U6 Watch: July 2013

U6 Watch is a monthly feature monitoring the success of the poverty-sustaining compromise of both political parties to use the U3 measure of unemployment.  Read the first U6 Watch for more background.  Other "recovery" news and labor market news is reported as well.

New data is in revising the basis of my frequent exasperation that corporate profits are at record highs, while wages and salaries are at record lows.  I wasn't wrong, it's just that things are more extreme than we thought:

Before the figures were revised, it appeared that wages and salary income in 2012 amounted to 44 percent of G.D.P., the lowest at any time since 1929, which is as far back as the data goes.

But the revisions cut that to 42.6 percent, which matched the revised 2010 figure as the lowest ever.

The flip side of that is that corporate profits after taxes amounted to a record 9.7 percent of G.D.P. Each of the last three years has been higher than the earlier record high, of 9.1 percent, which was set in 1929.

Last month's U6 Watch discussed the declining labor force participation rate.  An Urban Institute report (h/t) breaks down the components of the stagnating labor force participation rate, finding:

Obamacare's means testing is a phenomenal waste

Image: This is what Obamacare's means testing looks like, in flow chart form (source)

Much ink has been spilled about what an incredible corporate sell-out Obamacare is (my favorite piece).  But the law's centerpiece--the insurance exchanges--is based on the principle of means testing.  Means testing is always a waste of scarce resources.  As Obamacare's exchanges come online, it's worth pointing out (again) just how phenomenally wasteful Obamacare's means testing is.

Obamacare and why we have a two-tiered welfare state

Image: The illustration from Suzanne Mettler's article on the "submerged state," a key aspect of America's two-tiered welfare system.

A little background: In 2009, as Congress debated the corporate sell-out known as Obamacare, Iowa Republican Senator Chuck Grassley proposed an amendment that would force every member of Congress to use the Obamacare exchanges.  Grassley clearly thought that the Democrats secretly expected the exchanges to crash and burn, and would thus be unwilling to rely on them.  Fearing for their health, the Democrats would vote the amendment down, thus exposing their own hypocrisy.

Grassley miscalculated, however.  The Democrats, apparently confident in the principle of the health insurance exchanges, called Grassley's bluff and his amendment became law.  So, starting in 2014, all members of Congress are legally required to purchase health insurance from the exchanges.

This makes no sense, however, because the exchanges are meant for individuals who are not offered insurance through their employer, and the law does not permit employers to make a contribution to insurance their employees purchase over the exchanges.  Members of Congress do get health insurance through their  employer--the federal government--but are somehow expected to use the exchanges.

This creates an odd paradox wherein members of Congress are both expected to utilize their employer-sponsored health insurance, yet legally required not to.  This paradox was ironed out earlier this year, when it was determined that members of Congress would purchase their insurance on the exchanges with the help of the federal government; the federal government will pay the current employer contribution towards Congress' health insurance, and each member of Congress will have to pay the rest of the bill for whatever plan they purchase on the exchanges.

For those making up to 400% of the poverty line, subsidies are available on a sliding scale to help purchase insurance.  Obviously, members of Congress are making more than 400% of the poverty line, and thus would not be eligible for this subsidy.

Ok, done with the background.  This entire fiasco has led to one of the most amazing works of cognitive dissonance I have ever encountered:

U6 Watch: June 2013

Update (8/1/2013): There was a problem with the image I used for the labor force participation rate graph.  Put in a different graph.

Image: A Google image search for "unemployment" found this cartoon (source)

Both political parties have an cynical, poverty-sustaining compromise on the economy.

Both have agreed to use the U3 measure of unemployment in measuring the performance of the economy.  However, this measure makes no sense whatsoever; for June, U3 unemployment rate stayed steady at 7.6%, making it appear that things aren't getting worse.  They are.

The U3 measure divides:

(number of people actively searching for work) / (number people who are working + number of people actively searching for work)

Notice what the U3 measure conveniently leaves out:

Sequestration's Latest Victim: The Constitution

Image: Beneficiaries of the bottom tier of the American welfare system (source)

Updates--see below

I previously wrote about a Wonkblog round-up of media accounts of programs getting axed by the sequester, and how the sequester persists only because these cuts are focused on the bottom tier of the American welfare state.  Contrast the harm the sequester inflicts on the poor with the fact that any sequester cuts that inconvenience the rich were quickly rolled back: few things could more effectively express who our government works for.

Jared Bernstein has been running a "Sequester Watch" on his always excellent blog, and I'm embarrassed to say I haven't been keeping up.  In installment #14, he rounds up accounts of specific programs being cut: various Head Start programs, inner city schools, mental health services for Native Americans, low income housing, Meals on Wheels, federal public defenders, and others.  This is poverty sustainment; not giving poor children the educational opportunities they need to succeed is an endorsement of their poverty.

Here's another link describing the effect on federal public defenders:

Federal defenders already were facing a 5 percent budget reduction when $85 billion in spending cuts began coursing through federal agencies in March, lopping another 5 percent from the budget this fiscal year. Some courts have limited the hours they hear criminal matters. Defenders across the country are taking up to 15 days without pay, forcing postponements in many criminal proceedings...

The court system’s alternative is to hire private, court-appointed attorneys to represent indigent clients, since by law they must get a lawyer. They are paid from the same pool of money as public defenders. But they cost more, and according to some studies, are less experienced and less effective.

Nachnanoff told lawmakers that public defenders are expecting another hit to their budget of more than 20 percent in the fiscal year that starts Oct. 1, which would almost surely result in layoffs.

In a letter to the Judiciary Committee, a group of 40 former judges and prosecutors urged Congress to fully fund the defender program.

“These ill-conceived measures undermine not only the Federal Defender system, but the entire federal judiciary, without achieving any real cost savings,” they wrote of the sequestration cuts.

All American citizens have a Constitutional right to a trial and legal representation.  There can be little doubt this right was being trampled before sequestration; there can be zero doubt now that this is now occurring.

But a closer look reveals the cynicism of the sequester: because public defenders are being furloughed, the federal government is actually paying more money for worse representation for poor criminals.  Can there be any question that this is a feature, and not a bug?  Does the American ruling class really find this a convincing argument:

Poor people accused of federal crimes are more likely to go to prison because of the sequester, and we need to help them get adequate legal representation.

or would they rather that poor people suffer from incompetent representation?  That legislators are willing to pay money to ensure worse representation shows that worsening public representation is a pleasant surprise of sequestration, and not an unfortunate casualty.  Constitutional rights are to be protected, but only for the rich.  Remember, we imprison people at a higher rate than the world's autocratic dictatorships:

Crack babies and convenient explanations of poverty

The Philadelphia Inquirer has a story on a 25-year-long longitudinal study of 224 children (110 actually participated for the full 25 years) that set out to show the dangers of uterine crack cocaine exposure to children.  Instead, they wound up showing the dangers of poverty:

At age 4, for instance, the average IQ of the cocaine-exposed children was 79.0 and the average IQ for the nonexposed children was 81.9. Both numbers are well below the average of 90 to 109 for U.S. children in the same age group. When it came to school readiness at age 6, about 25 percent of children in each group scored in the abnormal range on tests for math and letter and word recognition.

"We went looking for the effects of cocaine," Hurt said. But after a time "we began to ask, 'Was there something else going on?' "

While the cocaine-exposed children and a group of nonexposed controls performed about the same on tests, both groups lagged on developmental and intellectual measures compared to the norm. Hurt and her team began to think the "something else" was poverty.

Basically, the study determined that poverty is really bad for children.  It's not hard to think of better headlines for this story (Poverty Bad for Children: Science).

As the children grew, the researchers did many evaluations to tease out environmental factors that could be affecting their development. On the upside, they found that children being raised in a nurturing home - measured by such factors as caregiver warmth and affection and language stimulation - were doing better than kids in a less nurturing home. On the downside, they found that 81 percent of the children had seen someone arrested; 74 percent had heard gunshots; 35 percent had seen someone get shot; and 19 percent had seen a dead body outside - and the kids were only 7 years old at the time. Those children who reported a high exposure to violence were likelier to show signs of depression and anxiety and to have lower self-esteem.

Large, universal Scandinavian-style government welfare programs do not hurt the economy or unemployment

Image: Don't worry kids.  It turns out that alarm over your ability to strangle the American economic system was just hype. (source)

Note: This post is about social democracy.  If you don't know what social democracy is, first read this page on basic social policy.

Several arguments are typically leveled against social democracies.  The most common objection is that universal social welfare programs are simply too large, and thus are a drag on the economy.  Having large programs like universal health care, universal child care, and universal old age and disability insurance thus result in slow economic growth, and thus high unemployment.  So, while these programs may be nice to have, the resulting slow economic growth and high unemployment make them more trouble than they're worth.  The second most common argument is that social democracies really aren't that much better at promoting social welfare.  Are the sacrifices to the economy really worth it for a populace that's only marginally better off?

Navarro and Shi (2001) looked directly at these two (related) criticisms by comparing health and economic indicators of all advanced countries with the four basic types of welfare systems (liberal, Christian democrat, social democrat, and fascist), over four decades (1950's through 1990's).