Here are this year’s entries with brief annotations.
1. In what may be the most important economic policy lesson of the year, fiscal drag is really a…you know…drag. This year’s economy, in terms of both growth and jobs, ended up considerably stronger than last year’s. One reason for that was that fiscal policy shifted from a major drag on economic growth to a neutral stance. In 2013, government spending cuts and tax increases subtracted about 1.5 percentage points off of the gross domestic product, equivalent to over a million jobs. This year, the impact of fiscal policy on growth was much closer to zero.
I’m not expecting the next Congress to do much to help the economy, but it would be very useful if they could stick with “do not harm” as their economic policy mantra.
2. If you can’t cut taxes, cut the IRS’s ability to do its job. Yes, the IRS kicked the ball in their own goal a couple of times, but it’s still the case that if they were adequately funded they could collect a lot more revenue. I’m talking about taxes owed that don’t reach the Treasury’s coffers due to unprosecuted tax evasion.
As I recently wrote on this page:
The Treasury estimates that a $1 investment in enforcement yields a $6 return; there’s a strong case to be made for a substantial increase in IRS funding. Remember, these are not new taxes; they’re taxes owed that are being left on the table due to underfunded enforcement of the existing code.
That’s why it’s so problematic that Congress passed a budget late this year that legislates the cuts shown below. Such weedy budget issues may seem obscure, but I give this figure high ranking because it’s a devious back-door way for conservatives to realize the ideological goal of shrinking government in an era when many of the challenges we face, from aging demographics to deteriorating infrastructure to climate change, require a government response.
In fact, inequality trends differ little between pre- and post-tax/transfer data (see first figure in my paper with Ben), and as the figure below reveals, the all-in CBO data (which only goes through 2011) show that all of the income gains between 2009 and 2011 went to the top one percent, while the middle class actually lost ground.
And as we stress in our paper (and Dean Baker points out here), these facts prevail even while the CBO makes numerous methodological choices that create an upward bias in income trends for the poor.
4. Next we turn to a big 2014 success story: Obamacare. I recently featured the first figure below to make the case about the 10 million people who gained health-care coverage through Obamacare in 2014, as both the Medicaid expansion and the health insurance exchange subsidies took effect this year.
The other important development, and I mean really, fundamentally important, is the decline in growth rate of health-care spending, at least part of which appears to stem from efficiency-enhancing changes to the health-care delivery system in Obamacare. This decline was, in fact, predictable based on the other figure below, which plots the relationship between what countries spend on health care against the share of that spending that comes from the public sector. I discuss the details here, but it’s not rocket science: When it comes to health-care expenditures, the public sector is better at cost control.
And if you know anything about that clump of dots representing all the other advanced economies that learned this critical lesson well before us, you know it’s not death panels and vicious rationing. It’s incentivizing the quality of care over the quantity of care.
5. The safety net works, but it will not eradicate poverty by itself. Jan. 8 was the 50th anniversary of the “War on Poverty,” begun in the Lyndon Johnson administration. See CBPP’s chartbook on the anniversary for a deep dive into the record, but as I argued here and as the figure below shows, to spout the conservative meme: “we fought the war on poverty and lost”—is to reveal your contempt for facts.
Safety net programs cut the poverty rate nearly in half in 2013 (the most recent data of this type), lifting 39 million people (including about 8 million children) out of poverty, according to special data from the Census Bureau. What’s unique about this analysis is that unlike the official poverty measure, it counts non-cash benefits like food stamps as well as tax credits for working families like the Earned Income Tax Credit.
Still, as the figure shows, considerable poverty remains even after counting the impact of safety net programs. To knock these rates down further, especially among working-age households, is as much about the safety net as it is about the job market. Our anti-poverty policy is increasingly a function of paid work, invoking the need to lift the quantity and quality of jobs available to low-income workers.
6. The growth in the disability rolls is about what you’d expect, given our demographic changes. If anything, the misleading meme that the Social Security Disability Insurance program (DI) is widely abused gained volume last year. Yet, as figures below reveal, while the DI rolls are clearly rising (left figure) once you control for four demographic changes, the increase is not so dramatic. Those factors, as explained in this CBPP chartbook, are a growing population, aging boomers, increased workforce participation by women (meaning more women now have enough work experience to qualify for benefits if they become disabled), and the increase in Social Security’s retirement age from 65 to 66.
Once you adjust for those four developments, the share of the insured population on the DI rolls is up just a few percentage points over the past 35 years.
7. Let’s close this out with two figures on Federal Reserve, one of which is actually useful.
The first is my rendition of their “dots” graph, where the members of Fed committee that decides where to set their key interest rate guesstimate where that rate will be in the future. I certainly applaud and understand the committee’s intention to manage expectations, and I guess you can look at the dots and gauge the extent to which the members of the committee are on a similar page in terms of the path of the Fed funds rate. But there’s such a thing a TMI, and the analysis of the dots I read in the press often comes a bit too close to entrail analysis.
So I wondered if connecting the dots, as below, might make more sense.
The key missing ingredient is a persistently tight labor market that will give workers the bargaining power they need to press for their fair share of the growth. Using a comprehensive measure of job market slack, I built a simple statistical model that tracks nominal (i.e., before inflation) wage growth. As I describe in the link above, 3.5 percent annual wage growth is non-inflationary, and according to the model, that’s due by around 2018.
The punchline is the Federal Reserve must heavily weigh the asymmetric risk profile they face: The downside risks to most wage earners of raising rates too soon are worse than those of holding off. If we want to see wage growth get back to the point where the benefits of growth are more broadly shared, it will take not just getting to full employment, but staying there.
What’d I miss? Feel free to add links in the comments section to the graphs you think added insight in 2014. And let’s hope 2015 brings us a few steps closer to Factville, where our decisions are informed by credible information, not by wishful thinking, untethered ideology and the money of the donor class.