I appreciate this opportunity to share my thoughts about ways that retirement plans can provide clear, concise and objective information to participants that enables them to make appropriate decisions.  However, I would go beyond that to provide information that also motivates employees towards actions that will prove to be in their long-term best interest.

General Thoughts about Participant Communications

The shift from traditional pensions to the current defined contribution system places most of the responsibility for making decisions on the participant.  Automatic enrollment and similar features assist them by combining several formerly potentially complex decisions about whether to participate, how much to save and what investment vehicle to use into one question that the employee can effectively answer by doing nothing.  While the result may not be optimal in all situations, it is certainly better for the saver than not saving at all or waiting until he or she has all of the answers – a day that for many may never come.  For these reasons, automatic enrollment and escalation are extremely popular with both those who accept the automatic choices and those who opt out.

Unfortunately, at this time, automatic mechanisms are not available for every decision that an employee might need to make between starting to save and retirement.  Over time, additional mechanisms that are in development will further simplify these plans, but they are not available yet.  Today’s automatic mechanisms also do not necessarily affect the attitudes that participants may have about their saving balances and how they might be used.  To assist in these areas, effective participant communication is needed.

In order to be effective, communications and notices to employees must have a consistent message that regularly appears throughout an employee’s career.  No single notice, no matter how effectively worded or how timely it is provided, will be as effective as a regular series of messages.  And in order to be effective, notices and statements need to be geared to the needs of the participant rather than to provide legal cover to the plan sponsor for any unanticipated situation.  This requires that they be short, clear, simple and to the point. 

This need for regular communication as opposed to a single notice or series of notices is especially true for withdrawal options.  Whether the participant is leaving the employer or retiring, they need to have key information well in advance of when it is needed.  Otherwise, the saver may be influenced by others who are not acting in their best interests or make a decision based on advice from well-meaning, but poorly informed family friends.

An effective participant education plan for lifetime plan participation and effective withdrawal options should have at least three separate parts, which are detailed below.  These include effective information contained in the quarterly statement; notices at the time an employee leaves the plan due to a job change, and a pre-retirement education campaign. 

While all three must have consistent messages, they should also be tailored for specific circumstances.  What follows is a general discussion, as effective model forms require field-testing in focus groups and similar settings.  Unfortunately, forms developed by financial professionals with a deep understanding of key issues often gloss over important background information or have technical wording that confuses non-professionals. 

Another problem with many individual statements and notices is that they contain too much information.  The professionals who developed them recognize the limitations of projection models and seek to compensate by providing a range of results using differing assumptions.  Unfortunately, this either further confuses the reader or appears as a dense block of type that is usually completely skipped.  It is far better to provide a simple illustration with clear warnings of its limitations than to flood the employee with complex information that will be ignored.

Improved Statements with Income Illustrations and Social Security Information

The most important participant education tool is the quarterly statement they receive.  Properly structured, these statements can set the stage for more specific notices before an employee leaves the employer due to either a new job or retirement.  Today’s statements are often too long and inadvertently cause the employee to focus on account balances rather than seeing the retirement plan as a source of future income.  In many cases, they also fail to note that income from the plan should be added to Social Security for a better estimate of total retirement income.  Two major innovations would be to add both income illustrations and to combine 401k statements with the existing Social Security statement.

Income illustrations: Most of today’s quarterly statements focus almost exclusively on the amount that an individual has saved and how much he or she has gained or lost in the previous quarter.  This focus damages the ability of a participant to see the plan as anything other than a savings account.  Faced with a lump sum of retirement savings that may be a much higher amount than an individual has ever had and little or no practical experience about how to translate that amount into an income stream, it would be very easy for a worker to assume that he or she is much better prepared for retirement than is actually the case.  An income illustration would help savers to make earlier and better decisions about how much they may need to save and how best to manage their retirement assets.

The illustrations should also encourage participation both by including both current and projected balances and by showing the additional income that could be expected if the saver slightly increased his or her contributions. 

Including income illustrations for both current and projected retirement savings balances would have a greater incentive effect than just including current balances.  For younger employees, the very small amount of income that would be produced from their current retirement savings balances may discourage them from further savings and thus have the opposite effect of what is in their long-term best interest and the objective of this disclosure.  Including an income illustration for projected balances that assumes continued participation provides a clearer picture of the extent to which the amount that the individual is saving will meet his or her retirement income needs.

Studies show that an illustration of the additional income that can be derived from a higher level of saving is likely to stimulate the participant to increase his or her savings rate.  Plan sponsors should be encouraged to also include balance projections and income illustrations that show how much retirement income an individual would have if they modestly increased the proportion of their income that they contributed to their retirement savings plan.  For instance, in addition to the income illustrations based on their current balances and projected balances assuming their current savings rate, there might be an illustration based on saving an additional one percent of income and another three percent of income. 

Combining Social Security Statements with Quarterly Statements: As a further way of moving the focus of quarterly statements away from lump sums and investment returns and towards retirement income, an accurate estimate of projected Social Security benefits could be added to at least one annual quarterly statement containing an income illustration.  Some 401(k) providers already simulate Social Security benefits and provide this information to account owners, but these providers lack the income and work history data to make a truly accurate projection.  Collaboration between SSA and 401(k) plan administrators could result in adding information from the once annual Social Security statement to at least one 401(k) quarterly report each year.

Two sets of concerns about using Social Security information would need to be addressed: concerns about privacy and concerns about accuracy. Previous discussions of similar proposals failed because of privacy concerns, as many individuals do not want employers to have access to their Social Security information. Account holders’ privacy is a concern for 401(k) providers too, and providers go to great lengths to protect the confidential data in the quarterly statements. To assuage concerns about the data from SSA, Social Security data could be provided directly to 401(k) administrators rather than employers and included on an annual 401(k) statement only if the administrators meet certain SSA-developed privacy standards. Individuals could have control over this decision through the ability to opt in to the service or to opt out, if the service were automatic. This should preserve individual choice and satisfy persons especially concerned about privacy.

To ensure accuracy and consistency, income illustrations of balances in the 401(k) and SSA projections would need to be produced using compatible methodologies that allow the projected monthly income estimates to be combined for a complete picture of estimated retirement income. This is not a terribly difficult problem.  This reform will give people important information about how to plan their futures. They desperately need this information, and providing it should be fairly simple and cost-effective.

Using an Enhanced Statement as a Base for Additional Guidance and Education

An enhanced quarterly statement with a consistent message that retirement plan participation is intended as retirement income will set the stage for more effective education when the participant leaves the employer.  The current statement format that focuses on aggregate savings amount and the performance of investments sends the message that the balances could be used for other purposes.  This encourage leakage when employees change jobs and may leave the impression that the savers has sufficient resources to use part or all of that money for other purposes.

While the information on investment returns is important and should remain on the statement, it should be de-emphasized, with the focus moving to retirement income that it can provide.  As an aside, let me be clear that I do not favor eliminating the ability to withdraw savings before retirement in the event of an emergency.  For one thing, doing so would reduce participation, and could hurt vulnerable populations that have no other major source of savings.  However, the purpose of the quarterly statement should be to inform savers of their future retirement income, and its orientation should be towards that goal.

Encouraging Participants to Preserve Savings When They Move to a New Job

Several studies show that the biggest source of leakage occurs when employees change jobs.  Part of the reason for this loss of savings may be the way that employers handle the discussion about retirement assets upon separation.  A discussion that is centered on the open question of what should we do with your money may encourage savers to simply ask for their money as a lump sum.  This is especially true if the participant is not informed of the tax consequences of an early withdrawal and the potential effect on future retirement income.

On the other hand, if the participant has received a consistent message that the account is for retirement income, and is informed of the potential consequences of withdrawing the money, they would be less likely to take the funds and more likely to leave the money in the current employer’s plan or to roll it into a plan offered by the new employer or an IRA.  Of course, part of this decision would be determined by whether the current employer is willing to allow the money to remain in their plan or if they would prefer it to be moved to another location.

As a side note, the process of combining retirement savings from one employer to another would be much easier if there is a simple mechanism that can be used to make such transfers.  As I can testify from personal experience, it can be extremely complex to roll retirement money from one employers’ plan to another’s even for those of us who work in this field.  Plan administrators from both the sending and receiving plans make this process overly difficult in part because one party needs to know if it is a legitimate transfer as opposed to a withdrawal, and the other needs to know that the money it is receiving has the proper tax status.  While it is beyond the scope of today’s hearing, it is definitely worth the effort for regulators and if necessary legislators to simplify the process and encourage automatic rollovers between employers.

Contents of Model Notices for Participants Changing Employers:

Given this background, a disclosure notice provided to employees who are moving to another employer should include specific information about several topics.  However, a one-shot notice will be far less effective than an educational campaign that includes information about how poor decisions when changing jobs can adversely affect retirement security.  This information should not be limited to when an employee departs; it should also be included in regular communications.

When an employee moves to another employer, he or she needs to know:

• Ability to retain fund in the account or roll them into another account: The employee should be informed that moving the money to another retirement account, ideally that of the new employer, is the best option.  He or she should also be informed if the current plan is willing to continue to hold the money.  Information about how to effect the rollover and/or a third party willing to assist with the transaction can be provided on a separate sheet.
• Tax consequences of withdrawing the money: An early withdrawal from a traditional account is usually subject to both income taxes and a penalty.  The employer should be informed of both the combined marginal rate and the total amount of retirement money that will be lost by taking the money out of the system.
• Effect on retirement security of withdrawing the money: Using an income projection, the participant should be shown that a withdrawal will potentially reduce their income at retirement by a certain dollar amount.  They should also be shown how long it will take to replace that amount of saving.
• Potential costs of moving to the wrong IRA provider: Moving from a relatively low administrative cost employer plan into an IRA with higher fees could have a major effect on the eventual retirement income.  Participants should be informed of this and offered a separate sheet discussing how to tell if an IRA provider has appropriate fee levels.  This can ge general information rather than tailored to the specific employee.
• Continuing to save at the same rate in the new employer’s plan: Finally, the employee should be encourage to start saving in the new employer’s plan at least at the same level that they have been contributing to the plan of the current employer.

These disclosures do not need to be extremely detailed or presented in legal terms.  If the participant cannot immediately understand what is being said, the information is essentially useless.  To relieve employers’ worry about legal liability, a model form that protects them from liability would be worth creating.  However, this information is important, and could have a major effect on whether the money leaks out of the retirement system or remains in it.

Finally, the term “model form” does not need to mean a single form.  In cases where a great deal of information needs to be available, one form could summarize the situation, while others provide more detailed information about certain subjects.  However, this does not mean that these other forms should be written in long, legalistic language.  Both the summary form and others should be in clear, concise language with appropriate graphics.

Assisting Participants to Make Appropriate Decisions When They Retire

Decisions about how to translate retirement savings into an appropriate income strategy can be among the most complex that an individual faces.  Even those of us who work in the field can find the decision about whether to use an annuity or longevity insurance to supplement other strategies daunting.  This confusion is only made worse by the focus of today’s quarterly statements on lump sums and investment performance.

Ideally, retirement income disclosures would be combined with an automatic enrollment-like withdrawal strategy that the employee could adopt simply by not opting out.  Unfortunately, while this is the subject of much research by both many groups and companies, it is not currently available.

To be most effective, education on retirement income strategies should not be delayed until the participant reaches a specific age.  Rather, it should begin with the design of the quarterly statement and continue with regular discussions of how to create a retirement strategy throughout an employee’s career.  Even if the participant does not pay much attention for many years, the information will form a backdrop that will be recalled when he or she starts to think about retirement.

Because retirement income strategies are complex, the notices should include both a short summary sheet and individual longer notices on specific topics.  Covered information should include:

• An overview sheet with general information: A general discussion of how to think of retirement income as well as the general elements that can be combined to provide an appropriate amount of secure income.
• The role of Social Security: Social Security pays an inflation-indexed annuity that serves as the basis for retirement income strategies.  Employees should be given information about how much they can expect, how to apply for benefits, and the value of delaying their benefits. 
• What income options are in the employer plan: If the employer plan offers any income options, they should be disclosed and explained.  If not, the employee should be informed that they would need to go outside the plan and given advice on how to select a provider (see below).  This would include the potential problems of turning the money over to a broker to manage.
• How long an individual is likely to live: Most people have no idea how long they could live in retirement.  A brief discussion of the average longevity for their specific gender and birth cohort along with a notation that average longevity means that half of them will live longer would be helpful.
• Longevity insurance and how to use it:  Longevity insurance can be a valuable part of a retirement income plan.  How to think about it and choose a policy would be valuable.
• Using immediate annuities and how to buy one: This is a separate discussion from longevity insurance.  While few of today’s retirees may be interested in immediate annuities, information on how to select one should be included.
• Positives and negatives of a phased-withdrawal system: Most retirees will use a phased-withdrawal system for at least some of their retirement income.  This would briefly explain the value of one, the drawbacks of withdrawing a set percentage of savings each year, and how to choose a plan.
• How to choose a financial advisor: Hopefully, may employees will seek the advice of a professional.  If the employer does not provide access to an adviser, tips on how to select one and what questions to ask would be useful.

Again, this is complex information, and employers should also be encouraged to sponsor seminars and counseling sessions for retiring employees.  As mentioned repeatedly, the value of this information and the employee’s receptivity to it would be much greater if it has been part of a regular communications strategy that is simple and accessible.

A Consistent Message Will Enhance Retirement Security

The contents of individual notices are important, but they will be much more effective if they are placed in the context of a communications strategy with a consistent message.  Making the focus of participant education the fact that the purpose of saving in the plan is to produce retirement income rather than lump sums will help participants understand the importance of rolling over their money when changing employers and of developing a sound income strategy when they retire.

       

       

       

British politics is starting to resemble a bowling alley. One after another, political figures are tumbling–including the leading lights of the Brexit campaign. They sowed the wind and now are reaping the whirlwind.

First to topple was the prime minister. After the referendum, David Cameron announced that he would step down. Last week fellow Conservative Boris Johnson, the leading light of the Brexit campaign, said he would not run to succeed Mr. Cameron after his ally Michael Gove, the justice secretary, concluded, in quintessentially British style, that Mr. Johnson lacked “the team captaincy” required. Then Nigel Farage stepped down as leader of the UK Independence Party, saying “I want my life back.” Labour Party leader Jeremy Corbyn has lost the support of his parliamentary colleagues and may be next to fall.

The exit of the leading Brexiteers is a relief. The skills required to run a populist, fact-averse campaign are not the same skills needed to lead a nation. For all his mercurial talents, on full display during his colorful stint as mayor of London, Boris Johnson would have been a disastrous prime minister. The alternatives–especially Mr. Gove and Home Secretary Theresa May–are steadier souls. Both are also better positioned to unite Conservative members of Parliament and hold on until the next scheduled general election, in 2020.

Mr. Corbyn is likely to go; the question really is when. It he doesn’t, the Labour Party will break apart. In his case the departure will be only slightly about the vote to remain in or leave the European Union. Broadly, his fellow Labour MPs didn’t want him as their leader in the first place; it was the votes of more left-wing party members that propelled him to the leadership, and many see him as an electoral liability. (He is.)

There is no direct connection between Brexit and Donald Trump. But a few things can still be deduced on this side of the pond. First, Mr. Trump may succeed in making the connection tighter. His immediate announcement that the vote was about “declaring independence” reflected his sharpening political instincts. The day after the vote, Mr. Trump said: “The people of the United Kingdom have exercised the sacred right of all free peoples. They have declared their independence from the European Union. … Come November, the American people will have the chance to re-declare their independence. Americans will have a chance to vote for trade, immigration and foreign policies that put our citizens first.”

Independence is a powerful populist theme, one Mr. Trump is likely to exploit it to its fullest.

Brexit and the economic and political chaos it has already sparked are proof that no matter how crazy or far-fetched an electoral outcome appears, it can happen. Right up to the last minute, many believed that even if the vote were close, it would be to remain in the EU. At some level we just couldn’t imagine the alternative. Maybe Mr. Cameron and Mr. Corybn felt the same, which is why they were so complacent. Not so, the other side.

All this suggests the wisdom of treating every poll with a fistful of salt. Electorates are becoming more volatile and more visceral. Pollsters are getting it wrong as often as they get it right. The last general election in the U.K. is another case in point. Populist sentiment wrecks standard political models. When people are angry, they don’t weigh the costs and benefits of their actions in the usual way; that’s true in life and it’s true in voting.

It’s also why it’s risky to allow populist campaigners near the levers of power. I’ve written in this space before about the dangers of injecting direct democracy in a parliamentary political system. Think of referendums as akin to Ming vases: something rare, to be handled with great care. The British Parliament is now acting as a firebreak. The leading populists will not get the keys to 10 Downing Street.

But the United States holds direct elections for president. If Donald Trump wins in November, he will assume the most powerful office in the world. There is no firebreak, no buffer, no second chance.

---

Editor's note: This piece originally appeared on the Wall Street Journal's Washington Wire blog.

       

       

       

       

       

       

       

       

       

Event Information

Register for the Event

Forty years after its initial publication, Equality and Efficiency: The Big Tradeoff remains an influential work from one of the most important macroeconomists over the last century, Arthur M. Okun (1928-1980). Okun’s theory on market economies reminds readers of an engaging dual theme: the market needs a place, and the market needs to be kept in its place. Articulated in a way that remains relevant even during today’s discussions on broadening gaps in income inequality, Okun emphasized that institutions in a capitalist democracy prod us to get ahead of our neighbors economically after telling us to stay in line socially.

On May 4, The Brookings Institution Press re-released Okun’s classic work with a new foreword from Former Treasury Secretary Lawrence H. Summers, in addition to “Further Thoughts on Equality and Efficiency,” a paper published by Okun in 1977. The event included opening remarks from Brookings Senior Fellow George Perry, with a keynote address from Larry Summers. Following these remarks, David Wessel moderated a panel discussion with former Chair of the Council of Economic Advisers Greg Mankiw, Economic Studies’ Melissa Kearney and Justin Wolfers, and Washington Center for Equitable Growth's Heather Boushey regarding the history and impact of Okun’s work.

Download a copy of Lawrence Summers' opening remarks.

Ted Gayer, Vice President and Director of Economic Studies and Joseph Pechman Senior Fellow, reads Lawrence Summers's opening remarks.

David Wessel (right), Director of the Hutchins Center on Fiscal and Monetary Policy, moderates a panel discussion with N. Gregory Mankiw, Melissa Kearney, and Heather Boushey.

Janet Yellen, Chair of the Board of Governors of the Federal Reserve System, listens to the discussion from the audience. To Yellen's right is former Congressional Budget Office director, Doug Elmendorf.

 

Video

• 40 years later- The relevance of Okun’s "Equality and Efficiency: The Big Tradeoff"

Audio

• 40 years later- The relevance of Okun’s "Equality and Efficiency: The Big Tradeoff"

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

• 20150504_okun_equality_efficiency_transcript
• 050415 Summers Okun Speech

       

       

       

November's U.S. Bureau of Labor Statistics (BLS) employment report showed continued improvement in the job market, with employers adding 211,000 workers to their payrolls and hourly pay edging up compared with its level a year ago. The pace of job growth was similar to that over the past year and somewhat slower than the pace in 2014. For the 69^th consecutive month, private-sector payrolls increased. Since the economic recovery began in the third quarter of 2009, all the nation’s employment gains have occurred as a result of expansion in private-sector payrolls. Government employment has shrunk by more than half a million workers, or about 2.5 percent. In the past twelve months, however, public payrolls edged up by 93,000.

The good news on employment gains in November was sweetened by revised estimates of job gains in the previous two months. Revisions added 8,000 to estimated job growth in September and 27,000 to job gains in October. The BLS now estimates that payrolls increased 298,000 in October, a big rebound compared with the more modest gains in August and September, when payrolls grew an average of about 150,000 a month.

Average hourly pay in November was 2.3 percent higher than its level 12 months earlier. This is a slightly faster rate of improvement compared with the gains we saw between 2010 and 2014. A tighter job market may mean that employers are now facing modestly higher pressure to boost employee compensation. The exceptionally low level of consumer price inflation means that the slow rate of nominal wage growth translates into a healthy rate of real wage improvement. The latest BLS numbers show that real weekly and hourly earnings in October were 2.4 percent above their levels one year earlier. Not only have employers added more than 2.6 million workers to their payrolls over the past year, the purchasing power of workers' earnings have been boosted by the slightly faster pace of wage gain and falling prices for oil and other commodities.

The BLS household survey also shows robust job gains last month. Employment rose 244,000 in November, following a jump of 320,000 in October. More than 270,000 adults entered the labor force in November, so the number of unemployed increased slightly, leaving the unemployment rate unchanged at 5.0 percent. In view of the low level of the jobless rate, the median duration of unemployment spells remains surprisingly long, 10.8 weeks. Between 1967 and the onset of the Great Recession, the median duration of unemployment was 10.8 weeks or higher in just seven months. Since the middle of the Great Recession, the median duration of unemployment has been 10.8 weeks or longer for 82 consecutive months. The reason, of course, is that many of the unemployed have been looking for work for a long time. More than one-quarter of the unemployed—slightly more than two million job seekers—have been jobless for at least 6 months.  That number has been dropping for more than five years, but remains high relative to our experience before the Great Recession.

If there is bad news in the latest employment report, it's the sluggish response of labor force participation to a brighter job picture. The participation rate of Americans 16 and older edged up 0.1 point in November but still remains 3.5 percentage points below its level before the Great Recession. About half the decline can be explained by an aging adult population, but a sizeable part of the decline remains unexplained. The participation rate of men and women between 25 and 54 years old is now 80.8 percent, exactly the same level it was a year ago but 2.2 points lower than it was before the Great Recession. Despite the fact that real wages are higher and job finding is now easier than was the case earlier in the recovery, the prime-age labor force participation rate remains stuck well below its level before the recession. How strong must the recovery be before prime-age adults are induced to come back into the work force? Even though the recovery is now 6 and a half years old, we still do not know.

      

The pace of employment gains slowed in January from the torrid pace of the previous three months. The latest BLS jobs report shows that employers added 151,000 to their payrolls in January, well below monthly gains in October through December. In that quarter payrolls climbed almost 280,000 a month. For two reasons, the deceleration in employment gains was not a complete surprise. First, the rapid growth payrolls in the last quarter did not seem consistent with other indicators of growth in the quarter. Preliminary GDP estimates suggest that output growth slowed sharply in the fourth quarter compared with the previous two. Second, I see few indicators suggesting the pace of economic growth has picked up so far this year.

It’s worth noting that employment gains in January were far faster than needed to keep the unemployment rate from increasing. In fact, if payrolls continue to grow at January’s pace throughout the year, we should expect the unemployment rate to continue falling. As usual in the current expansion, private employers accounted for all of January’s employment gains. Government payrolls shrank slightly. The number of public employees is about the same as it was last July. Over the same period, private employers added about 213,000 workers a month to their payrolls. In January employment gains slowed in construction and in business and professional industries. Payrolls shrank in mining. Since mining payrolls reached a peak in September 2014, they have fallen 16 percent. Manufacturing payrolls rose slightly in January, but payroll gains have been very slow over the past year. Employment in the temporary help industry contracted in January. The industry has seen no net change in payrolls since October.

Average hourly pay in private companies edged up in January. The average nominal wage was 2.5 percent higher than its level 12 months earlier. This is a faster rate of improvement compared with what we saw earlier in the recovery, when annual pay gains averaged about 2.0 percent a year. The modest acceleration in nominal pay gains has occurred against the backdrop of slowing consumer price inflation. The combination has given workers real wage gains approaching 2.0 percent over the past year.

The BLS household survey showed a small drop in unemployment. The jobless rate fell to 4.9 percent, just 0.3 points above its average level in 2007, the last year before the Great Recession. The drop in unemployment was the result of a rise in the number of survey respondents who were employed. The labor force participation rate increased in January, and it has increased 0.3 points since October.

This rebound in labor force participation is modest compared with the drop that occurred between 2008 and 2015. From 2007 to January 2016 the adult participation rate fell 3.4 percentage points. Roughly half the drop is traceable to population aging, but the other half is due to factors related to the deep slump or to long-term factors that have affected Americans’ willingness to enter or remain in the workforce. If we assume all of the drop was due to factors that have temporarily discouraged jobless adults from seeking work, then we can recalculate the unemployment rate to reflect the rate we would see if all of these discouraged workers were reclassified as unemployed. That calculation suggests the current unemployment rate would be about 7.4 percent rather than 4.9 percent.

It is of course unlikely all the adults who’ve dropped out the labor force would stream back in if job finding got easier and real wages continued to rise. It is encouraging to see, however, that participation is now climbing after a long period of decline. Over the past four months, the labor force participation rate of 25-54 year-olds increased 0.5 percentage points.

      

The latest BLS jobs report shows little sign employers are worried about the future strength of the recovery. Both the employer and household surveys suggest U.S. employers have an undiminished appetite for new hires. Nonfarm payrolls surged 242,000 in February, and upward revisions BLS employment estimates for January added almost 21,000 to estimated payroll gains in that month.

The household survey shows even bigger job gains in recent months. An additional 530,000 respondents said they were employed in February compared with January. This follows reported employment gains of 485,000 and 615,000 in December and January. Over the past year the household survey showed employment gains that averaged 237,000 per month. In comparison, the employer survey reported payroll gains averaging 223,000 a month.

These monthly gains are about three times faster than the job growth needed to keep the unemployment rate from climbing. As a result, the unemployment rate has fallen over the past year, reaching 4.9 percent in January. The jobless rate remained unchanged in February because of a continued influx of adults into the workforce. An additional 555,000 people entered the labor force, capping a three-month period which saw the labor force grow by over 500,000 a month. The labor force participation rate continued to inch up, rising 0.2 percentage points in February compared with the previous month. Since reaching a 38-year low in September 2015, the labor force participation rate has risen 0.5 points.

More than half the decline in the participation rate between the onset of the Great Recession and today is traceable to the aging of the adult population. A growing share of Americans are in late middle age or past 65, ages when we anticipate participation rates will decline. If we focus on the population between 25 and 54, the participation rate stopped declining in 2013 and has edged up 0.6 percentage points since hitting its low point. The employment-to-population rate of 25-54 year-olds has increased 3.0 percentage points since reaching a low in 2009 and 2010. Using the employment rate of 25-54 year-olds as an indicator of labor market tightness, we have recovered about 60 percent of the employment-rate drop that occurred in the Great Recession. Eliminating the rest of the decline will require a further increase in prime-age labor force participation.

Two other indicators suggest the job market remains some distance from a full recovery. More than a quarter of the 7.8 million unemployed have been jobless 6 months or longer. The number of long-term unemployed is about 70 percent higher than was the case just before the Great Recession. Nearly 6 million Americans who hold part-time jobs indicate they want to work on full-time schedules. They cannot do so because they have been assigned part-time hours or can only find a part-time job. The number of workers in this position is more than one-third higher than the comparable number back in 2007. Nonetheless, nearly all indicators of labor market tightness have displayed continued improvement in recent months.

February’s surge in employment growth and labor force participation was accompanied by an unexpected drop in nominal wages. Average hourly pay fell from $25.38 to $25.35 per hour. Compared with average earnings 12 months ago, workers saw a 2.2 percent rise in nominal hourly earnings. Because inflation is low, this probably translates into a real wage gain of about 1 percent. While employers may have an undiminished appetite for new hires, they show little inclination to boost the pace of wage increases.

       

       

       

       

       

       

       

       

       

During debates in Congress and in the legal battles testing its constitutionality, critics of the Bipartisan Campaign Reform Act of 2002 imagined a host of unanticipated and debilitating consequences. The law's ban on party soft money and the regulation of electioneering advertising would, they warned, produce a parade of horribles: A decline in political speech protected by the First Amendment, the demise of political parties, and the dominance of interest groups in federal election campaigns.

The forecast that attracted the most believers — among politicians, journalists, political consultants, election-law attorneys and scholars — was the claim that Democrats would be unable to compete against Republicans under the new rules, primarily because the Democrats' relative ability to raise funds would be severely crippled. One year ago, Seth Gitell in The Atlantic Monthly summarized this view and went so far as to call the new law "The Democratic Party Suicide Bill." Gitell quoted a leading Democratic Party attorney, who expressed his private view of the law as "a fascist monstrosity." He continued, "It is grossly offensive ... and on a fundamental level it's horrible public policy, because it emasculates the parties to the benefit of narrow-focus special-interest groups. And it's a disaster for the Democrats. Other than that, it's great."

The core argument was straightforward. Democratic Party committees were more dependent on soft money — unlimited contributions from corporations, unions and individuals — than were the Republicans. While they managed to match Republicans in soft-money contributions, they trailed badly in federally limited hard-money contributions. Hence, the abolition of soft money would put the Democrats at a severe disadvantage in presidential and Congressional elections.

In addition, the argument went, by increasing the amount an individual could give to a candidate from $1,000 to $2,000, the law would provide a big financial boost to President Bush, who would double the $100 million he raised in 2000 and vastly outspend his Democratic challenger. Finally, the ban on soft money would weaken the Democratic Party's get-out-the-vote efforts, particularly in minority communities, while the regulation of "issue ads" would remove a potent electoral weapon from the arsenal of labor unions, the party's most critical supporter.

After 18 months of experience under the law, the fundraising patterns in this year's election suggest that these concerns were greatly exaggerated. Money is flowing freely in the campaign, and many voices are being heard. The political parties have adapted well to an all-hard-money world and have suffered no decline in total revenues. And interest groups are playing a secondary role to that of the candidates and parties.

The financial position of the Democratic party is strikingly improved from what was imagined a year ago. Sen. John Kerry (D-Mass.), who opted out of public funding before the Iowa caucuses, will raise more than $200 million before he accepts his party's nomination in Boston. The unusual unity and energy in Democrats' ranks have fueled an extraordinary flood of small donations to the Kerry campaign, mainly over the Internet. These have been complemented by a series of successful events courting $1,000 and $2,000 donors.

Indeed, since Kerry emerged as the prospective nominee in March, he has raised more than twice as much as Bush and has matched the Bush campaign's unprecedented media buys in battleground states, while also profiting from tens of millions of dollars in broadcast ads run by independent groups that are operating largely outside the strictures of federal election law.

The Democratic national party committees have adjusted to the ban on soft money much more successfully than insiders had thought possible. Instead of relying on large soft-money gifts for half of their funding, Democrats have shown a renewed commitment to small donors and have relied on grassroots supporters to fill their campaign coffers. After the 2000 election, the Democratic National Committee had 400,000 direct-mail donors; today the committee has more than 1.5 million, and hundreds of thousands more who contribute over the Internet.

By the end of June, the three Democratic committees had already raised $230 million in hard money alone, compared to $227 million in hard and soft money combined at this point in the 2000 election cycle. They have demonstrated their ability to replace the soft money they received in previous elections with new contributions from individual donors.

Democrats are also showing financial momentum as the election nears, and thus have been gradually reducing the Republican financial advantage in both receipts and cash on hand. In 2003, Democrats trailed Republicans by a large margin, raising only $95 million, compared to $206 million for the GOP. But in the first quarter of this year, Democrats began to close the gap, raising $50 million, compared to $82 million for Republicans. In the most recent quarter, they narrowed the gap even further, raising $85 million, compared to the Republicans' $96 million.

Democrats are now certain to have ample funds for the fall campaigns. Although they had less than $20 million in the bank (minus debts) at the beginning of this year, they have now banked $92 million. In the past three months, Democrats actually beat Republicans in generating cash — $47 million, compared to $31 million for the GOP.

The party, therefore, has the means to finance a strong coordinated and/or independent-spending campaign on behalf of the presidential ticket, while Congressional committees have the resources they need to play in every competitive Senate and House race, thanks in part to the fundraising support they have received from Members of Congress.

Moreover, FEC reports through June confirm that Democratic candidates in those competitive Senate and House races are more than holding their own in fundraising. They will be aided by a number of Democratic-leaning groups that have committed substantial resources to identify and turn out Democratic voters on Election Day.

Democrats are highly motivated to defeat Bush and regain control of one or both houses of Congress. BCRA has not frustrated these efforts. Democrats are financially competitive with Republicans, which means the outcome will not be determined by a disparity of resources. Put simply, the doomsday scenario conjured up by critics of the new campaign finance law has not come to pass.

      

Event Information

Register for the Event

The 2008 elections showcased the power of the Internet to generate voter enthusiasm, mobilize volunteers and increase small-donor contributions. After the political world has been arguing about campaign finance policy for decades, the digital revolution has altered the calculus of participation.

On January 14, a joint project of the Campaign Finance Institute, American Enterprise Institute and the Brookings Institution unveiled a new report that seeks to change the ongoing national dialogue about money in politics. At this event, the four authors of the report will detail their findings and recommendations. Relying on lessons from the record-shattering 2008 elections and the rise of Internet campaigning, experts will present a new vision of how campaign finance and communications policy can help further democracy through broader participation.

Video

• Thomas Mann
• Michael Malbin
• Anthony Corrado
• Norm Ornstein

Audio

• Campaign Reform in the Networked Age: Fostering Participation through Small Donors and Volunteers

Transcript

• Transcript (.pdf)

Event Materials

• 20090114_campaign_finance

       

       

       

Scholars from the Brookings Institution and the American Enterprise Institute are collaborating to promote transparency in redistricting. In January 2010, an advisory board of experts and representatives of good government groups was convened in order to articulate principles for transparent redistricting and to identify barriers to the public and communities who wish to create redistricting plans. This document summarizes the principles for transparency in redistricting that were identified during that meeting.

Benefits of a Transparent, Participative Redistricting Process

The drawing of electoral districts is among the most easily manipulated and least transparent systems in democratic governance. All too often, redistricting authorities maintain their monopoly by imposing high barriers to transparency and public participation. Increasing transparency and public participation can be a powerful counterbalance by providing the public with information similar to that which is typically only available to official decision makers, which can lead to different outcomes and better representation.

Increasing transparency can empower the public to shape the representation for their communities, promote public commentary and discussion about redistricting, inform legislators and redistricting authorities which district configurations their constituents and the public support, and educate the public about the electoral process.  

Fostering public participation can enable the public to identify their neighborhoods and communities, promote the creation of alternative maps, and facilitate an exploration of a wide range of representational possibilities. The existence of publicly-drawn maps can provide a measuring stick against which an official plan can be compared, and promote the creation of a “market” for plans that support political fairness and community representational goals.

Transparency Principles

All redistricting plans should include sufficient information so the public can verify, reproduce, and evaluate a plan. Transparency thus requires that:

• Redistricting plans must be available in non-proprietary formats.
• Redistricting plans must be available in a format allowing them to be easily read and analyzed with commonly-used geographic information software.
• The criteria used as a basis for creating plans and individual districts must be clearly documented.

Creating and evaluating redistricting plans and community boundaries requires access to demographic, geographic, community, and electoral data. Transparency thus requires that:

• All data necessary to create legal redistricting plans and define community boundaries must be publicly available, under a license allowing reuse of these data for non-commercial purposes.
• All data must be accompanied by clear documentation stating the original source, the chain of ownership (provenance), and all modifications made to it.

Software systems used to generate or analyze redistricting plans can be complex, impossible to reproduce, or impossible to correctly understand without documentation. Transparency thus requires that:

• Software used to automatically create or improve redistricting plans must be either open-source or provide documentation sufficient for the public to replicate the results using independent software.
• Software used to generate reports that analyze redistricting plans must be accompanied by documentation of data, methods, and procedures sufficient for the reports to be verified by the public.

Services offered to the public to create or evaluate redistricting plans and community boundaries are often opaque and subject to misinterpretation unless adequately documented. Transparency thus requires that:

• Software necessary to replicate the creation or analysis of redistricting plans and community boundaries produced by the service must be publicly available.
• The service must provide the public with the ability to make available all published redistricting plans and community boundaries in non-proprietary formats that are easily read and analyzed with commonly-used geographic information software.
• Services must provide documentation of any organizations providing significant contributions to their operation.

Promoting Public Participation

New technologies provide opportunities to broaden public participation in the redistricting process. These technologies should aim to realize the potential benefits described and be consistent with the articulated transparency principles.

Redistricting is a legally and technically complex process. District creation and analysis software can encourage broad participation by: being widely accessible and easy to use; providing mapping and evaluating tools that help the public to create legal redistricting plans, as well as maps identifying local communities; be accompanied by training materials to assist the public to successfully create and evaluate legal redistricting plans and define community boundaries; have publication capabilities that allow the public to examine maps in situations where there is no access to the software; and promoting social networking and allow the public to compare, exchange and comment on both official and community-produced maps.

---

Official Endorsement from Organizations – Americans for Redistricting Reform, Brennan Center for Justice at New York University, Campaign Legal Center, Center for Governmental Studies, Center for Voting and Democracy, Common Cause, Demos, and the League of Women Voters of the United States.

Attending board members – Nancy Bekavac, Director, Scientists and Engineers for America; Derek Cressman, Western Regional Director of State Operations, Common Cause; Anthony Fairfax, President, Census Channel; Representative Mike Fortner (R), Illinois General Assembly; Karin Mac Donald, Director, Statewide Database, Berkeley Law, University of California, Berkeley; Leah Rush, Executive Director, Midwest Democracy Network; Mary Wilson, President, League of Women Voters.

Editors – Micah Altman, Harvard University and the Brookings Institution; Thomas E. Mann, Brookings Institution; Michael P. McDonald, George Mason University and the Brookings Institution; Norman J. Ornstein, American Enterprise Institute.

This project is funded by a grant from the Sloan Foundation to the Brookings Institution and the American Enterprise Institute.

       

Event Information

Register for the Event

The drawing of legislative district boundaries is among the most self-interested and least transparent systems in American democratic governance. All too often, formal redistricting authorities maintain their control by imposing high barriers to transparency and to public participation in the process. Reform advocates believe that opening that process to the public could lead to different outcomes and better representation.

On January 20, Brookings hosted a briefing to review how redistricting in the 50 states will unfold in the months ahead and present a number of state-based initiatives designed to increase transparency and public participation in redistricting. Brookings Nonresident Senior Fellows Micah Altman and Michael McDonald unveiled open source mapping software which enables users to create and submit their own plans, based on current census and historical election data, to redistricting authorities and to disseminate them widely. Such alternative public maps could offer viable input to the formal redistricting process.

After each presentation, participants took audience questions.

Learn more about Michael McDonald's Public Mapping Project »

Video

• Injecting Transparency into Redistricting
• GOP Could Re-Draw 145 Districts
• Towards a New Political Culture
• Coalitions Pushing for Greater Transparency
• The Public Mapping Project

Audio

• Toward Public Participation in Redistricting
• Toward Public Participation in Redistricting
• Toward Public Participation in Redistricting

Transcript

• Download Micah Altman's and Michael McDonald's Presentation (.pdf)
• Download Tim Storey's Presentation (.pdf)
• Download Clare Dyer's Presentation (.pdf)
• Download the Redistricting Authority in the States Factsheet (.pdf)
• Download Micah Altman's and Michael McDonald's Report (.pdf)
• Download the District Builder Summary (.pdf)

Event Materials

• 0120_redistricting_altman_mcdonald
• 0120_redistricting_storey
• 0120_redistricting_dyer
• 0120_redistricting_authority
• 0120_redistricting_report
• 0120_redistricting_summary

       

       

       

       

       

       

       

       

       

       

       

       

       

       

On May 16, I got into a Twitter argument with Campbell Brown of The 74, an education website.  She released a video on Slate giving advice to the next president.  The video begins: “Without question, to me, the issue is education. Two out of three eighth graders in this country cannot read or do math at grade level.”  I study student achievement and was curious.  I know of no valid evidence to make the claim that two out of three eighth graders are below grade level in reading and math.  No evidence was cited in the video.  I asked Brown for the evidentiary basis of the assertion.  She cited the National Assessment of Educational Progress (NAEP).

NAEP does not report the percentage of students performing at grade level.  NAEP reports the percentage of students reaching a “proficient” level of performance.  Here’s the problem. That’s not grade level. 

In this post, I hope to convince readers of two things:

1.  Proficient on NAEP does not mean grade level performance.  It’s significantly above that.
2.  Using NAEP’s proficient level as a basis for education policy is a bad idea.

Before going any further, let’s look at some history.

NAEP history 

NAEP was launched nearly five decades ago.  The first NAEP test was given in science in 1969, followed by a reading test in 1971 and math in 1973.  For the first time, Americans were able to track the academic progress of the nation’s students.  That set of assessments, which periodically tests students 9, 13, and 17 years old and was last given in 2012, is now known as the Long Term Trend (LTT) NAEP. 

It was joined by another set of NAEP tests in the 1990s.  The Main NAEP assesses students by grade level (fourth, eighth, and twelfth) and, unlike the LTT, produces not only national but also state scores.  The two tests, LTT and main, continue on parallel tracks today, and they are often confounded by casual NAEP observers.  The main NAEP, which was last administered in 2015, is the test relevant to this post and will be the only one discussed hereafter.  The NAEP governing board was concerned that the conventional metric for reporting results (scale scores) was meaningless to the public, so achievement standards (also known as performance standards) were introduced.  The percentage of students scoring at advanced, proficient, basic, and below basic levels are reported each time the main NAEP is given.

Does NAEP proficient mean grade level? 

The National Center for Education Statistics (NCES) states emphatically, “Proficient is not synonymous with grade level performance.” The National Assessment Governing Board has a brochure with information on NAEP, including a section devoted to myths and facts.  There, you will find this:

Myth: The NAEP Proficient level is like being on grade level.

 

Fact: Proficient on NAEP means competency over challenging subject matter.  This is not the same thing as being “on grade level,” which refers to performance on local curriculum and standards. NAEP is a general assessment of knowledge and skills in a particular subject.

Equating NAEP proficiency with grade level is bogus.  Indeed, the validity of the achievement levels themselves is questionable.  They immediately came under fire in reviews by the U.S. Government Accountability Office, the National Academy of Sciences, and the National Academy of Education.[1]  The National Academy of Sciences report was particularly scathing, labeling NAEP’s achievement levels as “fundamentally flawed.”

Despite warnings of NAEP authorities and critical reviews from scholars, some commentators, typically from advocacy groups, continue to confound NAEP proficient with grade level.  Organizations that support school reform, such as Achieve Inc. and Students First, prominently misuse the term on their websites.  Achieve presses states to adopt cut points aligned with NAEP proficient as part of new Common Core-based accountability systems.  Achieve argues that this will inform parents whether children “can do grade level work.” No, it will not.  That claim is misleading.

How unrealistic is NAEP proficient? 

Shortly after NCLB was signed into law, Robert Linn, one of the most prominent psychometricians of the past several decades, called ”the target of 100% proficient or above according to the NAEP standards more like wishful thinking than a realistic possibility.”  History is on the side of that argument.  When the first main NAEP in mathematics was given in 1990, only 13 % of eighth graders scored proficient and 2 % scored advanced.  Imagine using “proficient” as synonymous with grade level—85 % scored below grade level! 

The 1990 national average in eighth grade scale scores was 263 (see Table 1).  In 2015, the average was 282, a gain of 19 scale score points.

Table 1.  Main NAEP Eighth Grade Math Score, by achievement levels, 1990-2015

Year	Scale Score Average	Below Basic (%)	Basic	Proficient	Advanced	Proficient and Above
2015	282	29	38	25	8	33
2009	283	27	39	26	8	34
2003	278	32	39	23	5	28
1996	270	39	38	20	4	24
1990	263	48	37	13	2	15

That’s an impressive gain.  Analysts who study NAEP often use 10 points on the NAEP scale as a back of the envelope estimate of one year’s worth of learning.  Eighth graders have gained almost two years.  The percentage of students scoring below basic has dropped from 48%  in 1990 to 29% in 2015.  The percentage of students scoring proficient or above has more than doubled, from 15% to 33%.  That’s not bad news; it’s good news.

But the cut point for NAEP proficient is 299.  By that standard, two-thirds of eighth graders are still falling short.  Even students in private schools, despite hailing from more socioeconomically advantaged homes and in some cases being selectively admitted by schools, fail miserably at attaining NAEP proficiency.  More than half (53 percent) are below proficient. 

Today’s eighth graders have made it about half-way to NAEP proficient in 25 years, but they still need to gain almost two more years of math learning (17 points) to reach that level.  And, don’t forget, that’s just the national average, so even when that lofty goal is achieved, half of the nation’s students will still fall short of proficient.  Advocates of the NAEP proficient standard want it to be for all students.  That is ridiculous.  Another way to think about it: proficient for today’s eighth graders reflects approximately what the average twelfth grader knew in mathematics in 1990.   Someday the average eighth grader may be able to do that level of mathematics.  But it won’t be soon, and it won’t be every student.

In the 2007 Brown Center Report on American Education, I questioned whether NAEP proficient is a reasonable achievement standard.[2]  That year, a study by Gary Phillips of American Institutes for Research was published that projected the 2007 TIMSS scores on the NAEP scale.  Phillips posed the question: based on TIMSS, how many students in other countries would score proficient or better on NAEP?  The study’s methodology only produces approximations, but they are eye-popping.

Here are just a few countries:

Table 2.  Projected Percent NAEP Proficient, Eighth Grade Math

Singapore was the top scoring nation on TIMSS that year, but even there, more than a quarter of students fail to reach NAEP proficient.  Japan is not usually considered a slouch on international math assessments, but 43% of its eighth graders fall short.  The U.S. looks weak, with only 26% of students proficient.  But England, Israel, and Italy are even weaker.  Norway, a wealthy nation with per capita GDP almost twice that of the U.S., can only get 9 out of 100 eighth graders to NAEP proficient.

Finland isn’t shown in the table because it didn’t participate in the 2007 TIMSS.  But it did in 2011, with Finland and the U.S. scoring about the same in eighth grade math.  Had Finland’s eighth graders taken NAEP in 2011, it’s a good bet that the proportion scoring below NAEP proficient would have been similar to that in the U.S.  And yet articles such as “Why Finland Has the Best Schools,” appear regularly in the U.S. press.[3]

Why it matters

The National Center for Education Statistics warns that federal law requires that NAEP achievement levels be used on a trial basis until the Commissioner of Education Statistics determines that the achievement levels are “reasonable, valid, and informative to the public.”  As the NCES website states, “So far, no Commissioner has made such a determination, and the achievement levels remain in a trial status.  The achievement levels should continue to be interpreted and used with caution.”

Confounding NAEP proficient with grade-level is uninformed.  Designating NAEP proficient as the achievement benchmark for accountability systems is certainly not cautious use.  If high school students are required to meet NAEP proficient to graduate from high school, large numbers will fail. If middle and elementary school students are forced to repeat grades because they fall short of a standard anchored to NAEP proficient, vast numbers will repeat grades.    

On NAEP, students are asked the highest level math course they’ve taken.  On the 2015 twelfth grade NAEP, 19% of students said they either were taking or had taken calculus.   These are the nation’s best and the brightest, the crème-de la crème of math students.  Only one in five students work their way that high up the hierarchy of American math courses.  If you are over 45 years old and reading this, the proportion who took calculus in high school is less than one out of ten.  In the graduating class of 1990, for instance, only 7% of students had taken calculus.[4] 

Unsurprisingly, calculus students are also typically taught by the nation’s most knowledgeable math teachers.  The nation’s elite math students paired with the nation’s elite math teachers: if any group can prove NAEP proficient a reasonable goal and succeed in getting all students over the NAEP proficiency bar, this is the group. 

But they don’t.  A whopping 30% score below proficient on NAEP.  For black and Hispanic calculus students, the figures are staggering.  Two-thirds of black calculus students score below NAEP proficient.  For Hispanics, the figure is 52%.  The nation’s pre-calculus students also fair poorly (69% below proficient). Then the success rate falls off a cliff.  In the class of 2015, more than nine out of ten students whose highest math course was Trigonometry or Algebra II fail to meet the NAEP proficient standard.

Table 3.  2015 NAEP Twelfth Grade Math, Proficient by Highest Math Course Taken

Highest Math Course Taken	Percentage Below NAEP Proficient
Calculus	30
Pre-calculus	69
Trig/Algebra II	92

Source: NAEP Data Explorer

These data defy reason; they also refute common sense.  For years, educators have urged students to take the toughest courses they can possibly take.  Taken at face value, the data in Table 3 rip the heart out of that advice.  These are the toughest courses, and yet huge numbers of the nation’s star students, by any standard aligned with NAEP proficient, would be told that they have failed.  Some parents, misled by the confounding of proficient with grade level, might even mistakenly believe that their kids don’t know grade level math.

Conclusion 

NAEP proficient is not synonymous with grade level.  NAEP officials urge that proficient not be interpreted as reflecting grade level work.  It is a standard set much higher than that.  Scholarly panels have reviewed the NAEP achievement standards and found them flawed.  The highest scoring nations of the world would appear to be mediocre or poor performers if judged by the NAEP proficient standard.  Even large numbers of U.S. calculus students fall short.

As states consider building benchmarks for student performance into accountability systems, they should not use NAEP proficient—or any standard aligned with NAEP proficient—as a benchmark.  It is an unreasonable expectation, one that ill serves America’s students, parents, and teachers--and the effort to improve America’s schools.

       

Hypocrisy is not scarce in the world of politics. But the current House and Senate budget resolutions set new lows. Each proposes to cut about $5 trillion from government spending over the next decade in pursuit of a balanced budget. Whatever one may think of putting the goal of reducing spending when the ratio of the debt-to-GDP is projected to be stable above investing in the nation’s future, you would think that deficit-reduction hawks wouldn’t cut spending that has been proven to lower the deficit.

Yes, there are expenditures that actually lower the deficit, typically by many dollars for each dollar spent. In this category are outlays on ‘program integrity’ to find and punish fraud, tax evasion, and plain old bureaucratic mistakes. You might suppose that those outlays would be spared. Guess again. Consider the following:

Medicare. Roughly 10% of Medicare’s $600 billion budget goes for what officials delicately call ‘improper payments, according to the 2014 financial report of the Department of Health and Human Services. Some are improper merely because providers ‘up-code’ legitimate services to boost their incomes. Some payments go for services that serve no valid purpose. And some go for phantom services that were never provided. Whatever the cause, approximately $60 billion of improper payments is not ‘chump change.’

Medicare tries to root out these improper payments, but it lacks sufficient staff to do the job. What it does spend on ‘program integrity’ yields an estimated $14.40? for each dollar spent, about $10 billion a year in total. That number counts only directly measurable savings, such as recoveries and claim denials. A full reckoning of savings would add in the hard-to-measure ‘policeman on the beat’ effect that discourages violations by would-be cheats.

Fat targets remain. A recent report from the Institute of Medicine presented findings that veritably scream ‘fraud.’ Per person spending on durable medical equipment and home health care is ten times higher in Miami-Dade County, Florida than the national average. Such equipment and home health accounts for nearly three-quarters of the geographical variation in per person Medicare spending. Yet, only 4% of current recoveries of improper payments come from audits of these two items and little from the highest spending locations.

Why doesn’t Medicare spend more and go after the remaining overpayments, you may wonder? The simple answer is that Congress gives Medicare too little money for administration. Direct overhead expenses of Medicare amount to only about 1.5% of program outlays—6% if one includes the internal administrative costs of private health plans that serve Medicare enrollees. Medicare doesn’t need to spend as much on administration as the average of 19% spent by private insurers, because for example, Medicare need not pay dividends to private shareholders or advertise.

But spending more on Medicare administration would both pay for itself—$2 for each added dollar spent, according to the conservative estimate in the President’s most recent budget—and improve the quality of care. With more staff, Medicare could stop more improper payments and reduce the use of approved therapies in unapproved ways that do no good and may cause harm.

Taxes. Compare two numbers: $540 billion and $468 billion. The first number is the amount of taxes owed but not paid. The second number is the projected federal budget deficit for 2015, according to the Congressional Budget Office.

Collecting all taxes legally owed but not paid is an impossibility. It just isn’t worth going after every violation. But current enforcement falls far short of practical limits. Expenditures on enforcement directly yields $4 to $6 for each dollar spent on enforcement. Indirect savings are many times larger—the cop-on-the-beat effect again. So, in an era of ostentatious concern about budget deficits, you would expect fiscal fretting in Congress to lead to increased efforts to collect what the law says people owe in taxes.

Wrong again. Between 2010 and 2014, the IRS budget was cut in real terms by 20%. At the same time, the agency had to shoulder new tasks under health reform, as well as process an avalanche of applications for tax exemptions unleashed by the 2010 Supreme Court decision in the Citizens United case. With less money to spend and more to do, enforcement staff dropped by 15% and inflation adjusted collections dropped 13%.

One should acknowledge that enforcement will not do away with most avoidance and evasion. Needlessly complex tax laws are the root cause of most tax underpayment. Tax reform would do even more than improved administration to increase the ratio of taxes paid to taxes due. But until that glorious day when Congress finds the wit and will to make the tax system simpler and fairer, it would behoove a nation trying to make ends meet to spend $2 billion to $3 billion more each year to directly collect $10 billion to 15 billion a year more of legally owed taxes and, almost certainly, raise far more than that by frightening borderline scoff-laws.

Disability Insurance. Thirteen million people with disabling conditions who are judged incapable of engaging in substantial gainful activity received $161 billion in disability insurance in 2013. If the disabling conditions improve enough so that beneficiaries can return to work, benefits are supposed to be stopped. Such improvement is rare. But when administrators believe that there is some chance, the law requires them to check. They may ask beneficiaries to fill out a questionnaire or, in some cases, undergo a new medical exam at government expense. Each dollar spent in these ways generated an estimated $16 in savings in 2013.

Still, the Social Security Administration is so understaffed that SSA has a backlog of 1.3 million disability reviews. Current estimates indicate that spending a little over $1 billion a year more on such reviews over the next decade would save $43 billion. Rather than giving Social Security the staff and spending authority to work down this backlog and realize those savings, Congress has been cutting the agency’s administrative budget and sequestration threatens further cuts.

Claiming that better administration will balance the budget would be wrong. But it would help. And it would stop some people from shirking their legal responsibilities and lighten the burdens of those who shoulder theirs. The failure of Congress to provide enough staff to run programs costing hundreds of billions of dollars a year as efficiently and honestly as possible is about as good a definition of criminal negligence as one can find.

      

Medicare Hospital Insurance and Social Security would not add to deficits because they can’t spend money they don’t have.

The dog days of August have given way to something much worse. Congress returned to session this week, and the rest of the year promises to be nightmarish. The House and Senate passed budget resolutions earlier this year calling for nearly $5 trillion in spending cuts by 2025. More than two-thirds of those cuts would come from programs that help people with low-and moderate-incomes. Health care spending would be halved. If such cuts are enacted, the president will likely veto them. At best, another partisan budget war will ensue after which the veto is sustained. At worst, the cuts become law.

The putative justification for these cuts is that the nation faces insupportable increases in public debt because of expanding budget deficits. Even if the projections were valid, it would be prudent to enact some tax increases in order to preserve needed public spending. But the projections of explosively growing debt are not valid. They are fantasy.

Wait! you say. The Congressional Budget Office has been telling us for years about the prospect of rising deficit and exploding debt. They repeated those warnings just two months ago. Private organizations of both the left and right agree with the CBO’s projections, in general if not in detail. How can any sane person deny that the nation faces a serious long-term budget deficit problem?

The answer is simple: The CBO and private organizations use a convention in preparing their projections that is at odds with established policy and law. If, instead, projections are based on actual current law, as they claim to be, the specter of an increasing debt burden vanishes. What is that convention? Why is it wrong? Why did CBO adopt it, and why have others kept it?

CBO’s budget projections cover the next 75 years. Its baseline projections claim to be based on current law and policy. (CBO also presents an ‘alternative scenario’ based on assumed changes in law and policy). Within that period, Social Security (OASDI) and Medicare Hospital Insurance (HI) expenditures are certain to exceed revenues earmarked to pay for them. Both are financed through trust funds. Both funds have sizeable reserves — government securities — that can be used to cover short falls for a while. But when those reserves are exhausted, expenditures cannot exceed current revenues. Trust fund financing means that neither Social Security nor Medicare Hospital Insurance can run deficits. Nor can they add to the public debt.

Nonetheless, CBO and other organizations assume that Social Security and Medicare Hospital Insurance can and will spend money they don’t have and that current law bars them from spending.

One of the reasons why trust fund financing was used, first for Social Security and then for Medicare Hospital Insurance, was to create a framework that disciplined Congress earmarked to earmark sufficient revenues to pay for benefits it might award. Successive presidents and Congresses, both Republican and Democratic, have repeatedly acted to prevent either program’s cumulative spending from exceeding cumulative revenues. In 1983, for example, faced with an impending trust fund shortfall, Congress cut benefits and raised taxes enough to turn prospective cash flow trust fund deficits into cash flow surpluses. And President Reagan signed the bill. In so doing, they have reaffirmed the discipline imposed by trust fund financing.

Trust fund accounting explains why people now are worrying about the adequacy of funding for Social Security and Medicare. They recognize that the trust funds will be depleted in a couple of decades. They understand that between now and then Congress must either raise earmarked taxes or fashion benefit cuts. If it doesn’t raise taxes, benefits will be cut across the board. Either way, the deficits that CBO and other organizations have built into their budget projections will not materialize.

The implications for projected debt of CBO’s inclusion in its projections of deficits that current law and established policy do not allow are enormous, as the graph below shows.

If one excludes deficits in Social Security and Medicare Hospital Insurance that cannot occur under current law and established policy, the ratio of national debt to gross domestic product will fall, not rise, as CBO budget projections indicate. In other words, the claim that drastic cuts in government spending are necessary to avoid calamitous budget deficits is bogus.

It might seem puzzling that CBO, an agency known for is professionalism and scrupulous avoidance of political bias, would adopt a convention so at odds with law and policy. The answer is straightforward—Congress makes them do it. Section 257 of the Balanced Budget and Emergency Deficit Control Act of 1985 requires CBO to assume that the trust funds can spend money although legislation governing trust fund operations bars such expenditures. CBO is obeying the law.

No similar explanation exonerates the statement of the Committee for a Responsible Federal Budget, which on August 25, 2015 cited, with approval, the conclusion that ‘debt continues to grow unsustainably,’ or that of the Bipartisan Policy Center, which wrote on the same day that ‘America’s debt continues to grow on an unsustainable path.’ Both statements are wrong.

To be sure, the dire budget future anticipated in the CBO projections could materialize. Large deficits could result from an economic calamity or war. Congress could abandon the principle that Social Security and Medicare Hospital Insurance should be financed within trust funds. It could enact other fiscally rash policies. But such deficits do not flow from current law or reflect the trust fund discipline endorsed by both parties over the last 80 years. And it is current law and policy that are supposed to underlie budget projections. Slashing spending because a thirty-year old law requires CBO to assume that Congress will do something it has shown no sign of doing—overturn decades of bipartisan prudence requiring that the major social insurance programs spend only money specifically earmarked for them, and not a penny more—would impose enormous hardship on vulnerable populations in the name of a fiscal fantasy.

---

Editor's Note: This post originally appeared in Fortune Magazine.

      

The injustices faced by African Americans are high on the nation’s agenda. “Black Lives Matter” has become a rallying cry that has elicited intense feelings among both supporters and detractors. As William Julius Wilson has pointed out on this blog, the focus on policing and criminal justice is necessary but not sufficient. Concerted action is required to tackle systematic racial gaps in everything from income and wealth to employment rates, poverty rates, and educational achievement.

The moral argument for reparations

Ta-Nehisi Coates argues that financial reparations should be paid to all those who have suffered directly or indirectly from slavery and its aftermath, including present day injustices such as the targeting of subprime mortgages to minorities. The moral case is compelling, and Coates notes that there have been other instances in U.S. history when reparations have been paid—such as to some Native American tribes and to the Japanese-Americans thrown into internment camps during World War II.

Even if the moral argument for reparations is won, there are formidable obstacles in terms of policy, politics, and law. How would reparations work in practice? To be fair, Coates does support the bill from Congressman John Conyers establishing a commission to examine precisely these questions. Even if a workable policy can be found, the political opposition would, to put it mildly, be formidable. There are also doubts about constitutional legality. However, these are certainly questions worthy of better answers than the ones currently being made.

Race-conscious policy

Reparations are a stark example of a race-based policy: targeting resources or an intervention at an explicitly-defined racial group. At the other extreme are “race-blind” policies, applied with no regard to race (at least in theory). But there is a middle ground, consisting of what might be labeled ‘race-conscious’ policies. These policies would be designed to close racial gaps without targeting racial groups.

Bonds, jobs, tax credits: examples of race-conscious policies

What might race-conscious policies look like? Here are some ideas:

1. Professors William Darity at Duke and Darrick Hamilton of The New School propose to tackle race gaps in wealth by providing “baby bonds” to children born to families with limited wealth. In 2013, median net worth was $11,000 for black households compared to $141,900 for whites. Darity and Hamilton are supporters of reparations in principle, but are alert to policy and political feasibility. Their specific proposal is that every baby born into a family with below-median wealth receives a “baby bond” or trust fund. These would be worth $50,000 to $60,000 on average, but scaled according to the level of the family’s wealth. The money would be available at the age of 18 for certain expenditures such as paying for college or buying a home. This is a good example of a race-conscious policy. It is not explicitly targeted on race but it would have its greatest impact on African American families.
2. While racial wealth gaps are large and troubling, the disappearance of almost half of unskilled, young black men from the labor force may be an even greater problem in the long run. A comprehensive approach on jobs could include raising the minimum wage, expanding the EITC, and providing subsidized jobs in either the public or private sector for those unable to find jobs on their own. The job subsidies might be targeted on young adults from high-poverty neighborhoods where joblessness is endemic. The subsidized jobs would help people of all races, but especially African Americans. A jobs-based program is also likely to find greater political support than straightforward wealth redistribution. Granted, such jobs programs are hard to administer, but we now have a large number of workers whose job prospects are slim to nonexistent in a technologically-oriented and service-based economy.
3. An enhanced EITC could also help to increase wealth (or lower indebtedness). As Kathryn Edin and her colleagues note in It’s Not Like I’m Poor, the EITC is normally received as a lump sum refund at the end of the year. As a form of forced saving, it enables poor families to repay debt and make mobility enhancing investments in themselves or their children. According to Edin, recipients like the fact that, unlike welfare, the tax credit links them socially and psychologically to other Americans who receive tax refunds. A more generous EITC could therefore help on the wealth as well as income side, and narrow racial gaps in both.
4. A final example of a race-conscious policy is the Texas “top 10” law, which guarantees admission to any public university in the state for students in the top 10 percent of their high school class. This plan could be expanded to other states.

Taking race seriously

The “Black Lives Matter” movement has refocused the nation’s attention on mass incarceration and related injustices in the criminal justice system. But this problem exists side by side with racial inequalities in income, wealth, education, and employment. There are no easy answers to America’s stubborn race gaps. But jobs and wages seem to us to be of paramount importance. Implemented in a race-conscious way (by targeting them to areas suffering from high rates of poverty and joblessness), employment policy might be the most powerful instrument of all for race equality.