issue: Fiscal Policies

The Low-Income Tax Trap and COVID: The Real Societal Cost of Having the IRS Do Too Much

Posted on by The Progressive Policy Institute

The working poor are burdened with some of the most complex tax returns in the country as they annually claim Earned Income Tax and Child Tax refundable credits.  In the coming months, low- and middle-income Americans who received unemployment insurance payments during the Covid-19 pandemic may also face a “tax trap” that unexpectedly reduces their EITC benefits. At the same time, some have advocated that the IRS core mission be substantially expanded beyond their traditional role in society.  But the emerging environment tells us something important about the complexity of our tax system, and the societal costs of pushing the IRS to do too much. 

October 15th is the final tax deadline for the 2019 Tax Season, but it also the last normal Tax Day that Americans will have for a while.  Someone who filed for an extension to their 2019 taxes will have their return due on that day. But next year’s tax return, for Tax Year 2020 when it comes due in 2021, will reflect the utter chaos of our collective 2020 experience.

Many Americans will be dealing with a much different tax situation than they expected at the beginning of 2020.  If they worked remotely from a different state than their office, it’s entirely possible that many workers may end up paying taxes to two jurisdictions. If they lost their job, their earned income from work might be less, while their unemployment benefits might be higher. For too many unfortunate people the pain of a Covid diagnosis will be accompanied by much higher medical expenses.  All of these factors, and more, will lead to a 2021 Tax Day more painful and burdensome, and carrying greater risk, than usual for millions.

Facing particularly big problems in their Tax Year 2020 returns are the low- and moderate-income Americans who might qualify for the earned income tax credit (EITC). The EITC, along with the Child Tax Credit (CTC) is one of the nation’s most important anti-poverty programs. The EITC refundable credit alone provides as much as $6660, depending on income and number of children.  As of December 2019, the EITC paid out $63 billion to 25 million Americans.  Roughly 85% of that total went to taxpayers with adjusted gross incomes (AGI) of less than $30,000.

The importance of the EITC and the CTC cannot be overstated. In 2018, the EITC alone lifted about 5.6 million people out of poverty, including about 3 million children. But the problem is that the EITC has an extremely complicated set of rules and requirements about who is eligible and how much money they can receive, based on a combination of earned income, adjusted gross income, number of children, familial relationships, who lived with whom for how long, the composition of the family unit, and more. Individuals who violate any of these rules can have the tax credit taken away and may be banned from getting the credit for years.

Beyond this tax complexity that is always faced by working poor and moderate-income taxpayers, the returns due in 2021 are looming on the horizon as a daunting challenge for this population. A September 2020 report from the Tax Policy Center argues that recipients of the EITC will face a potentially large and unexpected Covid-related tax trap when they do their Tax Year 2020 returns. It turns out that the hundreds of billions of special unemployment insurance benefits received during the pandemic––so needed by those affected by pandemic loss of jobs—count towards overall income for tax purposes, but do not count as “earned income” for EITC purposes.  Because of the complex EITC rules, observes the TPC report, “receiving UI benefits can decrease the EITC, but cannot increase it.”

This Covid tax trap may unexpectedly reduce the EITC credit for many low-income families when it comes time to file their next taxes—an unwelcome surprise for people that are already struggling with the financial and health impacts of this pandemic. That’s a special problem, says the TPC report “since research shows low- and moderate-income families plan for that annual tax refund.”

Advocates of a return-free tax system have long contended that the IRS already has all the information it needs to prepare the returns for low- and moderate-income taxpayers. So in this real-world scenario, could the IRS use the information that it already has to help low- and middle-income Americans figure their EITC refund in this very complicated pandemic year, without the taxpayer having to struggle through all the rules and calculations to prepare their own return, or get professional help to qualify for refundable credits and determine the refund due to them?

The short answer is no. The IRS does not have the necessary information in its databases to accurately determine a low-income taxpayer’s eligibility for EITC and/or correctly calculate the amount of credit due to the taxpayer—indeed, far from it. The EITC is based on a stew of residency, family relationship, and income limits, with complex tie breaker rules. And like a giant puzzle, it requires deep knowledge of the personal lives of people living in the same household or family unit, with who else, for how long, and what their relationships and incomes are, just for a start. If a child qualifies to be claimed for EITC purposes by more than one person, there are six tie breaking rules.  Single parent households, and the non-traditional makeup of today’s household relationships, have also evolved in modern society faster than government regulations can keep up.

And especially when there are dramatic shocks to the economy—such as the health crisis of 2020, or a severe natural disaster or climate change event, or a future large-scale economic dislocation—there’s no way to use the previous year’s information as an accurate guide.  Moreover, no information return is automatically generated that says whether a child is living with their grandparents while their parents do essential jobs around the clock. And unique household or family circumstances are equally challenging given the velocity of domestic changes in today’s society, or in coping with crisis as we have in 2020. For example, the IRS does not automatically receive reports of split custody divorces where the children spend more than half of 2020 at the one parent’s house which had better broadband connections for school purposes or had broadband at all.

Suppose the next administration wanted to help out low- and middle-income Americans by estimating their EITC for 2020 and 2021. It would be a massive and costly undertaking for the IRS to go out nationwide to even try to collect and process the necessary extensive personal data on individuals, households and families to even begin to have enough information to even attempt to accurately determine eligibility for EITC and calculate the credit payment. To put this in perspective, the ten-year cost of conducting the 2020 Census is in excess of $15 billion. However, calculating the EITC actually requires collecting annually much more personal information than even the decennial Census. Moreover, part of the reason that the Census is so expensive is to track down precisely the low-income population that is eligible for the EITC.

Why so expensive and mammoth an undertaking? The rules for which taxpayers get to claim a child for EITC purposes depends crucially on who the child lived with during the year, and for how long. In other words, the IRS would need to know for each potential claimant—including grandparents and aunts and uncles in a multigenerational household, and whether and how household or family makeup changed or evolved during the year—and how many months each child lived there and with whom. In addition, the rules require information on adjusted gross income (AGI) per potential claimant.

The IRS already has a Dependent Database which helps it determine if two or more taxpayers have claimed the same child after they have filed, as part of tax administration. But the database does not have the prospective information to determine which person is the right one to make a claim for EITC before filing, much less accurately determine the amount of refund credit that the taxpayer will be due.

The only place this information can come from is the potential EITC recipients themselves. The data would have to be voluntarily submitted by the taxpayers themselves in advance of the government being able to attempt to accurately prepare the tax return for the taxpayer.  That means they would have to fill out new data collection forms in January, either online or on paper, which would compile the necessary information about where the child or children resided, with whom, for how long, the relationships to the children and among household or family members, and the varied incomes of those individuals in the household.  Indeed, expansion of the IRS into the function of annual collection of extensive personal nonfinancial data about individuals, households and families might very well receive bipartisan outcry, for any number of public interest reasons ranging from fiscal cost to the impact on personal privacy. The task each year would be huge.

Oddly enough, low- and moderate-income taxpayer returns that claim the EITC have been repeatedly described as “simple” returns by advocates of having the IRS take over tax preparation. But a study by the Tax Policy Center highlights the sheer complexity of low-income tax returns, noting that

…eligibility for child benefits has increasingly relied on the concept of a tax unit, which has not evolved with families…. The income tax law is based on annual filing and bases the definition of a filing unit primarily on legal relationships, child residency, and support. Consequently, families that change throughout the year may have difficulty correctly determining their filing status and who can properly claim a child for the purpose of receiving child-related benefits.

As the TPC study observed, “[b]ecause of these changes in family structure, tax filing has become more complex for many and will likely continue to grow more complex.”

The reality is that the IRS already collects 3.5 billion information returns each year, but most of them are generated automatically in the course of doing business by companies, such as employers and financial institutions.  Out of the 3.5 billion, for example, 2.3 billion are 1099-B forms for reporting securities transactions, which are tracked by brokerage firms as part of doing business. These forms are then delivered electronically to the IRS ready to be processed.

In contrast to the billions of electronic reported information forms, the IRS only processed 40 million paper information forms in FY 2019 and has been trying to drive down that number even more, as it continues its long-term modernization toward electronic tax operations originally begun back in 1998 as result of the work of President Bill Clinton’s National Commission on IRS Restructure and Reform, and its implementing Act. Shifting resources to a massive new data collection function to obtain the kind of personal data required to establish eligibility for the EITC, would require the IRS to go in the opposite direction and set up an entirely new set of workstream and systems for electronic and paper submission of “pre-return” personal information returns. In the best-case electronic scenario, that would include creating and maintaining a significant new online user interface for entering details of children, residency, relationships, and potential claimants.

Indeed, the United Kingdom offers a real-world case study of exactly this problem, based on their difficult experience with the UK version of the EITC, the Working Tax Credit, introduced in 2003. According to a study by the All-Party Parliamentary Taxation Group, a non-partisan committee of the UK parliament, the government figured out the hard way that it simply did not have enough information to accurately determine family tax credit eligibility, despite the fact that Her Majesty’s Revenue and Customs (HMRC) had long run a classic ‘return-free’ tax system for blue-collar taxpayers.

In response, the HMRC mandated the annual preparation and filing of a multi-page “pre-return” by taxpayers to establish their eligibility for the Working Tax Credit.  This pre-return, resembling an old-fashioned, multi-page American 1040 tax return, provides the government the extensive personal information it needs for the government to prepare the taxes for the taxpayer– so the taxpayer doesn’t have to file a return.  This tortured logic illustrates the problems that low- and middle-income taxpayers in the U.S. would face if the IRS followed the UK example, held up by return-free advocates as the state-of-the-art model to follow to reduce taxpayer burden.

How much would it cost to expand the IRS Dependent Database on short notice, in order to collect the significant additional information necessary, process it, to accurately establish whether EITC claimants are eligible or not, and then correctly calculate the tax benefit?  There’s no way of knowing the total overall cost for this data collection undertaking, but we can analyze the problem.

The IRS processed roughly 250 million personal,business, and related tax returns and 3.5 billion financial information returns in FY 2019, and handled 650 million online visits to IRS.gov. Against that backdrop, 25 million EITC recipients don’t seem like much of an extra burden.

But as noted above, the vast majority of those information returns are electronically generated and low-cost to handle. And the vast majority of the website visits are queries about the status of refunds and tax return transcripts, rather than the sort of interactive data entry that the EITC and CTC would require.

The Taxpayer First Act of 2019 did require the IRS to develop an internet portal by 2023 that allows taxpayers to electronically file 1099 forms for reporting income and other financial data, which are vastly simpler than the personal information collection that would be needed for the EITC. However, that process of development of a 1099 financial reporting portal is just starting, with Deloitte just recently receiving a 3-year contract to set up a project management office.

So we can reasonably expect that the EITC information return would have to be supplied via paper form submissions, at least for the foreseeable future, just as took place in the United Kingdom when the requirement was mandated there. One 2009 estimate by the Treasury Inspector General for Tax Administration put the cost of processing a paper tax return at $2.87 per return.  But greatly complicating this type of undertaking is the fact that the IRS has gradually dismantled its paper return processing capacity over the last 20 years, with a residual capability that is a shadow of the legendary IRS paper processing operation in the first century of the IRS’s existence.

The Broader Context

This analysis, driven by the crisis of 2020 and the tax year to follow, raises the obvious question of why the IRS would set up an expensive new process to collect substantial personal information from EITC recipients, separate from the citizen’s actual tax return, which would have otherwise been submitted by the taxpayer in the normal voluntary compliance process.  More generally, it does provide some insights into the costs of adopting return-free filing in an uncertain world and rapidly changing society.  Return-free filing has often been thought of as a free lunch, where the IRS makes use of information that it already has to make life easier for low- and middle-income taxpayers and to save money. But the reality is starkly different from the rhetoric, and the often-claimed benefits for the working poor could in fact turn into another burden.

The IRS estimated that 25.3 percent ($17.4 billion) of the total EITC payments made in FY 2019 were “improper.” However, the IRS also estimated that approximately 21% of eligible taxpayers did not claim the credit that they deserve.   That leads people to jump to the conclusion, as one journalist wrote, that “….Automatic filing would provide EITC payments to many of that 20 percent not getting them, and would spare taxpayers from doing complex calculations that sometimes lead to errors.”

But there are no secret troves of free data that are being hidden that would immediately translate into return-free filing, with fair and equitable treatment for the working poor and disadvantaged. One issue is that the United States has no official resident register that tracks where people are living. By comparison, many of the countries that have “return-free” filing are already tracking where people live through an official resident register. In Germany, often held up as a return-free filing example, the Federal Ministry of the Interior, Building and Community supervises an official resident register:

“Anyone who moves into a residence in Germany must register within two weeks of moving in. To register, you have to go to the registration authority of your municipality and present a valid ID card, passport or passport substitute document and a certificate issued by the person providing the residence.”

The U.S. does not maintain such official government requirements for registration of domicile. Drivers’ licenses, school records, healthcare records, and tax records could be used to assemble a partial picture, but not enough to fulfill the needs of the EITC.

Proponents of return-free filing argue that the IRS can use data already submitted by the taxpayer in the past. For example, Austan Goolsbee in 2006 proposed a Simple Return that “would use the taxpayer’s tax return information from the previous year.”

However, the 2020 example shows it’s just not possible to assess today’s residency from last year’s reports due to rapidly changing household units and relationships, and now especially with remote work and remote learning. The research by the TPC demonstrates that even in ‘normal’ times the increasing velocity of change in the makeup, location and relationships of American households, particularly among the working poor, is significant and government’s regulatory frameworks and definitions cannot keep up.

Moreover, these changes interact with the tricky rules for EITC eligibility.  The Center for Budget and Policy Priorities notes that:

families’ living arrangements can be complicated, with working grandparents or aunts and uncles living with working parents and their children. More than one working adult in such families may potentially qualify to claim a given child for the EITC. Neither they nor, in many cases, their tax preparers may fully understand the complex rules that determine who is entitled to claim the EITC in such circumstances.

In the same vein, a report from the Tax Foundation observes that “improper payments are largely a result of the same child being claimed multiple times due to shared custody agreements or other complex living situations.”

Of course, the deeply layered complexity of the tax system doesn’t help either. The analysts at the Tax Policy Center write “If an income tax system were simple enough, the government could withhold taxes owed and do its own accounting at the end of the year without much help from taxpayers.” But what they mean by simple enough is a massive and comprehensive overhaul of the tax code, including a myriad of such fundamental changes as making the unit of taxation the individual rather than the family, and simplifying eligibility requirements for refundable credits.

The EITC and similar tax benefits such as the Child Tax Credit are hard cases for return-free filing just as a practical matter, because they require so much information which the IRS does not currently have. And prior year tax returns are no cure for ensuring accurate payment of future refundable credits, or avoidance of improper payments (either too little, or too much, or correct determination of eligibility for payment at all).  The essence of accurately establishing annual eligibility is in its recognition of the greatly increased velocity of societal changes in the family unit, household makeup, human relationships, job changes, moving and other changed housing circumstances, and more, But they are also the cases that make a difference, because they directly affect the lives and economic well-being of so many low- and moderate-income Americans, because they are so complicated, and because there are so many mistakes, in both directions.  And getting it right directly affects the economic condition of the people for whom refundable credits are intended as an anti-poverty lifeline.

There are no shortcuts. Precisely the people who need the help are those who would not benefit from return free filing. What 2020 shows us is that rather than giving these Americans extensive new forms to complete and file as a pre-return, or alternatively, to establish an intrusive new government national program of annual personal information collection, it is better to take that money and use it to improve the whole rickety IT infrastructure of the IRS in the performance of its core mission, which has been underfunded and woefully behind the IT and performance curve for decades.

Indeed, in a recently released paper PPI estimated that the federal government has an accumulated software investment deficit in excess of $200 billion. That is the extra amount that the federal government would have needed to invest in software to keep up with the private sector. Under these circumstances it’s difficult to justify diverting the IT funds to set up a “return-free” system that is actually not return-free for the low- and middle-income taxpayers who carry the burden of its complexity.

At its heart, this analysis of the Covid tax trap raises the broader question of the true societal cost for low- and moderate-income Americans in mandating a fundamental change in the nation’s voluntary compliance tax system that is touted as “reform”, “burden reduction,” and “cost reduction.”  As we have shown here, the reality is quite different, and those adversely hit by the “return-free” proposal––making the government tax collector also the nation’s tax preparer––are the working poor and other low- and moderate-income Americans. These are the people with the least means, voice or resources to advocate for themselves, turning tax fairness and societal equity on its head.

The GOP’s Pivot Away From Fiscal Relief Hurts Millions of Americans

Posted on by The Progressive Policy Institute

At every turn, the Trump administration and Republicans in Congress have bungled the coronavirus pandemic and shortchanged our recovery. For the first month after most programs created by the CARES Act – the last major stimulus bill passed by Congress back in March – expired, the GOP wasted valuable time on half-measures that could not pass and executive orders that do not help. Washington Republicans have now completely abandoned work on further relief measures so they can focus on a partisan gambit to pack the Supreme Court with yet another right-wing justice before voters have a chance to make their voices heard in just five weeks.

It didn’t have to be this way. Back in May, House Democrats passed the $3 trillion HEROES Act that they intended to be a follow-up to the CARES Act. Although the bill had many flaws, it offered a starting point for negotiations. Their Republican counterparts in the Senate, on the other hand, spent two months doing literally nothing to advance any additional relief legislation. It was only a full month after the major provisions in the CARES Act had expired that the Republican-controlled Senate voted on a partisan $500 billion “skinny” stimulus bill, which then failed to pass the chamber. Negotiations have now stalled due to GOP’s insistence on penny-pinching for a critical stimulus bill that, it should be noted, would almost certainly be less expensive than the wasteful $2 trillion tax cut the party enacted at the height of our most recent economic expansion.

In an attempt to cover for his party’s fecklessness, President Trump issued a series of executive orders ostensibly designed to fill the needs for further relief unmet by Congress. But as is too often the case with Trump, these actions were almost entirely superficial – and in some cases, actively harmful to the people supposedly helped. Rather than playing these pointless partisan games, Republicans need to join Democrats at the negotiating table and deliver a real solution for the millions of Americans struggling to survive amidst a global pandemic and the worst economic crisis since the Great Depression.

Anyone at Risk of Contracting Coronavirus

The first priority for policymakers must be controlling the pandemic, as our economy cannot fully recover until people feel safe going in public to work or spend money. Adequate testing and tracing are essential to preventing the virus from spreading until a vaccine is found, but delays in test results have already undermined our COVID response. Democrats proposed $75 billion for coronavirus testing and contact tracing as part of their stimulus proposal in the HEROES Act, while Republicans proposed a much-smaller $25 billion investment, including just $16 billion of new funding not reallocated from CARES Act programs. But without a deal, neither side gets any investment – and the virus continues to spread through our communities.

People Who Have Lost Their Jobs

Up to 26 million Americans remain unemployed thanks to the pandemic. In normal times, unemployment benefits typically only cover 34-54 percent of lost wages for a limited period of time. These benefits, however, are woefully insufficient during a prolonged period when few job openings are available to be filled. The CARES Act sought to address this problem by increasing UI benefits by $600/week through the end of July and extending the maximum number of weeks someone could claim unemployment benefits until December.

Democrats proposed to continue the full $600/week until January (or tie the extension of benefits to real economic indicators), while Republicans wanted to replace it with a $300/week supplement through the election). There was a very reasonable middle-ground here, as both sides agreed that supplemental unemployment benefits should not be allowed to expire in their entirety – but because no agreement was reached, that is exactly what happened.

Trump claimed to resolve the problem with an executive order letting states use Federal Emergency Management Agency (FEMA) money to establish a supplement for unemployment insurance. But this approach was riddled with problems: it depended on state unemployment offices, which are already burdened with crushing caseloads and obsolete information technology, to set up new administrative structures, delaying the receipt of benefits. The new supplement was worth only half as much as the one authorized by the CARES Act, and was not made available to low-income workers who receive less than $100/week in normal unemployment benefits. Finally, the FEMA fund only had enough money to fund benefits for six weeks – and required drawing upon funds that will likely be needed to fight wildfires out west and repair damage from hurricanes in the south.

Landlords and Lenders

Failure to adequately support unemployed Americans will have cascading effects throughout the economy. Because the unemployed then cannot spend as much money as usual, the businesses that rely on their patronage also lose income, which hurts workers throughout the broader economy and deepens the recession. They are also more likely to fall behind on payments for rents, utilities, or mortgages. The CARES Act included a temporary moratorium on evictions, but now that it is expired, millions of American families are at risk of losing their homes by the end of the year. Democrats  have proposed imposing an even broader moratorium than was included in the CARES Act. The Trump administration, meanwhile, ordered the Centers for Disease Control to enact a limited moratorium on evictions until the end of the year for low- and middle-class renters.

Although a moratorium may give at-risk renters some temporary relief, it fails to resolve the underlying issue: lost income. Trump’s moratorium simply delays the inevitable for any renter who is behind on rent and would otherwise face eviction. Meanwhile, smaller landlords will lose out on income they need to pay for mortgages and property taxes, which puts them at risk of default. Lenders may also face significant losses from landlords and homeowners unable to make their required payments. If Congress were to instead provide adequate income support for people who have lost their incomes in the pandemic, they would ensure people can afford to remain in their homes without creating these new burdens.

Small Businesses and Their Workers

The CARES Act included a Payroll Protection Program (PPP), which gave small- and medium sized-businesses money to retain their workforce. That funding dried up when the program ended on August 8th. Here, Congressional Republicans actually want to be more generous, proposing almost $360 billion in small business support, loans, and employee retention provisions, while Democrats proposed $290 billion. But without a deal, small businesses – many of which are operating in industries, such as dining and hospitality, that have been particularly hurt by the pandemic – have not gotten any more support.

The only support for small businesses in President Trump’s executive orders was a counterproductive payroll tax holiday. Neither party in Congress supported Trump’s previous proposals to temporarily cut the payroll tax, so instead he used his limited authority to defer collection of some payroll taxes until next year. But since workers will still owe that money in 2021, many employers are just withholding the tax anyway. Meanwhile, federal workers – including those in the military – who cannot opt out of deferral are being advised not to spend the money so they aren’t financially flattened by the massive tax bill for back taxes they will receive next year.

State and Local Governments

The coronavirus pandemic has blown a massive hole in the budgets of state and local governments: income and sales taxes are drying up while spending on safety-net programs, such unemployment insurance and Medicaid, have increased dramatically. Because most state and local governments are required to balance their budget, this fiscal squeeze will compel them to cut their budgets right when people and businesses need government support the most.

Although Congress included some aid for state and local governments as part of the CARES Act, it only allowed this money to be spent on new coronavirus-related expenses, not to replace lost revenues. Republicans have proposed to loosen rules on how states could spend this aid, but offered no additional funding. Democrats, meanwhile, included almost $1 trillion in new funding for state and local governments in the HEROES Act.

Many on the right have argued that providing further aid would be a “bailout” for the finances of poorly-managed states, but this criticism is at best deeply misguided. PPI projects that state and local governments will need at least $250 billion in additional support beyond what was already appropriated before the end of 2021 just absorb the pandemic’s financial impacts without making deep cuts to essential services – and this figure could be even higher if the economic impact of this unpredictable crisis is worse than current projections. Rather than argue over an arbitrary dollar amount, Congress can easily address the concerns of both Democrats and Republicans by designing programs that provide aid to state and local governments based on the real pandemic-induced shortfalls realized on their balance sheets.

Parents and Families

The pandemic has taken a particularly brutal toll on parents who are unable to send their children back to school this fall. It is difficult for workers to do their jobs, either remotely or in-person, when they are unable to access child care that they usually could depend on at this time of year. It also poses a special burden on students from low-income families who lack the internet access necessary to participate in online classes.

The good news here is that both parties have proposed about $100 billion in additional support for schools. But they disagree on what it should be used for: the Trump administration would use this money to pressure school districts across the country to return to in-person classes, the even though doing so would be unsafe without the proper public health safeguards in place. The Democrats’ proposal, on the other hand, would also enable schools to stand up high-quality remote learning to keep their students learning while school buildings remain closed.

Unfortunately, these nuances don’t even matter at the moment: because Congress failed to reach a broader agreement, schools have received no additional federal support. Even worse, the looming shortfalls facing state and local budgets are likely to result in deep cuts to education spending (as they did following the 2008 financial crisis), further jeopardizing the long-term opportunities for children and families.

Voters

State and local governments face an unprecedented challenge administering a national election in the midst of a pandemic, made even worse by foreign governments threatening to interfere again like they did in 2016. The HEROES Act included $3.6 billion to support election integrity and vote-by-mail operations to make sure every vote is counted, while the Senate bill included nothing. As we enter the final stretch of what is perhaps the most contentious presidential election in modern history against the backdrop of several overlapping national crises, the failure of federal policymakers to support election infrastructure jeopardizes the bedrock of our democracy.

Conclusion

Although neither party’s proposals have been perfect, only one is making any serious effort to find common ground and support our economy in a time of unprecedented crisis. While House Democrats prepare to vote this week on a new package of proposals that is more moderate than the HEROES Act they passed four months ago, President Trump and Senate Republicans are leaving millions of Americans in the lurch by prioritizing partisan court packing over any further fiscal relief. Democratic candidates for office and all stakeholders, from the worker who is at risk of losing her home along with her unemployment benefits to the parent who cannot save his small business and give his child a decent education at the same time, should pressure Republicans to return to the negotiating table and work in the public interest – or face severe consequences in November.

Unemployed Americans Face Benefit Cut-Off

Posted on by The Progressive Policy Institute

While House Democrats and Senate Republicans remain at an impasse over how generous unemployment benefits should be in the current recession, a potentially greater problem is looming: millions of unemployed Americans will see their benefits terminated prematurely unless Congress takes additional action in the next three months. What’s more, many workers are forced to clear bureaucratic hurdles to qualify for extended benefits Congress approved last spring to help them ride out the pandemic.

This piece explains why jobless Americans are entangled in red tape and on course to lose their benefits at the end of this year. Congress should fix these problems by tying the duration of unemployment benefits to actual economic conditions rather than arbitrary deadlines, streamlining the transition from regular benefits to extended pandemic benefits, and requiring the states to do a better job of informing workers about special pandemic extensions.

Not All Unemployed People Are Eligible for the Same Number of Weeks

People who lose their jobs through no fault of their own can typically draw unemployment benefits for 26 weeks. When unemployment spikes, the Extended Benefits (EB) program automatically extends the duration of benefits, usually for 13–20 weeks. But to buy unemployed people more time to find work amid the pandemic recession, Congress created a new program that offered 13 additional weeks of benefits for job seekers to draw before EB, called Pandemic Emergency Unemployment Compensation (PEUC). (Since some states offer unemployment benefits for fewer than 26 weeks, Congress also let people who exhausted all available benefits in fewer than 39 weeks make up the difference through the new program otherwise meant for self-employed workers, Pandemic Unemployment Assistance.)

However, it turns out that many people who lost their jobs as a result of the pandemic will not receive all 39 weeks of unemployment benefits. Why? Because the pandemic-specific unemployment programs expire at the end of this year. That means that anyone who began receiving benefits after March 28 will have their pandemic benefits cut off before they receive 39 weeks of benefits.

Leaders may have hoped back in March that the pandemic would subside and the unemployed would not need an extension after December. But we now know that’s not likely. Instead of “going away” as President Trump said that it would, the pandemic became worse than ever, which hurt the economy and caused even more layoffs. Over 80 percent of all initial normal unemployment claims filed during the pandemic were filed with fewer than 39 weeks to go before the end of the year. While some of those recipients are repeat claimers who might still get the full benefit, evidence from California suggests most were newly unemployed people who cannot. Republicans’ refusal to negotiate seriously with House Democrats now risks undermining the stimulus that Congress has already passed by prematurely kicking millions from pandemic unemployment programs.

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Even Eligible Beneficiaries Face Hurdles to Claiming Benefit Extensions

The looming cutoff isn’t the only problem facing unemployed people. To get however much of a benefit extension they do qualify for, recipients must also run a bureaucratic gauntlet through state unemployment offices already saddled with outdated technology and unprepared for the flood of applications. The U.S. Department of Labor has told states to require beneficiaries who have exhausted their normal benefits to actively apply for PEUC benefits, rather than receiving the benefits automatically. Some states are automatically enrolling beneficiaries in the program anyway, but PPI has only identified 14 such states, while 29 states indicate beneficiaries must specifically apply for PEUC in some way (several states have not yet set up their PEUC programs, and others do not indicate on their websites how beneficiaries transition from normal benefits to PEUC). This new application is simple in some jurisdictions, but onerous in others. Jobless people in Arkansas, for example, must physically go to a state unemployment office to apply for these benefits, even though they can apply for normal benefits online.

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These extra barriers could deter some recipients from getting the benefits they are entitled to. And beneficiaries who may have already survived onerous wait times to get their normal benefits may once again face delaysas states struggle to process PEUC applications. Kansas warns people transitioning from normal unemployment benefits to PEUC to expect delays in their payment, which can be brutal on cash-constrained people struggling to pay their bills.

Federal policy requires states to notify people who are likely eligible for PEUC, but many are not doing so until after a recipient exhausts their normal benefits, which risks leaving people confused as to whether they are entitled to more benefits. Although I have found no good data on how common this is, anecdotal evidence from my experience suggests the problem is real. My mother, who is furloughed, did not understand what the benefit extensions would entitle her to, and those extensions made gave her a better alternative to accepting an early retirement offer from her employer. Another close friend, who is unemployed, was planning to move to his parents’ house hundreds of miles away before he found out about PEUC through his own research. States should inform all recipients of everything they are entitled to when they begin receiving benefits (or as soon as new information becomes available) so no one makes life-changing decisions based on incomplete information.

Longer Benefits Could Support the Economy Even More Than Larger Benefits

Spending more on unemployment benefits helps more than just the recipients themselves — it helps the economy in which that money is spent. And while Congress can and should do both, extending the duration of unemployment benefits might do even more to stimulate the economy than increasing the size of benefits. This is because money put into circulation by the government only stimulates the economy if it gets spent on goods and services by those who receive it. Beneficiaries are likely to spend every dollar of a small benefit to pay for necessities, but every additional dollar is slightly less essential to maintain their standard of living. As the size of the benefits grows, recipients are more likely to save rather than spend a greater share of those benefits. Accordingly, the jobless population is more likely to spend money they receive from a benefit extension than they are a bigger weekly benefit with a similar cost.

Further, the long-term unemployed are less likely to have savings or other resources to support themselves, making it even more likely they will spend a large share of their benefit. And contrary to GOP Senator Rand Paul’s claim that said “If you give people money and you make it less painful to be in a recession we can stay in a recession longer,” research on the Great Recession found that extending benefit duration did not create a strong disincentive to work. Because people can only draw unemployment benefits if they are looking for a job, extending unemployment benefits can give recipients a vital lifeline without holding back the economic recovery.

To strengthen this safeguard for job seekers and the economy, Congress should return to the negotiating table and take three immediate actions:

  • First, cancel the arbitrary end-of-year deadline for pandemic benefits and tie the duration of unemployment benefits to real economic conditions as indicated by figures such as the unemployment rate.
  • Second, direct the Labor Department to let states automatically enroll beneficiaries who exhaust their normal benefits in PEUC.
  • Third, require states to notify all beneficiaries about the full slate of benefits available to them, with immediate updates should those benefits change.

For more information on how states say people can apply for PEUC, see below.

State, How are Normal Beneficiaries Transferred to PEUC:

Alabama, Automatically
Alaska, New Application
Arizona, New Application
Arkansas, New Application
California, Automatically
Colorado, New Application
Connecticut, New Application
Delaware, Automatically
Florida, New Application
Georgia, Automatically
Hawaii, New Application
Idaho, New Application
Illinois, Automatically
Indiana, Not Clear
Iowa, Automatically
Kansas, New Application
Kentucky, New Application
Louisiana, Not Clear
Maine, New Application
Maryland, Automatically
Massachusetts, Automatically
Michigan, Automatically
Minnesota, New Application
Mississippi, Not Clear
Missouri, New Application
Montana, New Application
Nebraska, Automatically
Nevada, New Application
New Hampshire, Not Clear
New Jersey, Automatically
New Mexico, New Application
New York, Automatically
North Carolina, New Application
North Dakota, New Application
Ohio, New Application
Oklahoma, New Application
Oregon, New Application
Pennsylvania, Automatically
Rhode Island, Not Clear
South Carolina, New Application
South Dakota, Not Clear
Tennessee, New Application
Texas, Not Clear
Utah, New Application
Vermont, Automatically
Virginia, New Application
Washington, New Application
West Virginia, New Application
Wisconsin, New Application
Wyoming, New Application

Weave a Stronger Safety Net Post-COVID

Posted on by The Progressive Policy Institute

The coronavirus pandemic has opened some gaping holes in our nation’s social safety net, especially where hunger and malnutrition are concerned. Millions of low-income workers have lost their jobs (and will soon lose expanded unemployment benefits if Congress fails to extend them) and millions of children in low-income families have lost access to school meals because the K-12 system has shutdown. These twin blows have triggered a dramatic rise in hunger and food insecurity in America.

Even before the pandemic hit, an estimated 37 million people, including 11 million children, reported experiencing food insecurity or hunger. Unless Covid-19 is contained, that estimate could reach 54 million by the end of 2020.

America’s most vulnerable populations – poor families with children, Black Americans, Hispanics and those living in rural areas and the South – are disproportionately affected by food insecurity and hunger. Their school-aged children also are more likely to rely on free and reduced-price school meals to meet their nutritional needs.

In March, Congress passed the Families First Coronavirus Response Act, which provided emergency food assistance and authorized the U.S. Department of Agriculture and the states to adapt the Supplemental Nutrition Assistance Program (SNAP, formerly food stamps) to meet the needs of the hungry during the crisis. According to a Center on Budget Policy Priorities report, almost all states have taken advantage of the flexibility the Act provides to maintain SNAP benefits to households with children missing school meals.

Before Covid-19, the national school lunch program on average served nearly 29 million students, and the school breakfast program served nearly 15 million students. When the schools closed in March, many school districts scrambled to keep feeding their students, by establishing “Grab and Go” sites for picking up meals, or establishing daily meal delivery routes using buses to deliver food rather than transport students.

Despite these improvisations, however, most school aged children apparently are not receiving as much food as they did before their schools closed. For example, a survey of school nutritional professionals found that 80 percent of school districts reported serving fewer meals since school closures. Of those districts, 59 percent have seen the number of meals served drop by 50% or more.

In response to the K-12 shutdown, the Families First Act created the Pandemic Electronic Benefit Transfer program that provides food to families that have lost access to free and reduced-priced meals. This one-time meal replacement benefit is added to an existing electronic benefits transfer card for families already receiving SNAP. Families with school-age children that don’t receive SNAP can also get a card.

SNAP historically has proven to be one of the nation’s most effective programs for providing low-income households with food during economic downturns. That makes it a powerful counter-cyclical policy tool. Research shows each $1 of SNAP benefits generates between $1.50 and $1.80 in total economic activity. Yet when Congress in April passed its next pandemic relief measure, the CARES Act, it increased more operational funding for SNAP operations but failed to increase SNAP direct benefits.

There are compelling moral and economic reasons why U.S. lawmakers should make offering more food aid a top priority as Covid-19 infections climb in most of the states, slowing economic recovery and causing more workers to file for unemployment. In the first place, hungry and malnourished people are more vulnerable to disease. There’s also a strong possibility that many K-12 students will not be able to go back to school in September, despite President Trump’s ill-considered calls for a general reopening. Additionally, by supporting food consumption by low-income families, more aid stimulates demand and keeps our stricken economy afloat.

To meet the immediate crisis, PPI endorses anti-hunger provisions of the HEROES Act that House Democrats passed in May, but is now blocked by Republican Senate Majority Leader Mitch McConnell. These include:

• Increasing the SNAP maximum benefit by 15 percent through September 30, 2021, which translates into an additional $25 per person each month;

• Raising the minimum monthly benefit from$16 to $30;

• Adding $3 billion for child nutrition programs; and,

• Extending the Pandemic Electronic Benefits program through the fall of next year.

MODERNIZING THE SAFETY NET

This is also the right time to look beyond the current crisis and ask how our country can build a more resilient system of social supports that can better protect our most vulnerable citizens against future pandemics and other emergencies.

“While it’s true that government safety net programs help tens of millions of Americans avoid starvation, homelessness, and other outcomes even more dreadful than everyday poverty, it is also true that, even in ‘normal times,’ government aid for non-wealthy people is generally a major hassle to obtain and to keep,” notes Joel Berg, CEO of Hunger Free America.

“Put yourself in the places of aid applicants for a moment,” Berg added. “You will need to go to one government office or web portal to apply for SNAP, a different government office to apply for housing assistance or UI, a separate WIC clinic to obtain WIC benefits, and a variety of other government offices to apply for other types of help—sometimes traveling long distances by public transportation or on foot to get there—and then once you’ve walked through the door, you are often forced to wait for hours at each office to be served. These administrative burdens fall the greatest on the least wealthy Americans.”

A survey of low-income households by Hunger Free America found that 42 percent said it was “time-consuming and/or difficult to apply” for Unemployment Insurance, and nearly a quarter said the same about applying for SNAP. In addition, “40 percent of respondents said they had problems reaching government offices while applying for SNAP, with 36 percent stating that they never received a call back after leaving
a message.”

To reduce the high “opportunity costs” of being poor in America, the federal and state governments should adopt modern digital technologies that help low-income families apply once for public benefits without having to run a bureaucratic gauntlet of siloed programs for nutrition, housing, unemployment, job training, mental health services, and more. Specifically, as Berg proposed in a 2016 report for PPI, governments at all levels should cooperate to create online accounts from which families can apply remotely for all the benefits they qualify for, and into which they can deposit their public assistance.

This proposal is the centerpiece of a new bill introduced by U.S. Reps. Joe Morelle (D-NY) and Jim McGovern (D-Mass) and Senator Kirsten Gillibrand (D-NY). The Health, Opportunity, and Personal Empowerment (HOPE Act) would fund state and local pilot projects setting up online HOPE accounts to make it easier for low-income people to apply for multiple benefits programs with their computer or mobile phone. In addition to saving them time, money and aggravation, HOPE accounts enable people to manage their benefits – effectively becoming their own “case manager” – and easing their dependence on often inefficient and unresponsive social welfare bureaucracies.

In keeping with former Vice President Joe Biden’s “Build back better” theme, expanding food aid now to stem a surge in hunger, while deploying digital technology to give low-income Americans more control over their economic security, can help us weave a stronger and more resilient social safety net, rather than simply plugging holes in the old one.

Create a “Fiscal Switch” to Make Our Economy More Resilient Against Recessions

Posted on by The Progressive Policy Institute

The federal government is on track to run a record-shattering $4 trillion budget deficit in 2020, in large part due to its aggressive fiscal response to the pandemic-induced recession. Some on the right have raised alarm about this borrowing, despite their support for budget-busting tax cut and border-control policies over the last three years. The hypocritical chorus will likely only grow louder if Democrat Joe Biden is elected president in November.

But temporary deficits are an invaluable tool for mitigating the damage caused by economic downturns, as government spending replaces a drop in demand from the private sector. The long-term fiscal costs of failing to support an economy with a double-digit unemployment rate would far exceed those of even the most overzealous stimulus measures. Necessary fiscal support should therefore continue as long as the economy remains hobbled by the coronavirus, no matter the cost.

However, Washington also faces structural deficits that will persist long after the pandemic has been contained. Thanks to the Trump administration’s reckless borrowing binge at a time when the unemployment rate was below 5 percent, the federal government was already projected to spend over $1 trillion more than it raised in revenue even before the pandemic hit. This structural deficit will only grow worse in the coming years because our nation’s aging population is causing federal spending on health-care and retirement programs to grow significantly faster than the revenues needed to finance them. The Trump administration did not create these problems, but it did make them significantly worse with its pre-pandemic fiscal policy and its disastrous handling of the public health crisis.

In the two years following the 2008 financial crisis, the national debt grew from less than 40 percent of gross domestic product to more than 60 percent of GDP. In 2020 alone, the debt will likely surpass the all-time high it reached following the end of World War 2 (106 percent of GDP). The rising cost of servicing this growing debt threatens to crowd out critical public investments that lay the foundation for long-term growth after the recession ends.

The federal government spent more money servicing the national debt last year than it spent on critical public investments in education, infrastructure, and scientific research combined. Although interest rates are low now, they eventually will rise as the economy recovers. Allowing interest payments on our debt to further crowd out these investments – which have already fallen by nearly 40 percent in real terms since the 1980s – would have disastrous consequences, including lower incomes, fewer high-quality jobs, and reduced economic mobility.

It is therefore essential to pay down the debt during expansions to create fiscal space for the necessary surge in short-term borrowing during recessions. Unfortunately, Washington has often waited too long to enact sufficient stimulus in response to recessions, and then failed to summon the will to narrow the structural gap between taxes and spending when the economy rebounds.

To make our economy more resilient against downturns, PPI proposes the federal government adopt a “fiscal switch” that automatically balances out the business cycle by increasing spending during recessions and recouping the cost during subsequent periods of economic growth. This switch would trigger based on economic variables such as the unemployment rate and operate through three mechanisms: a rebalanced relationship between federal and state governments, a more dynamic and progressive tax code, and phased-in reforms to mandatory spending programs driving our structural deficits. Implementing these automatic mechanisms, as recommended here and in PPI’s Emergency Economics report earlier this year, takes politics out of these decisions and ensures stimulus or deficit reduction will be implemented as warranted by economic conditions.

The first step is to better leverage the federal government’s unique borrowing capacity, which is unavailable to the vast majority of state and local governments required by law to balance their budget each year. Many government programs, including Medicaid, infrastructure, and education spending, are partnerships in which the federal government provides matching grants for state and local spending.

Some of these partnerships could be improved by allowing matching rates to adjust up or down automatically based on a state’s unemployment rate. This would prevent state and local governments from having to cut essential services during a downturn while asking them to shoulder a greater share of program costs when their budgets are healthy.

Other programs that currently function as a federal-state partnership but whose costs fluctuate significantly with the business cycle would benefit from becoming more nationalized. For example, when Congress tried to ensure that unemployment insurance replaced a minimum percentage of lost wages for everyone who was laid off in the early days of the coronavirus recession, lawmakers found they were unable to do so because of outdated operational infrastructure in a messy patchwork of 50 different state programs. As a result, policymakers were forced to settle for a controversial across-the-board benefit increase of $600 per week that gave some laid-off workers even more income from unemployment benefits than they lost in missed wages, while failing to make others whole. Even worse, Congressional squabbling over how long to maintain this benefit increase allowed them to lapse temporarily in the midst of an economic crisis.

Moving the operations of unemployment insurance and similarly-situated safety-net programs off state balance sheets and onto the federal government’s, in addition to automatically making benefits more generous during downturns and phasing them out in recoveries, would leverage Washington’s fiscal firepower in recessions when it’s needed most.

The second step is to make the income tax code more progressive, which serves as a strong automatic fiscal stabilizer by boosting average tax rates when incomes rise in expansions and lowering them when incomes fall in recessions. This objective could be accomplished by closing tax preferences for the wealthy, such as lower tax rates on inherited income and income from capital gains, while expanding the Earned Income Tax Credit and other pro-worker tax incentives. PPI also favors replacing the antiquated payroll tax with a dynamic value-added tax – which has a rate that automatically falls during recessions and rises during expansions – to encourage hiring and consumption when the economy needs it most and reclaim substantial revenues during economic expansions.

Finally, lawmakers must take additional measures to rein in the drivers of underlying structural deficits automatically when the fiscal switch calls for a pivot away from stimulus. Social Security and Medicare – the two largest programs in the federal budget – both face the prospect of becoming insolvent within the next decade, potentially leading to sudden and across-the-board benefit cuts for millions of seniors if lawmakers take no action to close the growing gap between dedicated revenue and scheduled benefits. Significant deficit reduction that takes effect in the middle of a recession could be catastrophic, but lawmakers should put in place a process now to develop and phase in a balanced package of revenue increases and benefit changes as the economy recovers. PPI’s Progressive Budget for Equitable Growth offers policymakers a model for how they can modernize these programs to strengthen work incentives, retirement security and financial sustainability in a way that is fair to both younger workers and older beneficiaries.

The right fiscal policy in a recession is not the right fiscal policy for an expansion, and vice versa. Washington politicians are often too slow or ideologically beholden to react sufficiently swiftly to changing economic circumstances. Taking these steps and creating a two-sided fiscal switch will give our government the tools it needs to manage the economy through both the ups and the downs of the business cycle.

Create Two Million New Businesses

Posted on by The Progressive Policy Institute

Millions of America’s smallest businesses have been severely affected by the COVID-19 crisis. They’ve seen revenue evaporate and have been forced to lay off millions of workers. Over two million small businesses had simply disappeared by June 2020. The U.S. economy now finds itself in a deep hole, with millions of small businesses gone for good—and a dried-up pipeline of new business creation.

By the end of June, the American economy also was without tens of thousands of new “employer” businesses (those with employees) that normally would have been started. The pandemic and economic crisis have wreaked havoc on existing small businesses and the new start-ups that the economy depends on for job creation and innovation.

Meanwhile, the Trump administration’s implementation of the Paycheck Protection Program (PPP), authorized by Congress to provide billions in loan guarantees through the Small Business Administration (SBA), has been flawed. The Treasury department has provided insufficient, and constantly changing, guidance to lenders and businesses. The SBA’s own Inspector General found that the administration did not adhere to Congressional intent in deploying PPP funds.

Even before COVID-19, the Trump administration had proven itself incapable of inspiring entrepreneurial confidence. Business formation had trended steadily downward over the previous two years. According to a PPI analysis of Census Bureau data earlier this year, new business applications fell steadily from the middle of 2018, after rising more or less interrupted since 2012. Business applications that have a “high propensity” of turning into employer businesses had also fallen since the middle of 2018.

The picture gets worse the deeper you dig. The pandemic recession has disproportionately affected female, Black, and Latinx business owners. By April, the number of female-owned businesses had fallen by 25 percent (compared to 20 percent for male-owned businesses). The number of Black- and Latinx-owned businesses had shrunk by, respectively, 41 and 32 percent (compared to 17 percent for white-owned businesses).

These are astonishingly high losses and they come on top of a small business landscape already tilted against minorities and women. According to Census data, going into the crisis, Blacks owned just two percent of employer businesses in this country, despite comprising 13 percent of the population. Latinos and Latinas, making up 18 percent of the population, owned six percent of businesses. Male-owned businesses were larger and with higher revenues than female-owned businesses.

What’s needed now is a major national push to reinvigorate business creation and address underlying demographic disparities in business ownership. For women and minorities, when it comes to entrepreneurship, returning to the pre-crisis status quo is simply not an option. It shouldn’t be an option for the country, either. Greater business creation and ownership among women, Blacks, Latinx, and others will accelerate recovery and strengthen resilience.

Over the last 40 years, new businesses have, on average, created about six jobs per year, per company. If one million new Black and Latinx businesses opened (replacing the ones that have closed permanently) and were joined by half a million additional new businesses, we could see about nine million new jobs created. Not all these companies would survive—in the “normal” course of economic activity—but a significant subset of them would not only survive but also thrive. Young companies that survive and grow drive the lion’s share of net new job creation each year.

Public policy should seek to help stimulate new business creation and support the survival and growth of young businesses. The focus of this effort should be on women- and minority-owned businesses. Vice-President Joe Biden has proposed renewing the State Small Business Credit Initiative (SSBCI), an Obama-era program, to focus on these businesses. Evaluations of the SSBCI found positive effects in terms of investment and job creation, but a much larger effort is likely needed. The federal government has many tools at its disposal to be leveraged in support of new business formation and to aid specific types of entrepreneurs.

PPI believes the federal government should launch a National Start-Up Initiative that aims to spur creation of at least two million new businesses as our country recovers from the pandemic recession. It would include the following key actions:

  • Create a startup visa for founders of new companies. These would include foreign students graduating from a U.S. university, those transitioning out of Optional Practical Training, or any H1B visa-holder after three years. The foreign-born start companies at disproportionately high rates; encouraging them to do so would give a significant boost to overall business creation. This could be accompanied by incentives for business creation in specific geographic areas or neighborhoods.
  • Leverage federal research funding to reform technology commercialization processes at universities. America’s research universities are the best in the world at knowledge creation, yet their ability to turn knowledge into innovation and new companies has been declining. Many promising entrepreneurial ventures get stuck in bureaucratic processes. The federal government, which provides billions of dollars to support university research, should create new incentives for those institutions that devise more effective commercialization practices and generate new businesses for their communities.
  • Create a new “Start-Up Tax Credit” to encourage new businesses to grow into large businesses. Modeled on the Earned Income Tax Credit, the Startup Credit is designed to help these businesses avoid the scale-up trap unintentionally posed by tax breaks and regulatory exemptions for new enterprises. For example, businesses with fewer than 50 employees are exempt from the employer shared responsibility payment of the Affordable Care Act and providing unpaid leave. While these “carveouts” certainly help small businesses get off the ground, they impose an implicit tax when those companies grow past a certain threshold. The Startup Tax Credit would mitigate that tax.

As proposed by PPI economist Elliott Long, the Startup Tax Credit would be tied to the number of employees and payroll at a small business. Firms that have been operating for fewer than five years would be eligible for a credit equal to half the employer-side payroll tax they pay on their first 100 employees, up to a maximum credit of $1,200 per employee in 2020 (indexed to inflation). The proportion of payroll taxes offset by the credit and the maximum credit per employee would then gradually phase down as businesses grow until phasing out entirely once the business reaches 500 employees. PPI estimates this proposal would cost roughly $150 billion over 10 years.

  • PPI has also supported the New Business Preservation Act, introduced by Sen. Amy Klobuchar (D-MN). This would allocate $2 billion in federal funding to match private investments in areas of the country bereft of startup equity investments.

These steps would help seed the ground for new business creation, just as our country needs to create millions of them to provide jobs to U.S. workers whose previous jobs vanished in the pandemic shutdown. They would also create conditions that would make America’s entrepreneurial culture more vibrant and resilient against future public emergencies of all kinds.

Democratize Capital Ownership

Posted on by The Progressive Policy Institute

As Covid-19 wreaks havoc in Southern and Sunbelt states, America’s battered economy faces a new round of shutdowns, bankruptcies and layoffs. Yet one sector seems strangely buoyant – the financial markets. From its all-time high in mid-February, the S&P 500 plummeted 34%, only to recoup all its losses by mid-June.

What explains Wall Street’s remarkable resilience while Main Street endures a punishing pandemic recession?

Although the three economic relief packages Congress has passed since the crises began no doubt have played a supportive role, the answer mainly lies in bold intervention by the Federal Reserve. The Fed played a similar role in staving off a financial collapse following the 2007-08 housing crisis. With a robust toolkit at its disposal, from slashing interest rates, purchasing securities, lending money directly and backstopping unstable markets, the Fed allayed investor fears about the impact of the Covid-19 lockdown on corporate profits and debts.

While Fed action to keep capital markets afloat is essential to prevent a wider economic implosion, it does have the unfortunate consequence of aggravating economic inequality. Only about 55% of Americans own stocks, and the top 1% percent own 50% of all equities. Pushing up stock prices, in other words, helps the rich get richer.

The progressive response to this distributional dilemma is not to let financial markets crash, but to democratize capital ownership in America.

U.S. policymakers therefore should emerge from the Covid-19 crisis resolved to tackle a growing “wealth gap” that is largely defined by race and ethnicity. According to the Urban Institute, the median wealth of white families in 1963 was $45,000 higher than the median wealth of nonwhite families. By 2016, the median wealth of white families had climbed to $171,000, or $132,600 more than the median wealth of black families ($17,400) and of Hispanic families ($21,000).

The strategy for narrowing the nation’s wealth gap has three key parts: Reduce racial and ethnic wage disparities, expand home ownership, and create new opportunities for Americans now locked out of capital markets to build financial assets that allow them to take advantage of the power of compound interest.

Focusing here on the third element, PPI endorses a radically pragmatic idea for democratizing capital ownership: Create lifetime savings accounts for all newborns, tied to voluntary national service. Here’s how these new “America Serves” investment accounts would work:

At birth, the federal government would stake every U.S. child to a $5,000 investment account similar to a government Thrift Savings Plan or a 401k. The money would be invested in a market index or target date fund to ensure the high average returns of investing in equities rather than low-return T-bills. With one stroke, this action would put America on the road toward universal capital ownership.

Families could also contribute post-tax earnings to their children’s accounts. No one could touch the funds in the account until the children turned 18. An “asset waiver” would also protect the account, preventing the income from being counted toward means testing for financial aid, food stamps, Supplemental Security Income (SSI), Social Security Disability Insurance (SSDI) or Medicaid.

Upon turning 18, account owners would face a choice. If they agree to perform a year of national service before they turn 25, they would be deemed 100% vested and could tap their funds after serving for specified purposes at tax advantaged rates. These include: post-secondary tuition, down payment on a first home, or starting a business.

Our goal is to start by engaging one million young adults in qualified domestic and international service programs (including active military), out of the roughly four million who turn 18 every year. Those who choose not to serve would be entitled to only the returns (and principal) on half the original stake — $2,500. The other half of their accounts would revert back to the taxpayers via the U.S. Treasury.

Although the governments’ upfront investment is considerable, over the long-term costs of America Serves accounts will likely decline. We estimate that the first 10 years would cost $230 billion, and a 25-year timeline sees total outlays of just under $700 billion.

It’s even possible that after 25 years, the program could become self-financed, depending on how many people choose to serve. Our projections are based on the assumption that one in four newborns will receive the full government contribution via service.

We use a historic average return rate on the S&P 500 of 8% for our assumptions. That means the $5,000 initial taxpayer contribution invested in the market grows to $34,250 after 25 years (See tables below). Assuming that one in four account holders choose to serve, the rest will be required to return to the U.S. Treasury half their savings – $17,125 (half the original government contribution plus market earnings.) That would be enough to stake three newborns with $5,000 contributions.

By creating a strong incentive to serve, this proposal – in the spirit of the World War II G.I. Bill — would link the opportunity to start building significant financial assets to civic responsibility. It would help to scale up voluntary national service and make it a more potent tool for public problem solving. Volunteers, for example, could assist in contact tracing during future pandemics, provide services to the swelling population of older Americans, help tutor low-income children, clean up public spaces, and much more.

A large national service program would also help our divided society bridge its class, racial and cultural divisions by bringing together youths from all backgrounds to engage in a common civic enterprise.

The organizing framework already exists: AmeriCorps and Peace Corps and other volunteer programs that operate under the aegis of the Corporation for National and Community Service (CNCS). The 75,000 yearly volunteers in these civilian service programs are in addition to the approximately 180,000 Americans who join the active duty military each year, and who would also qualify for full “America Serves” investment accounts.

The idea of expanding national service already enjoys bipartisan support in Congress. Senators Chris Coons, (D-DE), Roger Wicker (R-MS) and Cincy Hyde Smith (R-MS) recently introduced the CORPS ACT, which would increase from 75,000 to 150,000 in year 1, and up to 300,000 in years 2 and 3, the number of civilian national service slots.

“As we work to recover from the dual challenge of a public health crisis and an economic crisis, national service presents a unique opportunity for Americans to be part of our response and recovery while earning a stipend and education award and gaining marketable skills,”

Sen. Coons has said. “Expanding these programs to all Americans who wish to serve should be a key part of our recovery effort.” Another sponsor of the bill, Sen. Tammy Duckworth (D-IL), a Purple Heart military veteran gravely wounded in action, notes that “Just as picking up a rifle to defend our country is ‘American Service,’ so is helping out a food pantry for those at risk of hunger, assisting students with remote education and helping patients make critical health care decisions.”

WHY INVEST FUNDS IN THE MARKET?

Simply put, stock markets have been the most reliable generator of long-term wealth accumulation in history, and financial capital grows traditionally faster than wages. There have also been a series of innovations that have helped underpin the ability to efficiently and safely invest for the long term.

These include Index based, passive investing in target date ETF’s (Exchange Traded Funds), which essentially invest in a diverse basket of stocks or other assets such as commodities or bonds, and manages risk according to a future “target date” – usually when someone plans to retire. This passive investment approach diversifies the risk of any single stock plunging in value, and uses the ETF structure with minimal fees as opposed to active management models that assess much higher fees. Small investors get access to higher returns with less risk and keep more of their money as it grows.

To illustrate how “America Serves” investment accounts could grow, consider these projections of possible returns over 18, 25, and 65 years from an initial $5,000 contribution:

Let’s look at the standard market benchmark of the S&P 500, which since adopting 500 stocks to the index in 1957 has produced an annual return of 8% (through 2018). Yet, since stocks and bonds fall as well as rise in value, it is worth looking at the largest “drawdown” (market pullback) since that time. According to S&P Dow Jones Indices:

“the most significant market downturn occurred in the early 1970s, coinciding with the U.S. economy reeling from double-digit inflation courtesy of a quadrupling in oil prices. During this period, the S&P 500 declined by 45% over a 21-month period and took three and a half years to return to its previous local peak.”

This means that should the market be down in any given year, history shows us the largest pullback only took about 5 years to regain all its lost value. What that means is that by ensuring that every American has an opportunity to build a significant financial asset, this proposal would enhance their economic security and resilience in economic downturns from whatever sources.

CONCLUSION

The pandemic has thrown a harsh light on America’s economic and racial inequities. The government’s otherwise commendable efforts to keep the comatose U.S. economy from flatlining have had the unintended effect of making these disparities worse. By giving every newborn child a capital stake in America’s future, we will put our economy on a higher growth trajectory while also making it fairer. And by linking the accounts to service, we will create a powerful new incentive for young Americans to give back to their communities and their country.

(Note: The author would like to thank Alan Khazei, a longtime PPI friend and co-founder of Boston’s City Year voluntary service program, who with the late Harris Wofford and other leading national service advocates originally envisioned the link between “service bonds” and service.)

PODCAST: Conversation with Rep. Sharice Davids and Rep. Scott Peters

Posted on by The Progressive Policy Institute

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PPI President Will Marshall and Ben Ritz from the Center for Funding America’s Future are joined by Congresswoman Sharice Davis (KS-3) and Congressman Scott Peters (CA-52) for a conversation on the fiscal health of the United States, priorities for the upcoming stimulus bill, the election, and their perspective on how America’s economy can return with a resilient recovery.

The HEROES Act fixes what the CARES Act broke

Posted on by The Progressive Policy Institute

Conservatives call the House Democrats’ Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act a “gigantic political scam.” Senate Republicans say HEROES, passed by the House on May 15th, is “dead on arrival when it reconvenes. As they negotiate with Democrats, Republicans should think carefully about certain student loan relief provisions in the bill.

Even in good times, a substantial portion of 45 million Americans’ paychecks go to student loan payments rather than to goods and services that keep our economy churning. There’s little doubt that this debt contributes to suppressed consumer consumption, which stifles economic growth. In this bad time, Americans collectively owe $1.6 trillion in student debt. This debt burden is now dramatically heavier with the economic shutdown and coming diminished post-pandemic employment opportunities.

Some say no additional student loan relief is needed because the Coronavirus Aid, Relief and Economic Security (CARES) Act that Congress passed in March temporarily suspended student loan payments. That would be a decent argument if CARES applied to everyone, but it doesn’t.

Read the full article here

House HEROES Act Gets The Trade-Offs Wrong

Posted on by The Progressive Policy Institute

The U.S. House of Representatives is moving ahead with plans to vote today on the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act: the fifth – and potentially final – a piece of major legislation addressing the coronavirus pandemic and its economic effects. The 1800-page bill is estimated to cost roughly $3 trillion and contains a mix of both good policies and bad but is perhaps most notable for what it leaves out: automatic stabilizers.

The biggest flaw with previous relief bills was that aid was limited by the availability of funds appropriated by Congress or arbitrary calendar dates it chose instead of being based on the real needs of our economy. As a result, measures like the Paycheck Protection Program (PPP) were exhausted within three weeks and many eligible businesses couldn’t get needed financial relief until Congress took additional action. The best way to prevent this problem in the future is by adopting “automatic stabilizers” — policies that cause spending to rise or taxes to fall automatically as predetermined economic or public-health benchmarks are met. For example, a proposal by Congressman Don Beyer and Senators Jack Reed and Michael Bennet would change the expansion of unemployment benefits included in the CARES Act to gradually phase out as the economy recovers instead of expiring arbitrarily on July 31st. The centrist New Democrat Coalition has also been vocal in calling on leadership to adopt automatic stabilizers in future relief bills.

Unfortunately, the HEROES Act doesn’t include any new automatic stabilizers – reportedly because House Speaker Nancy Pelosi is concerned about the bill’s $3 trillion price tag. On the one hand, Speaker Pelosi is right to be concerned about wasting taxpayer money on unnecessary expenses given our nation’s serious long-term fiscal challenges. But the unfortunate reality is that supporting our economy during the worst public health crisis of our lifetimes is a large and necessary expense. It is no less fiscally responsible to pass one $3 trillion bill than three $1 trillion bills if the money is efficiently targeted to support our economy throughout this pandemic. Moreover, there are a number of costly provisions included in the HEROES Act that are a poor trade-off for sacrificing automatic stabilizers.

Read the full piece on Forbes.

House Democrats Have The Right Coronavirus Response

Posted on by The Progressive Policy Institute

The outbreak of COVID-19 (commonly known as coronavirus) has created a global market downturn and raised the prospect that the United States could enter its first recession since the 2008 financial crisis. Last night, President Donald Trump and U.S. House Speaker Nancy Pelosi offered two competing approaches for securing both the health and economic security of the American people. While the president’s proposals would arguably do more harm than good, Speaker Pelosi and House Democrats should be commended for swiftly developing a comprehensive and serious plan to effectively tackle the crisis.

During the last recession, Speaker Pelosi passed a stimulus bill that used a combination of deficit-financed tax cuts and government spending increases to boost the economy. With interest rates on government debt now below projected inflation, many are calling for her to now take similar action. The problem is that commerce is currently being constrained by proactive measures people are taking to limit the spread of a pandemic, not a lack of money in consumers’ pockets. Additionally, the coronavirus has disrupted global supply chains, which no amount of demand-side stimulus can alleviate in the short term. A unique economic problem requires a unique solution.

Read the full piece on Forbes.

Low-Income Borrowers and the Auto Loan Market

Posted on by The Progressive Policy Institute

Executive Summary

Some are concerned that subprime auto loans – which offer higher interest loans to riskier borrowers – pose a threat to the stability of the global economy in much the same way that the subprime mortgage market contributed to the Great Recession. Democratic presidential candidate Elizabeth Warren, in particular, has raised the warning flags as part of her campaign. But these worries are ill-founded and based on misleading data and faulty analogies.

In particular:

  • Auto loans account for a relatively small percentage of the increase in nonfinancial debt over the past five years;
  • Americans are spending less of their budgets on car purchases today, including finance charges, than they were before the recession;
  • Low-income households saw motor vehicle purchases and finance charges fall from 8.5 percent of household budgets in 2000 to 4.9 percent in 2018;
  • Over the past five years, the share of new auto loans going to low-credit borrowers has remained relatively constant. There are no signs that low-credit borrowers are either being frozen out of the market or becoming too large a share of loans;
  • Newly delinquent auto loans, as a percentage of current balances, have been falling over the past two years; and
  • Subprime auto loans differ significantly from subprime mortgages in key respects that make them less likely to pose a serious threat to financial stability

Risk-based pricing of auto loans appears to be working so far, keeping low-income borrowers in the market without driving up delinquencies or to low-income consumers, while not posing the same risk that the subprime mortgage market.

Introduction

To purchase a vehicle, Americans with low or non-existent credit scores often use auto loans with higher interest rates than loans to prime borrowers. Some market watchers have indicated concern about “subprime” auto-loan trends and the potential for a crisis similar to the subprime mortgage crisis that heralded the last recession.

The subprime mortgages and the related mortgage-backed bonds remain the classic case of a poorly executed financial innovation. The initial impetus behind the idea was a good one. Housing is a key element of middle-class wealth, so expanding the system of mortgage finance to help lower-income households buy homes seemed like a positive. However, the subprime mortgages and bonds were designed in such a way that they assumed rising housing prices. When housing prices started to fall, the subprime mortgage system collapsed and contributed to the financial crisis.

Will subprime auto loans create the same problems? In a recent essay, Democratic presidential candidate Senator Elizabeth Warren raised the warning flag:

Auto loan debt is the highest it has ever been since we started tracking it nearly 20 years ago, and a record 7 million Americans are behind on their auto loans — many of which have similar abusive characteristics as pre-crash subprime mortgages1 .

Warren is not alone in her worries. In late 2016, for example, the Office of the Comptroller of the Currency warned that auto-lending risk was increasing and that banks (and other investors in securitized assets) did not have sufficient risk-management policies in place. Fed Governor Lael Brainard pointed to subprime auto lending as an area of concern in a May 2017 speech, while analysts worried about “deep subprime” auto loans2. Some groups used the term “predatory” auto lending.3

But these concerns are misplaced. As we will show later in this paper, the statistic cited by Senator Warren does not reflect the current state of the auto loan market, as it includes old loans from much weaker economic times. Perhaps most fundamental to understanding the problem with drawing a parallel between the mortgage crisis and today is the fact that subprime mortgages and subprime auto loans are very different products.

Naturally, lower-income households with low credit scores or limited credit history may have fewer financial resources and be inherently riskier borrowers. Moreover, the fact that motor vehicles depreciate over time means that the collateral for the loan becomes less valuable.

Nevertheless, the ability to own a car and, therefore, access credit is crucial for this population. Risk-based pricing charges low- rated borrowers higher interest rates, but in return, offers them the opportunity to borrow money to buy a vehicle that might otherwise be financially inaccessible.

For many lower-income households, their vehicle is the single biggest asset they own.

While vehicles do not appreciate in value as homes do, vehicles are income-producing assets in the sense that they are often essential for commuting to work, especially in non-urban areas. As one report noted, “Owning a car is the price of admission to the economy and society in much of America.”4

 In this paper, we analyze the auto loan market, paying particular attention to auto loans made to low-income Americans and to people with bad credit. We find that:

  • Auto loans account for a relatively small percentage of the increase in nonfinancial debt over the past five years;
  • Americans are spending less of their budgets on car purchases today, including finance charges, than they were before the recession;
  • Low-income households saw motor vehicle purchases and finance charges fall from 8.5 percent of household budgets in 2000 to 4.9 percent in 2018;
  • Over the past five years, the share of new auto loans going to low-credit borrowers has remained relatively constant. There are no signs that low-credit borrowers are either being frozen out of the market or becoming too large a share of loans;
  • Newly delinquent auto loans, as a percentage of current balances, have been falling over the past two years; and
  • Subprime auto loans differ significantly from subprime mortgages in key respects that make them less likely to pose a serious threat to financial stability.

Risk-based pricing of auto loans appears to be working so far, keeping low-income borrowers in the market without driving up delinquencies or threatening the financial system. We conclude that the subprime auto loan market is beneficial to low-income consumers, while not posing the same risk that the subprime mortgage market did before the financial crisis. While it will be instructive to observe subprime auto loan trends going forward, current trends do not indicate significant instability concerns in this market.

Recent Patterns in Debt Accumulation

Recent patterns in debt accumulation are very different from those that preceded the financial crisis and Great Recession. Non-mortgage consumer credit – including auto loans, credit cards, and student debt – has risen by $900 billion over the past five years, according to Federal Reserve data. While that figure sounds substantial, that increase amounts to less than 9 percent of the total increase in domestic nonfinancial debt – that is, all debt except borrowing by financial institutions. The rise in consumer borrowing is dwarfed by the increase in business debt ($4.1 trillion) and federal debt ($4.2 trillion) over the same period. Those two categories together account for 82 percent of the increase in domestic nonfinancial debt (Table 1). The leading contributors to business debt growth are mortgages and corporate bonds.

Indeed, businesses have taken the greatest advantage of low-interest rates. Nonfinancial corporations have almost doubled their outstanding corporate bonds since the end of 2007 when the last recession started. Meanwhile, household debt has risen by only 10 percent.

Taking home mortgages into account, households have only accounted for 19 percent of the increase in domestic nonfinancial debt since 2014. By contrast, in the five years leading up to the Great Recession, households accounted for 48 percent of the debt increase. In other words, the financial boom in the pre-recession years was heavily driven by household borrowing, while households have only contributed a small portion to the current debt increase.

A skeptic could argue that, given derivatives and financial engineering, it’s possible for a relatively small portion of the debt market to drive an outsize increase in risk for the whole system. Indeed, that’s what happened ahead of the 2008 financial crisis. In May 2007, then-Chairman of the Federal Reserve Ben Bernanke famously said, “We believe the effect of the troubles in the subprime sector on the broader housing market will be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”5 At the time, the value of subprime mortgages was about $1.3 trillion, which was only 10 percent of the mortgage market and an even smaller share of total borrowing. Bernanke and other policymakers figured that the problems in subprime mortgages could be easily contained.

What Bernanke and others failed to reckon with, however, was how the subprime mortgages had been designed to make sense only in a rising real estate market. Subprime mortgages were constructed effectively to subsidize interest rates with the possibility of appreciation. These financial instruments would offer low upfront rates that enabled lower-income borrowers to qualify. When the teaser rates eventually reset to much higher levels, the assumption was that the borrower could refinance into a new mortgage.

Moreover, the subprime mortgages were then securitized and used to build complicated financial derivative products. And when the subprime mortgages failed because of declining home prices, so did the derivatives. In other words, problems in a relatively small financial sector could be amplified and have a much larger effect on the rest of the economy.

Despite this concern, there is evidence to suggest that subprime auto lending is not a substantial risk to the broader economy. Auto loans are only 7.4% of household debt, which is the 40-year historical average.6 Moreover, the auto asset-backed securities (ABS) market is likewise dwarfed by the mortgage-backed securities (MBS) market. As of the second quarter of 2019, there was a mere $264 billion in auto-related securities, which included only $55 billion in subprime auto securities. By comparison, the amount of outstanding mortgage-related securities came to almost $10 trillion.7

Further, subprime auto loans don’t work the same way that subprime mortgage loans did in the pre-crisis era. Cars and trucks depreciate steadily over time, so the value of the collateral diminishes. That means lenders can’t afford to offer teaser rates, or excessive levels of negative equity, to buyers with low credit scores. They must charge higher rates, properly pricing risk. As one article put it, “the very nature of a real estate loan is very different from an auto loan. Real estate is an investment that typically appreciates over time. During the bubble years, consumers and lenders falsely believed appreciation would bail them out from poor judgment. Vehicles, on the other hand, depreciate. There is no false hope of higher values in the future to bail out a borrower or a lender.”8

The Auto Market

Despite the relatively small role that consumer debt is playing in the current debt expansion, some people can’t shake the idea that Americans are over-spending and over-borrowing to maintain a particular lifestyle. Consider this quote from an April 2019 piece from Business Insider:

The fact that America’s top-selling vehicle — a Ford truck with a price starting at nearly $30,000 – and many like it cost nearly half the median household income hasn’t stopped people from buying them and hasn’t stopped lenders from facilitating loans.9

Over the past five years, the price of new motor vehicles has risen by only 1.1 percent, according to estimates by the Bureau of Economic Analysis (BEA).10 By contrast, the overall price level of consumer goods and services have risen by 6.7 percent over the same stretch.11 In other words, the relative price of new motor vehicles has fallen over this period.

Not surprisingly, the share of consumer spending on new and used vehicles has fallen as well. In 2000, 5.4 percent of consumer spending went to purchases and leases of new and used vehicles. Today, that share is down to 3.6 percent (Figure 1).12

The BLS Consumer Expenditure Survey tells the same story. In 2000, motor vehicle purchases and finance charges amounted to 9.7 percent of household outlays. As of 2018, the last year for which full data is available, the share of vehicle purchases and finance charges fell to only 6.7 percent of household outlays.13 In part, this decline may represent a lengthening of the term of auto loans.14 (These figures would not be changed much by including automobile lease-related payments, which amount to about 10 percent of automobile purchase-related payments in 2018.)

The State of the Low-Income Auto Market

It’s not surprising that lower-rated borrowers pay more for their auto loans. Table 2 below shows interest rates for a 36-month new car loan at different credit rates for December 2015, which was close to the bottom of the credit cycle, and August 2019 (Table 2).

We can see that rates have risen for all credit-rating levels, but more so for the low-rated borrowers.

This risk-based pricing means that low-rated borrowers are not frozen out of the auto loan market. That’s good news, since, in many parts of the country, a car or truck is a necessity, even for low-income households. There is little or no public transit outside of densely populated urban areas, and ride-sharing services are not viable alternatives in many places. So, it is unsurprising that the share of low-income (the bottom quintile) households with a vehicle hold steady at 66 percent in both 2000 and 2018.

At the same time, low-income households saw motor-vehicle purchase and finance taking a smaller share of their budgets. In the bottom quintile of pre-tax income, motor vehicle purchases and finance charges fell from 8.5 percent of household budgets in 2000 to 4.9 percent in 2018 (Figure 2), a drop of almost four percentage points.15

Similar data from the New York Fed’s Household Debt and Credit Report confirm that low-income households are not being uniquely stressed financially by automobile borrowing. Figure 3 shows the share of all auto loan originations that are going to low-rated borrowers (with a Riskscore of less than 620). Before the financial crisis, about 30 percent of new auto loans were going to low-rate borrowers, a startlingly high percentage. That share fell to 20 percent after the crisis and shows no signs of rising (Figure 3).16

The biggest piece of negative news has come from the New York Federal Reserve’s well-publicized finding in February 2019:

…(T)here were over 7 million Americans with auto loans that were 90 or more days delinquent at the end of 2018. That is more than a million more troubled borrowers than there had been at the end of 2010 when the overall delinquency rates were at their worst since auto loans are now more prevalent.18

This startling number, while impressive, simply doesn’t mean what it seems to suggest. This figure includes anyone who still has an old, bad auto loan on their credit record, even if the loan was made and written off years earlier.19 In fact, even after the lender writes off the loan, the loan servicer could continue to report the account to the credit bureaus.

The recent economic history of the United States helps to explain this figure. The number of nonfarm jobs did not return to pre-recession levels until 2014, while the employment-population ratio for Americans with a high school diploma but no college did not bottom out until 2015. As a result, today’s subprime borrowers are carrying around bad loans from the days when the labor market for less-educated workers was still struggling.

Indeed, in an August 2019 blog item, New York Fed economists recommend that anyone interested in the current performance of debt should look at the transition into delinquency- that is, a chart such as Figure 4.20 And by that measure, auto loans are doing far better than in the pre-recession years.

Conclusion

In the event of a recession or a significant economic slowdown, auto loan delinquencies will predictably rise. Subprime auto borrowers, who are more likely to have fewer resources, will be likely to fall behind in their payments when times turn bad.

Nevertheless, a careful look at the data does not suggest that either the origination of subprime auto loans or the exposure of the broader macroeconomy to the auto loan market is a cause for concern. In particular, the subprime auto-loan market looks nothing like the mortgage market before the Great Recession.

Newly delinquent auto loans, as a percentage of current balances, have been falling over the past two years, and the fact that a record number of Americans have a bad auto loan on their credit record is a testimony to economic history more than current loan practices and economic conditions, particularly given the rapid rise in total car sales during this period.

Indeed, risk-based pricing in the auto loan market appears to be supplying a steady flow of credit to low-rated borrowers without imposing excess stress on the financial system.

About the Authors

Michael Mandel is Chief Economic Strategist of the Progressive Policy Institute.

Douglas Holtz-Eakin is President of the American Action Forum.

Thomas Wade is Director of Financial Services Policy of the American Action Forum.

 

Ritz for Forbes: “New CBO Report Projects $13 Trillion Deficit Over 10 Years”

Posted on by The Progressive Policy Institute

Projections published today by the non-partisan Congressional Budget Office confirm that the federal government is on course to spend $1 trillion more than it raises in revenue in Fiscal Year 2020. Trillion-dollar deficits continue as far as the eye can see, with CBO estimating a 10-year deficit of over $13 trillion.

Legislative changes since August have increased projected deficits by more than $500 billion, according to CBO. More than 90 percent of the increase comes from a package of irresponsible tax cuts added to a year-end spending agreement passed in December. But most of the change was offset by a decline in the projected interest rates and other technical changes, leaving 10-year deficit forecasts “only” $160 billion more than they were in August 2019.

What’s driving these deficits? Primarily the growth in federal health-care and retirement programs caused by our ageing population. Federal spending on Social Security, Medicare, and other health programs is projected to grow from 11 percent of gross domestic product today to 14 percent in 2030. All other non-interest spending, meanwhile, is projected to shrink as a percentage of GDP. Revenue won’t keep up with these costs, in large part because the Trump administration keeps charging tax cuts upon tax cuts to the national credit card. If anything, CBO’s projections are overly optimistic because the agency is required to assume most of these tax cuts expire in 2025 as they are scheduled to under current law.

Read the full piece here.

Discussing the Budget with Students at the New England College Convention

Posted on by The Progressive Policy Institute

Ben Ritz, the Director of PPI’s Center for Funding America’s Future, presented to students during two breakout sessions at the New England College Convention in Manchester, New Hampshire this week. The first session was a joint presentation about the national debt as an intergenerational issue with Bob Bixby from The Concord Coalition and Brian Riedl from the Manhattan Institute. The panelists spoke with local radio host Chase Hagaman about their presentation on his show, Facing the Future, which airs on New Hampshire’s WKXL station and can be found at the link below. Hagaman also moderated a second session in which Ben discussed with students the public investment proposals presented so far in the presidential campaign, how candidates would fund their agendas, and the impact these plans would have on young Americans.

Listen to the interview here.

Ritz for Forbes: “The Trillion-Dollar Question Missing From The Presidential Debate”

Posted on by The Progressive Policy Institute
Congress voted this week for a $1.9 trillion tax and spending deal, over a quarter of which was added to our $23 trillion national debt. Thanks to this and other fiscally irresponsible legislation signed into law by President Donald Trump, the federal government will run an annual budget deficit of over $1 trillion this year and every year that comes after it. Yet of over 500 questions asked throughout six presidential debates, not a single one has raised the issue.

 

Read the full piece on Forbes.

Ritz for Forbes: “Naughty Or Nice? Breaking Down Congress’s $1.9 Trillion Budget Deal”

Posted on by The Progressive Policy Institute
The House of Representatives earlier this afternoon passed two bills to provide $1.4 trillion in funding for defense and non-defense spending programs that must be appropriated on an annual basis. As is often the case with must-pass legislation at the end of the year, these bills have become “Christmas trees” decorated with various policy riders and pet projects for members of both parties in Congress. What are the major provisions attached to this legislation that help add $500 billion to its price tag, and should they put Congress on the naughty or the nice list?

Read the full piece on Forbes.