip on ourselves, and get the NEED ACT OF 2011 introduced by Denis Kucinich signed into law, which will transfer the capability of conjuring money up out of thin air from the FED to the Congress. The CREDIT that must be issued in abundance, MUST BE FOR MULTI GENERATIONAL PROJECTS, that will create an environment that will be suitable for generations to come, to be scientifically, industrially and agriculturally progressive and productive, AND ESPECIALLY WITH A HEALTHY SPACE PROGRAM, SATELITES TO MONITOR GALACTIC CONDITIONS FOR WARNING PURPOSES AND LEARNING PURPOSES AND FOR MANNED MISSIONS TO OTHER PLANETS INCLUDING MARS. We are not going to survive if we just sit around, grumbling and allow the super twelve committee to impose draconian austerity measures upon our people. That is not constitutional and must be stopped. We cannot have a president that goes around murdering US citizens by attacking them with drones, or declaring war on countries that have not attacked us on the premise of protecting their citizens but then using NATO to go ahead and destroy their cities and kill citizens in droves to boot. We cannot have a president that is so weird that he doesn’t know what year it is, who doesn’t know how many states there are in the USA, and who thinks we are in an economic recovery when we are going broke in a handbasket. He’s lost it, that is if he ever had it.
We need to get someone up in the WH who has a grip of the US Constitution and isn’t a bloodthirsty CREEP. I recommend logging onto larouchepac.com and watching a few of the videos and reading a few of the articles, there is a whole section on Glass Steagall and another on NAWAPA which could put millions back to work and make a huge difference to the planet as a whole.
FDR took on the banks and it worked out fine, we have to place our trust in his methods and put them into practice once more, there is no point reinventing the wheel.
Economically there’s a difference, but the biggest leap in income by group is in the very stratospheric 0.1%. But, politically, it’s much more palatable and likely to work if you say wealthy in America certainly includes people who make $1 million / year or more. That may not include absolutely everyone who is wealthy, but it’s hard to say those people AREN’T wealthy. And, it will bring a significant amount of revenue to the federal gov’t if they’re taxed more.
If $1M incomes are taxed at 20% (counting various kinds of income being taxed at 35% or 15% and deductions) and you increase that 5% and if there are possibly 20% of the GDP going to those people, then you might raise an extra $150 Billion per year (not per 10 years). These are really rough guesstimates, but the numbers are huge for the country and bearable for individuals.
Ending the Bush tax cuts, implementing the Buffett Rule (which Reagan approved of) would help cut the deficits tremendously (despite Republican comlaints that you could take all the rich people’s money and it wouldn’t be enough). Getting the economy moving would help them make more and perhaps not lose anything in the net effect.
One pundit said that all the president did was use tricks. Well, in a crisis tricks are worth the effort. The bigger things which last generations take a bit more work, but Dems did financial reform to fix what the Republicans broke and that ought to last a while and the Dems did health care reform and that ought to be considered fundamental and the Dems are pushing high-speed broadband Internet and that is profound and the Dems have done a small bit of patent reform for the long haul and … you get the idea. Tricks are the duct tape to get us through the crisis, but the fundamental reforms are still underway. Tax reform is another big one coming up. Immigration reform is a big one. Republicans have ducked out on those fundamental reforms, so it’s up to Democrats to take the lead and Pres. Obama is doing that.