The Worst Jobs Day Ever

Driven by the COVID-19 shutdown, April marked the greatest job loss in American history. The unemployment rate skyrocketed to 14.7 percent, and employers cut 20.5 million jobs.

Those figures are heart-wrenching. But as awful as they are, they do not fully capture workers’ hardships. To be counted as unemployed, people must be available for work and actively seeking it. With schools closed, job opportunities withering, and social distancing the new norm, many displaced workers don’t satisfy those requirements. Instead, they officially show up as having left the labor force.

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From February to April, the labor force shrank by 8 million people. Add that to the more than 17 million increase in unemployment, and 25 million Americans are no longer employed. More than 61 percent of Americans had jobs in February. In April, only 51 percent did, the lowest level since records began in 1948.

In addition, millions of Americans still have jobs but have seen their hours cut. From February to April, the number of people reporting that they work part-time for economic reasons rose by 6.6 million. That spike happened even though part-time workers have lost jobs at a particularly sharp rate. Unemployment among people who usually work part-time rose from 3.7 percent in February to 24.5 percent in April, while unemployment for full-time workers rose from 3.5 percent to 12.9 percent.

Americans from all walks of life are suffering in the great shutdown. But the employment damage is not distributed equally. As often happens in downturns, highly educated workers have fared better than those with less education. Among workers with a college degree, unemployment increased from 1.9 percent in February to 8.4 percent in April. High school graduates with no college education, however, have seen unemployment spike from 3.6 percent to 17.3 percent.

Teenage unemployment is now almost 32 percent, far more than for older workers. Unemployment among Hispanic workers has increased more than for white, black, and Asian workers. Women experienced a larger increase than did men.

We are living through remarkable times. The United States has not experienced unemployment at these levels since the Great Depression. The one bit of good news is that many job losses may be temporary. Indeed, a record 78 percent of unemployed workers report they are on temporary layoff.

Unfortunately, many jobs will be permanently lost. To date, policymakers have rightly focused on economy-wide disaster relief. Keeping families and employers financially afloat is essential for an eventual recovery.

When we start down the path to recovery, policymakers should assess how severe the longer-term damage will be and consider policies that accelerate the return to full employment.

This post originally appeared on the Urban Institute’s Urban Wire blog.

If We Give Everybody Cash, Let’s Tax It

Giving people cash is a great way to soften COVID-19’s economic blow. But it’s sparked a classic debate. Should the federal government give money to everyone? Or target it to people with low incomes?

Targeting has the potential to deliver the biggest benefit per dollar spent. But eligibility requirements add complexity and will inevitably screen out some people who need help. Universality is simpler and recognizes that we are all in this together.

Happily, we can combine the best features of both approaches: Let’s give cash to everyone, and then tax it later. By distributing money today, we get the speed and inclusiveness of universality. By taxing it later, we can recapture some of the benefits from those who needed them least.

One approach is simply to tax the assistance just like any other income. A person with little income this year would keep the full government payment of, say, $1,000. But a billionaire in California would net only $500. At tax time next year, Uncle Sam would get $370 back and California would get $130. The billionaire would receive half as much as the person with little income. And states with income taxes would get a much-needed boost in revenues.

Ben Ritz of the Progressive Policy Institute has proposed another approach: structuring the money as a pre-paid tax credit and then clawing back some of it at tax time. The clawback system could be designed to accomplish any distributional and fiscal goal you want. For example, you might phase out the credit entirely for folks earning more than $150,000. Another possibility would be to link the credit amount to some measure of income loss, not just income level, by comparing the income changes across tax years.

Any of these approaches would reduce the fiscal cost of the cash payments and thus, for the same overall cost, allow them to be bigger for those who get them. Taxing the payments as income, for example, might create a 11 percent offset in new federal revenues. (That figure is based on a report Elaine Maag and I did on carbon dividends, an idea for universal payments linked to a carbon tax.) A taxable payment of $1,125 would then have the about same net fiscal cost as an untaxed $1,000 payment. Under Ritz’s proposal, a more aggressive clawback approach could allow even bigger payments for the same overall cost.

The payments described here should not be treated as income in determining eligibility and benefits in safety net programs. They should be treated as income if we were enacting universal payments in normal times. But times are decidedly not normal. There is no reason for these temporary payments to reduce the efficacy of the existing safety net.

I favor targeting assistance to people with low incomes or sudden income loss if it’s easy to do so. There’s clearly more bang per buck in directing aid to those who likely need it most. Australia has already enacted one program along those lines. But if we go with universal payments, let’s make the payments taxable.

Economic Policy in the Time of COVID-19

COVID-19 poses a severe threat not only to public health but also to the overall US economy. The nation’s policy response should focus on four basic strategies.

First, we should embrace those economic losses that protect health. The steps needed to combat the coronavirus will inevitably reduce economic activity. We want risky activities to stop. Social distancing is in. Gatherings are out. Reducing economic activity will reduce the overall size of the economy. But we all know Gross Domestic Product is not a measure of social wellbeing. That’s especially true today.

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Second, we should help people get through this sudden financial shock. Millions of workers will see their incomes fall from reduced work hours, furloughs, and layoffs. Restaurants, bars, and many other small businesses will see their revenues crater.

Expanding existing safety net programs—as the House-passed Families First Coronavirus Response Act does for unemployment insurance, Medicaid, and food assistance—is a good start. So is supporting paid sick leave. But those programs miss many people.

That’s why we are seeing new proposals to get money out the door quickly. Making direct payments to households—recently proposed by Jason Furman (former economic advisor to President Obama), Greg Mankiw (former advisor to President Bush), and now Senator Mitt Romney (R-UT)—is one approach. Targeting payments to low income households, as Australia is doing, is another. Giving money to employers who keep workers on their payrolls is a third. Whichever approach we take, a priority is getting support out quickly to soften what may be an unprecedented loss in income.

Third, we should protect our economy’s productive capacity so it can rebound once the virus risk recedes. COVID-19 shouldn’t destroy otherwise healthy businesses and nonprofits.

The Federal Reserve will play a role by ensuring smooth functioning of credit markets. Adding liquidity to Treasury markets, as the Fed is doing, is a good step. It may well take more steps in the days ahead. But that won’t be enough.

Congress and President Trump should help fundamentally healthy firms that are facing sudden cash flow stress and lack good financing options. Lending to small businesses is a natural first step. Trump has proposed expanding lending authority by the Small Business Administration. Other nations have announced similarly-focused programs. The United Kingdom, for example, has introduced new business interruption loans.

What to do for larger businesses is a harder question. Many large businesses do have private financing options. Or would if they had managed their balance sheets better. Expect spirited debate about where to draw the line between good and bad bailouts and, for that matter, about what constitutes a bailout. (I’ll have more to say about that in another post.)

Fourth, we should make full use of our economy’s productive capacity once the virus recedes. Rebounding supply will help only if demand keeps up.

The Fed has taken a first step to support demand by cutting its target interest rate to effectively zero and expanding its purchases of Treasury bonds and mortgage-backed securities. Those steps will soften the decline in consumer and business spending.

Whether that will be enough is anyone’s guess. With effective actions now, the economy may rebound quickly once the virus threat abates. Unfortunately, it’s also possible that economic activity will lag. If that happens, fiscal policy can help boost demand. The actions we take now to provide income support will help and could be continued. We also have the usual arsenal of tax (e.g., lowering payroll taxes) and spending (e.g., aid to states) options.

In recent days, America has made great strides in the first strategy, embracing the economic losses necessary to fight the virus. In coming days, the priority will shift to the next two, helping people survive the resulting sudden income loss and defending our productive capacity so it can rebound quickly. Policymakers may also take initial steps to support demand to make full use of that capacity. But the ultimate scope of those efforts will need to track the still-unknown size of the longer-term challenge.

Brainteasers From My Dad

When my sister and I were little, our Dad would challenge us with riddles and word games. I mentioned three in my eulogy for Dad:

1. Imagine a two-volume dictionary sitting on a shelf. Each volume has 500 pages. A bookworm is on the first page of letter A. It wants to eat its way to the end of letter Z as fast as possible. How many pages does it need to eat?

2. Should you walk to work or bring your lunch?

3. Is it warmer in the summer or in England?

Dad used the first to show the perils of leaping to conclusions. The second introduced basic economics. As far as I can tell, the third is just amusing; if you see a deeper meaning, please let me know.

 

Remembering My Dad, Donald Marron, 1934 – 2019

© Matt Greenslade

My dad died unexpectedly last Friday. He lived a remarkable, generous life. Obituaries in Bloomberg, NYT, and WSJ give a taste of his success in business, charity, and the arts. He was truly a self-made man.

Some of my favorite memories, however, are of my dad’s rare failures. His unsuccessful effort to hurdle my sister’s cello during a game of chase. That time we got ejected from Yankee Stadium for throwing paper airplanes. The one and only set of tennis I ever won from him.

It’s difficult to believe he’s gone. Dad brought such vigor and energy to life. Indeed, it was only a few months ago that we rocked to Billy Joel at Madison Square Garden. You should have heard him sing “Movin’ Out”. If I make it to my 80s, I’d be thrilled to have half his energy and sharpness.

Health issues brought me to New York City often this past year. They proved a blessing in disguise. My sister Jennifer and I got to see much more of Dad than usual. We hung out in his office, grabbed a few dinners, and celebrated both Dad’s and my birthdays. We feel fortunate we had that time together.

Dad was an inspiration and a great deal of fun. It’s an honor to bear his name.

P.S. See some of his favorite brain teasers here.

Should Congress Use The Income Tax To Discourage Consumer Drug Ads?

Senator Jeanne Shaheen (D-NH) and a score of Democratic cosponsors want to use the tax code to discourage direct-to-consumer advertising by drug companies. Their bill, the End Taxpayer Subsidies for Drug Ads Act, would prohibit firms from taking tax deductions for any consumer advertising of prescription drugs.

Limiting tax deductions is a blunt and arbitrary way of approaching a legitimate concern. Consumer drug ads play an important role in debates about the costs of prescription drugs, the risks of misuse and overuse of some medications, the balance of authority between doctors and patients, the limits of commercial speech, and a host of other issues. For overviews, see here, here, and here.

But the bill is not well crafted to address those issues. The problem starts with the legislation’s name: Allowing drug companies to deduct advertising costs is not a subsidy. Many other deductions are: The charitable deduction in the personal income tax, for example, subsidizes charitable giving. And the mortgage interest deduction subsidizes borrowing to buy a home.

But the business deduction for advertising costs is not a subsidy. Continue reading “Should Congress Use The Income Tax To Discourage Consumer Drug Ads?”

Designing Carbon Dividends

Carbon dividends are the hottest idea in climate policy. A diverse mix of progressive and conservative voices are backing the idea of returning carbon tax revenues to households in the form of regular “dividend” payments. So are a range of businesses and environmental groups. Two weeks ago, six House members—three Democrats and three Republicans—introduced carbon dividend legislation.

Here is the idea: A robust carbon tax would cut emissions of carbon dioxide and other gases that are threatening our climate. It also would indirectly increase taxes on consumers and raise significant revenue. Carbon dividends would distribute that revenue back to households through regular payments, thus softening the financial blow of the tax while still reducing emissions. (Of course, the revenue also could be directed to other purposes.)

While the premise is simple, the details of implementing carbon dividends are complex. Policymakers face a range of philosophical, political, and practical issues. In a new report, How to Design Carbon Dividends, my Tax Policy Center colleague Elaine Maag and I explore those issues. Our work was funded by the Climate Leadership Council, an advocate for carbon dividends (full disclosure: I am a senior research fellow with the organization).

Two distinct philosophic views animate carbon dividend proposals. One sees dividends as shared income from a communal property right. Just as Alaskans share in income from the state’s oil resources, so could Americans share in income from use of atmospheric resources.

The second sees dividends as a way to rebate carbon tax revenues back to the consumers who ultimately pay them.

Though these ideas can be complementary, they have different implications for designing carbon dividends. Continue reading “Designing Carbon Dividends”

Three Things You Should Know about the Buyback Furor

Record stock buybacks—driven in part by the corporate tax changes in the Tax Cuts and Jobs Act (TCJA)—have sparked a media and political furor. Unfortunately, they’ve also created a great deal of confusion. To help elevate the debate, here are three things you should know.

1. Repatriated overseas profits are the main way TCJA is boosting buybacks

By slashing corporate taxes, TCJA will boost after-tax profits and cash flow. Companies will use some of that cash to buy back shares. But that is not the main way TCJA is fueling today’s record buybacks.

The big reason is the “liberation” of around $3 trillion in overseas profits. Our old system taxed the earnings of foreign affiliates only when the domestic parent company made use of them. To avoid that tax, many companies left those earnings in their affiliates. They could reinvest them in their foreign operations or hold them in U.S. financial institutions and securities, but they couldn’t use them for dividends to parent company shareholders or stock buybacks.

By imposing a one-time tax on those accumulated profits, the TCJA freed companies to use the money wherever they wanted, including in the United States. And multinational firms are leaping at the chance. Cisco, for example, says they are repatriating $67 billion and buying back more than $25 billion in stock.

Cisco’s response reflects a broader trend. Repatriated profits will account for two-thirds of this year’s increase in stock buybacks, according to JP Morgan. Stronger earnings, due to both improved before-tax profits and lower taxes, make up only one-third.

2. Buybacks do not mechanically increase stock prices

Buybacks can help shareholders. But it’s not as simple as much commentary suggests. Continue reading “Three Things You Should Know about the Buyback Furor”

How Should Tax Reform Treat Employee Stock and Options?

The tax treatment of employee stock and options raises a classic Goldilocks problem. We want to tax this compensation neither too much or too little. In a recent policy brief, I consider three questions about how to strike that balance.

Do companies get excessive tax deductions for employee stock and options?

This concern rocketed to prominence in 2012 when Facebook went public. Its employees earned billions from their stock options and restricted stock units. The company, in turn, got billions in tax deductions, reducing its income taxes for years.

Those deductions outraged some observers who asked how Facebook could get billions in tax write-offs when its financial statements showed much lower compensation costs. Lawmakers on both sides of the aisle denounced the “stock option loophole” and proposed limiting these deductions.

While there are good reasons for Congress to worry about companies gaming the tax code, this is not one. The tax deductions that companies receive for employee stock and options are, with few exceptions, just like those for cash wages, salaries, and bonuses. Continue reading “How Should Tax Reform Treat Employee Stock and Options?”