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Larry Mishel at the Economic Policy Institute has a helpful primer on the economic downturn and what lies ahead. Well worth a look.

In a new CEPR report, John Schmitt, Hye Jin Rho, and Shawn Fremstad note that while the U.S. unemployment rate had been lower than those of many rich European countries in the 1980s and 1990s, it now has caught up to and surpassed most of them. In March of this year our unemployment rate was tied for fourth-highest among the major OECD nations. This, they say, “has turned the case for the U.S. model almost entirely on its head.” (Floyd Norris in the New York Times and John Quiggin at Crooked Timber have also picked up this story.)

I’m sympathetic to the conclusion, but I’d prefer it to be based on a different measure of labor market performance.

The unemployment rate is calculated as the number of people looking for work but without a job (unemployed) divided by the number of people either employed or unemployed. Its weakness is that it takes no account of people who aren’t seeking work because they doubt they could find a satisfactory job or have given up trying. The U.S. Bureau of Labor Statistics has broader unemployment measures that try to incorporate this, but there aren’t cross-nationally comparable data for those measures.

If our interest is in an economy’s success in creating jobs, a better indicator for cross-country comparison is the employment rate: the share of working-age people (age 15 to 64 is the standard) that are employed. The following chart shows employment rates for the two most recent business-cycle peak years: 2000 and 2007. The U.S. is one of just a few nations in which the employment rate declined during this period, though it’s in the middle of the pack rather than at the bottom.

What’s happened since then? Employment rates aren’t updated as regularly as unemployment rates, so recent trends are more difficult to judge. The data below are the best I can do at the moment. They show percentage change in the number (not share) of people employed from the fourth quarter of 2007 to the fourth quarter of 2008, and for a few countries to the first quarter of 2009. Our economy has lost more jobs — 4.5%, or about 6.5 million jobs — than most others.

The American labor market hasn’t been the worst at creating and maintaining jobs in the 2000s (though bear in mind that we’re talking here solely about the number of jobs, not their quality). Yet as Schmitt, Rho, and Fremstad rightly suggest, things have changed sharply relative to the 1980s and 1990s when our performance was near the top of the comparative heap.

A retiring hedge fund manager, interviewed by the New York Times‘ Joe Nocera, reflects that his business

was part of this huge trend toward the celebration of wealth. Hedge fund managers overearned. It just became too easy. There has been a massive misallocation of human resources. I have so many smart guys here who were making seven figures. And I think it is a fair question to ask: what would they have been doing in 1948 — going into the foreign service? If Obama does anything, the best thing he could do is change a generation’s values.

The point is right on. A significant portion (though not all) of the activity that’s yielded huge incomes in finance over the past several decades has been, in effect, little more than high-stakes gambling — betting on which way asset valuations will move, devising new instruments and techniques for doing so and for collecting fees on the transactions, and convincing investors to pony up more and more money to fund such bets. Even setting aside the danger this can pose to the real economy, it would be good if less of our collective intelligence and effort were dedicated to these sorts of pursuits.

Yet while changing values is a worthwhile aim, I doubt it’ll do the trick. What’s needed is to shift the incentives, via regulation and/or taxes.

“Far from leaning against economic inequality, U.S. schools make it worse.” This sentiment, from a recent Clive Crook op-ed, expresses a view that’s commonplace on both the left and the right, and among both proponents and opponents of school reform.

It’s wrong. Americans do leave the schooling system more unequal in cognitive and noncognitive skills than when they enter it. Yet that inequality is less — probably much less — than it would be in the absence of schools. Schools don’t increase inequality; they just don’t do enough to overcome the inequality produced throughout childhood by differences in families, neighborhoods, peers, and other influences.

How do we know that? First, children are vastly unequal in ability when they enter the school system at age five or six. This is due partly to genetics and partly to environmental differences.

Second, we have evidence from the natural experiment that is summer vacation. During those three months out of school, the cognitive skills of children in lower socioeconomic status (SES) households tend to stall or actually regress. Kids in high-SES households fare much better during the summer, as they’re more likely to spend it engaged in stimulating activities. In his book Intelligence and How to Get It, cognitive psychologist Richard Nisbett concludes that “much, if not most, of the gap in academic achievement between lower- and higher-SES children, in fact, is due to the greater summer slump for lower-SES children” (p. 40).

Without schools this pattern would be magnified, and the gap in cognitive and noncognitive abilities at age 18 almost certainly would be much greater than it now is.

This by no means implies our educational system is doing fine. It could and should do much better at helping children from disadvantaged environments. But saying it currently makes things worse suggests the situation is hopeless. Instead of promoting reform, that undercuts it.

Megan McArdle has a nice piece in The Atlantic pointing out that our bankruptcy process is more generous to firms and individuals than its counterpart in much of Europe. It provides a more effective cushion against a particular type of risk.

That generosity breeds frustration among the public, who tend to feel bankruptcy filers get off too easy. But McArdle notes that the system actually reduces the overall cost to taxpayers and enhances incentives for entrepreneurship. It both cushions and enables. Yes, some abuse it; yet as a society we nevertheless benefit.

Of course, similar considerations apply to other aspects of the safety net, such as unemployment insurance, and on those we tend to be less generous than Europe rather than more.

Matt Miller’s new book, The Tyranny of Dead Ideas, is very good. I agree with a great deal of what he has to say. On what Miller thinks is our most important problem, though, the book falls a little short.

Here’s a brief summary of what Miller suggests are six influential but misleading ideas, why they’re wrong, and what we should do:

1. Taxes hurt the economy, and they’re always too high

It’s time, says Miller, to stop pretending that federal tax revenues can remain at their current level, much less be reduced. Rising costs of Medicare (and eventually Social Security) alone will require increases. And real solutions to the myriad other problems we face necessitate further increase. Even (honest) conservatives acknowledge this, though few are willing to do so publicly. “Once this rendezvous with reality trickles down from conservative intellectuals to pols, and liberals find the courage to say the obvious, we’ll start the debate we need: not about whether taxes should go up, but given that taxes are going up, what’s the best way to fund the government we want, consistent with strong economic growth and other vital goals such as saving the planet?” (p. 183).

Miller’s answer is a value-added tax (VAT) and a carbon tax. On the former, “liberals will find that they can offset the regressive tilt of a VAT in several ways: first, by using it to fund progressive programs (like universal health coverage); second, by using a fraction of the proceeds to boost subsidies to the working poor; or third, by exempting certain basic necessities from the tax” (p. 186). I agree.

2. Your company should take care of you

Structuring our health insurance system around employers was reasonable once upon a time, but these days it’s asinine. It results in bloated health care expenditures, inadequate coverage, and an excessive cost burden on firms. This role needs to be shifted to government. Yes.

3. Free trade is “good,” no matter how many people get hurt

The fact that free trade is good for Americans on average doesn’t mean that it’s good for all Americans. Some lose their jobs, and some experience stagnant or falling wages. The answer isn’t protectionism; that would hurt lots of people in developing nations who are far poorer than we are. Instead, we need “a new formulation: that free trade is good, provided we have protections in place to make people feel sufficiently secure in a time of rapid economic change. This means health care and pension security that aren’t tied to a job that can suddenly disappear. It means broader trade adjustment assistance, job retraining, and wage insurance that keeps offshoring from being a catastrophe for affected families” (p. 60). Good.

I think Miller is wrong, however, on an important tactical question. He says politicians should not commit to any further expansion of trade until these protections are in place (p. 60). I disagree.

4. Schools are a local matter

Our decentralized educational system, in which administration and funding of public elementary and secondary schools are primarily local responsibilities, does a disservice to virtually all students, but particularly to those living in districts that are poor and/or have overly intrusive school boards. We need enhanced federal government spending, mainly to raise the salaries of good teachers, and imposition of nationwide performance standards. I like this too.

5. The kids will earn more than we do

For most of the period since World War II, Americans have taken it for granted that income would grow steadily across generations. But new technologies facilitate the automation of more and more jobs, and globalization encourages the offshoring of others. In the past generation many kids have ended up with incomes no higher than their parents’, and in Miller’s view this is likely to continue.

Part of the answer, he ways, is technology, which continuously reduces prices, improving living standards for the middle class and the poor even as their incomes stagnate or decline. Beyond that lie changes in our preferences: “The economic challenges ahead will spark a renaissance of interest in less material sources of meaning and happiness, and for many a flight from the consumer culture altogether…. Time with friends and loved ones will become more cherished. The craving for community will deepen. And curiosities like today’s nascent ‘slow movement,’ which cheerleads for (among other things) longer meals savored with loved ones and a quieter pace of life in general, will expand from a niche lifestyle to a broader force in the culture” (pp. 202-03). Again good, though I would add that expansion and improvement of public services can help to push up the floor of consumption and experience.

6. Money follows merit

Traditionally, Americans haven’t gotten too worked up about high levels of income inequality because they’ve believed that the big paychecks go to those who contribute the most. But when CEOs of companies whose stock price has fallen through the floor walk away with $25 million severance packages and financial players run the economy into the ground yet rake in mammoth bonuses, things clearly have gone awry. Miller says frustration is likely to be especially pronounced among highly-educated professionals who, for reasons that seemingly have nothing to do with merit or societal contribution, bring home a mere $150,000 a year instead of $15 million.

Inequality is a major problem, in Miller’s view. Indeed, he says it is “the preeminent economic issue of the twenty-first century” (pp. 146, 148).

Here’s what he believes these “lower uppers,” and more broadly we as a society, will and should do:

Now that their second-tier status is awakening them to the fragility of ‘merit’ as the source of their self-esteem and as the basis for where they ‘deserve’ to stand in society, Lower Uppers will start seeing luck’s hand elsewhere. They’ll see it not only in their own story or in the fate of the ultrarich above them, but in the destiny of millions of their countrymen, now buffeted and struggling with rapid economic change. They’ll be open to fresh appeals about what these powerful forces outside people’s control should mean for society’s basic arrangements. As a result they’ll become stronger voices for equal opportunity, and for some set of minimal protections appropriate for a wealthy nation like the United States. Like their Progressive Era predecessors … they’ll also see justice (and take satisfaction) in asking the ultrarich to kick a little more into the pot to make this happen. (pp. 195-96)

Compared to Miller’s other proposals, this is pretty vague. One of the things I like most about Miller’s earlier book, The Two-Percent Solution, is that he picked a small set of problems and offered specific proposals for what to do. To some extent that is true of The Tyranny of Dead Ideas as well. Miller gives us concrete numbers for what the federal government’s contribution to school expenditures should be and for what share of GDP tax revenues will need to rise to, and he tells us what specific programs will help to cushion the impact of globalization. But here, on this “preeminent issue,” detail is absent.

This omission is even more problematic because though Miller advocates higher taxes on those with top incomes, in a prior chapter he offers a caution: “Some suggest … we eliminate the cap on the amount of earnings subjected to the 12.4 percent payroll tax, so that it would apply to a person’s entire income. While at first blush this step might seem fair, if it were done in addition to proposals to return marginal income tax rates to the 39.6 percent that prevailed under President Clinton, it would effectively boost marginal rates beyond 50 percent — and this would be before high tax states and localities add what could be another 7 to 10 percent. You don’t need to be a Reagan Republican to think that marginal income tax rates at these levels would have negative economic effects” (p. 185).

It isn’t easy to figure out exactly what the tax rate should be on high-income households, or what programs would be most useful in boosting the living standards of those in the lower half of the income distribution. I wish Miller, whose policy thinking tends to be both interesting and level-headed, had made more of an attempt. It’s a small scar on what’s otherwise a very helpful book.