House Speaker Nancy Pelosi holds a press conference at the Capitol to commemorate the 75th anniversary of the Social Security Act. (Pete Marovich/ZUMApress.com)

This summer, Social Security – the government program that provides a steady check for seniors – turned 75. In Washington, lawmakers celebrated its platinum anniversary not with champagne, but with a heated argument over whether to reform the costly entitlement program by slashing benefits or raising the retirement age. Indeed, with the national debt over $13 trillion and the government running at a $1 trillion a year loss, the Obama administration created a deficit commission — the bipartisan National Commission on Fiscal Responsibility and Reform — to find ways to return the country to the black. In anticipation of its report, and in anticipation of possible changes to the program, lawmakers have started discussing how to reform Social Security.

[Economy1] After running a surplus for years and building up a sizable trust fund, Social Security now runs in the red. Though the program is far from bankrupt, more money is pouring out than going in. Economists project that the trust fund will be emptied by 2037. From there, opinions diverge on how far into debt the program will fall if nothing is done.

“Social Security is not in immediate trouble. There’s been a lot of exaggeration of that problem,” says Alice Rivlin, senior fellow at the Brookings Institution and a member of the deficit commission. “It is not on a solid basis for the long run, however. The sooner we act, the less we have to do.”

The problem is, there’s no consensus on what form that action should take. And many of the most commonly discussed tactics for stemming the flow of red ink would disproportionately impact lower-income Americans, the segment of the population that depends on Social Security the most.

One idea that comes up frequently is raising the retirement age. House Minority Leader John Boehner (Ohio), for instance, proposes lifting it to 70; some economists have suggested lifting it to as high as 75.

The idea sounds good: People are living longer, so it makes sense they will be working longer as well, right? But raising the retirement age will not necessarily keep people in the workforce longer, says Dean Baker, co-director of the Center for Economic Policy Research. For lower-income Americans, it would often just consign them to a retirement of lower benefit checks.

Already, around two-thirds of non-disabled workers elect to begin receiving smaller checks at 62 rather than full payments at 65. The hardship of raising the retirement age falls disproportionately on low-income workers who work in physically demanding professions, jobs they may not be able to continue through their seventh decade. According to Baker, 45 percent of workers over the age of 58 hold physically demanding jobs. Among those who lack a high-school diploma, that percentage skyrockets to around 75 percent. “If the hope is that people will work longer, that’s a very difficult thing for low and moderate income Americans to do,” Baker says.

Moreover, though the average lifespan has increased since Social Security’s creation, those extra years aren’t enjoyed equally by all Americans. Overall, Americans are living about 7 years longer. But the poorest 20 percent of Americans are living just two years longer – coinciding with that increase in retirement age. Baker notes that minority Americans fare even worse. “Even at 65, there’s a gap of about two years in lifespan. Also, on average, they have much lower wealth at retirement, so they’re much more dependent on Social Security.”

Center and right-leaning policy experts say another way to limit Social Security expenditures is to change the baseline for the benefits calculator from a wage index to a price index. Since the price of goods tends to grow more slowly than wages do, this shift would reduce the amount the program would have to pay out in the future. Supporters of this proposal say that because the benefits will still increase along with price inflation, seniors won’t suffer a shortfall in real-dollar terms.

This logic works in theory. But in practice, it would seriously impact lower-income Americans. Why? Seniors spend differently than average-aged workers: They buy more healthcare goods and services. And healthcare costs are skyrocketing well above the average inflation rate, so lowering benefits would make it more difficult for retirees to cover their costs. The more economically strapped the American, the more it would hurt.

Other plans would have less impact on those least able to shoulder the burden. One idea would be to reduce benefits for wealthy retirees. The idea is that “Bill Gates doesn’t need social security,” says Brookings’ Rivlin.

The problem is deciding where to set the bar: Too low, and you ensnare middle-class families, too high, and you only earn the ire of the superrich without contributing much to the bottom line. Some experts, including Rivlin, think the political cost probably wouldn’t be worth the impact on the bottom line. Polls show that even wealthy Americans want their Social Security, and are willing to pay for it. The government might net a little more money, but it would lose the public support and buy-in of wealthy (and thereby influential) citizens.

“U.S. benefits relative to earnings are low by comparison with those in other wealthy nations,” says Henry Aaron, senior fellow at the Brookings Institution. “I don’t think there’s a strong case for cutting benefits on the merits of the idea. In my view, the bulk of the fix should come from the revenue side.”

Many economists on the left share that sentiment. “It makes sense to fix social security by increasing revenues and making sure a good chunk of those revenues come from the high end of the income distribution,” says Monique Morrissey, an economist at the Economic Policy Institute.

Raising the payroll cap is one popular idea. Currently, the first $106,800 an American makes is subject to the Social Security tax; above that, the earner pays nothing. “If you eliminate the cap, you’re probably getting very close to eliminating the entire Social Security deficit for the next 75 years,” says Christian Weller, senior fellow at the Center for American Progress. “The more common proposal is to raise the cap so 90 percent of earnings are subject to the tax, which would eliminate about a third of the deficit.”

Another idea under consideration is raising the payroll tax rate by a fraction of a percentage point. Although the flat rate of this tax is inherently regressive, some left-leaning experts say it’s preferable to a cut in benefits, especially when the prospect is discussed in conjunction with other modifications like a minimum benefit, as described in a recent report by the Urban Institute.

Not everyone thinks adding to the payroll tax rate is the way to go, though. “It seems to me that raising the payroll tax is the least desirable way to try to move the program towards solvency,” says Will Marshall, president of the Progressive Policy Institute. “It’s a tax on work and makes it more expensive for employers.”

Marshall supports ideas more commonly embraced by the right to make up the shortfall, including an increase in the retirement age and a downward adjustment on the formula used to calculate benefits.

Some Republican politicians are still pushing for privatization, pointing to the rise of the stock market over the long term. Mike Tanner, senior fellow at the Cato Institute, asserts that even if a retiree cashed out at the trough of the market in 2009, he or she would have still experienced a growth in wealth. Given the wariness with which many Americans bruised by a drop in their 401(k) and home values now view the stock market, though, privatization may be a tough sell at least until the current bear market fades from our collective memory. “A lot of Republicans seem to view private investment as some kind of panacea, which I don’t think is correct,” says PPI’s Marshall. “That wouldn’t solve the underlying structural problems.”

Right-leaning experts tend to paint a bleaker view of the Social Security situation in general. Cato’s Tanner explains that the difference is that they include in their calculation of upcoming obligations the cost to be borne by the Treasury when the program cashes in its trust fund bonds. Obviously, that money will have to come from somewhere, but progressive economists like CAP’s Weller, counter that it’s disingenuous for the right to say those bonds pose an economic risk when the Social Security surplus is one factor that was used to justify Bush-era tax cuts in the first place.

Experts of all stripes like to point out that Social Security reform should be a snap compared to changing more complex programs like Medicare. In a strictly economic sense, that’s true. But the discussion around Social Security often threatens to collapse under the metaphorical weight lawmakers have conferred on the program. “It’ll probably be more politically determined than substantively determined,” PPI’s Marshall concedes. “Right now neither side wants to come out of its assigned place.”

A new report shows that the income gap between rich and poor in America is at an eight-decade high — the largest differential since the period immediately preceding the Great Depression. And economists fear that the education and job-creation programs that could bridge this gap are lacking in the recessionary economy.

[Economy1] On June 25, the Center on Budget and Policy Priorities released a report on the growing income gap in the United States. While the data it studies are not new — the income stats end at 2007, just before the advent of the current recession — the report synthesizes both census and Internal Revenue Service information to paint a more complete picture of the finances of the various strata of American society.

“It’s given us the first clear, comprehensive picture of income distribution over the economic cycle that ended in 2007,” said Arloc Sherman, senior researcher at the CBPP. “Now we know definitively that income inequality grew in that cycle. Just before the recession hit, we know that inequality was heading into record-breaking territory.”

In 2007, 17.1 percent of all after-tax income in the country went to the top one percent of earners. According to Emmanuel Saez, an economist at the University of California, Berkeley, who used a slightly different methodology in calculating his figures, the proportion of the country’s income going to the top one percent is at its highest since 1928.

The CBO data studied by the CBPP show that in just under three decades, the after-tax income for the top one percent rose by 281 percent. By contrast, incomes for the middle quintile of income distribution rose a much more modest 25 percent over the same time period, while incomes for the bottom fifth increased by only 16 percent. If Americans in the middle fifth of the income distribution curve had seen their incomes rise at the same rate as those of the top one percent, that would equal an extra $13,000 in annual income for middle-class households, says Sherman.

A variety of factors, some stretching back a generation or more, have played a role in cultivating this inequality. Throughout the generation following World War II, incomes rose in a more evenly distributed manner, and a broad middle class was established. This trend reversed itself in the 1970s, when the income gains of the rich started outpacing those of the rest of the country.

Economists say there were several factors at play, some of which might have been unavoidable. The growth of technology rendered low-skill manufacturing jobs redundant. Globalization accelerated this decline as companies moved their production facilities offshore to take advantage of lower labor costs. The shift from a manufacturing to a service economy weakened the collective bargaining power of unions, a key force in establishing the wages on which America’s mid-century middle class was built.

“Union contracts helped bolster wages across the distribution, and the manufacturing sector was historically a highly unionized sector,” said Heidi Shierholz, an economist at the Economic Policy Institute, a think tank. Declining union membership since the 1950s has eroded manufacturing wages.

Industrial and corporate deregulation added fuel to the fire. Executive compensation swelled even as the minimum wage failed to keep pace with the rising cost of living. Shierholz said a robust minimum wage doesn’t only benefit those who are paid minimum wage. Rather, that baseline impacts lower-income wages across the board.

Tax policies also widened the income gap. While many point to George W. Bush’s tax cuts as a key accelerant in the runaway income growth of the wealthy, economists note that other, long-standing parts of the federal tax code played a role as well.

“Our housing policy, with the mortgage interest reduction, is absolutely ridiculous in that most of the subsidies go to the richest people,” said Dean Baker, co-director of the progressive Center for Economic and Policy Research.

The net result is that the middle class today is in a precarious position, and the working class even more so. For much of the past decade, loosening credit standards and rampant consumer lending fueled by the housing bubble camouflaged the increasingly skewed dispersal of resources.

“The notion that ever-increasing home prices are going to provide us with wealth is clearly not sustainable,” said Lawrence Katz, a professor of economics at Harvard University. “There was a mirage of consumption growth, so some of the growth of inequality didn’t fully show up in consumption rates,” he said.

While the drop taken by the stock market during the recession has diminished the level of inequality from the 2007 levels shown in the CBPP report, the middle class is struggling more than ever as a result of the housing crash. “It’s a huge issue,” said Baker. “They’re getting to retirement and seeing most of their wealth vanish, since most of that wealth was in their house.”

As problematic as this is for the middle class, the households at the bottom of the income ladder are even worse off.

“One of the things we know about the bottom fifth is that it’s harder for them to move up,” said Heather Boushey, senior economist at the Center for American Progress. “We talk a lot about encouraging people to work their way out of poverty, but without middle-class jobs, this consigns those at the bottom to staying there.”

Economists fret that the legacy of the wealth chasm will be greater than simply a shaky foundation for the country’s already-slowing recovery. Profound inequality sows the seeds for social unrest and widespread disenfranchisement.

“Politics have become increasingly rife with class conflict,” Boushey said.

The EPI’s Shierholz concurs. “When you have both high inequality and low mobility, we’ve turned into a place that’s inconsistent with American values,” she said. “It becomes a set class system.”

Even though the recession has put a small dent in the income gap, most economists agree that if the status quo holds, the trend will continue apace when the economy rebounds. Following the dot-com crash and 2001 recession, the incomes of the top one percent dropped from 20.6 times that of the middle fifth to 14.3 times as high. But this flattening of the income distribution disappeared when the economy recovered. In 2007, the top one percent earned 24 times as much as the middle fifth.

Economists say there’s no silver bullet for narrowing the income gap, but a number of policies and programs could help. First up, says Chad Stone of the CBPP, is letting the Bush-era tax cuts expire on schedule. “That will return rates at the top to approximately where they were at the boom of the 90s,” he said. Some say the imbalance could be partially offset by a more progressive federal tax code, a higher minimum wage and legislation that gives workers more bargaining power, while CEPR’s Baker suggests what he terms a “financial speculation” tax to capture some of the outsize profits generated by Wall Street and the financial sector.

But economists say the real key to regaining lost ground, especially for the middle class, is cultivating large numbers of jobs in new and growing industries like green technology and health care, and providing unfettered access to higher education so middle- and lower-income Americans can train for these careers.

“I think it’s widely agreed that education plays a huge role here and more so than in the past,” said Ron Haskins, an economist at the Brookings Institution. “The problem is a lot of people don’t have skills, and that’s because our high school dropout rates are high and people don’t go to college.”

The flip side of that coin is having jobs available for young people after they’ve invested in their education. “There’s potentially a lot of growth in health care and skilled manufacturing, but we need to do a much better job of providing access to training,” said Harvard’s Katz. “The traditional jobs that have provided wages to the middle class are clearly not doing well in today’s economy and are unlikely to come back. We need to think about a different middle class.”

“What we need is a policy conducive to innovation and entrepreneurship,” said Will Marshall, president of the Progressive Policy Institute, a think tank. “You need the energy of invention just as we saw in the late 90s. We need another spurt of innovation-fueled growth.”

“Inequality is one of the great structural challenges facing America,” Marshall continued. “It raises questions about whether the American dream still works. … That’s why it demands attention from policymakers as something we’ve got to squarely face.”

The Commerce Department tweaked China recently when it slapped a 99 percent tariff on Chinese-made oil field pipes entering the U.S. The move was but the latest volley in a long-running skirmish over a wide variety of imports. To the extent that most people think of tariffs at all, it’s usually in a context like this. Tariffs are perceived as little more than an obscure negotiating tactic for trade disputes. But thanks to the large number of imported goods Americans consume on a regular basis, tariffs actually play much more of a role in average Americans’ lives — and household budgets — than they may realize.

[Economy1] Most people take for granted that they know how much an item will cost them when they look at the price tag and figure in the amount of their local sales tax. But low-income Americans end up paying extra for necessities like clothes and shoes — victims of an outdated, inefficient tariff system that inadvertently penalizes the poor. Even proponents of reform, though, acknowledge that the byzantine nature of the tariff code and the low priority it’s generally assigned by lawmakers makes the prospect of changing this entrenched system unlikely.

Luxury goods have very low tariffs, while cheap clothes, underwear, shoes and household products have much higher rates, said Edward Gresser, trade policy director at the Democratic Leadership Council. “The people who are paying for the tariff system don’t know they’re paying for it,” he said.

“It’s the dirty secret of the U.S. tariff code,” said Daniel Griswold, trade policy expert at the Cato Institute. “It’s our most regressive tax that the federal government imposes.”

The country’s trade policy is a quilt of special interests, trade group bargaining chips and concessions, some pieces of which date back to an era when the manufacture of household goods was a booming part of the domestic economy.

“[It’s] usually for no good reason other than the political influence of a domestic group or for retribution against some other country that placed a high tariff on one of our exports,” said Barry Bosworth, an economist at the Brookings Institution.

The disparities are staggering. In his research, Gresser found that the tariff rate on a cashmere sweater is 4 percent; the rate for one made of much cheaper acrylic is 32 percent. A silk brassiere has a tariff rate of less than 3 percent, but the rate on a polyester one is slightly less than 17 percent. The tariff rate on a snakeskin handbag is just over 5 percent but climbs to 16 percent for one made of canvas. Similar variations occur when it comes to household goods. Drinking glasses that cost more than $5 each have a tariff of 3 percent, while those that cost less than 30 cents each have a rate of 28.5 percent. A silk pillowcase has a rate of 4.5 percent; this goes up to nearly 15 percent for one made of polyester.

Overall, clothes and shoes contributed nearly $10 billion in tariff revenue in 2009, while higher-cost items including audiovisual equipment, computers and even cars added less than $2 billion. Gresser contends that the $10 billion is disproportionately borne by people who can’t afford to buy luxury goods. What’s more, when customers pay sales tax on these products, that amount is also higher than it would otherwise be thanks to the tariff that drives up the retail price.

In spite of this evidence, Gresser has had an uphill battle gaining support for his cause. Trade groups and politicians don’t want to lower a bar to foreign importers without getting some kind of concession in return. From their perspective, dropping a tariff that adds 32 percent to the price of a cheap men’s shirt amounts to giving away a valuable bargaining chip. Other groups — including, it should be noted, some prominent left-leaning think tanks — say dropping tariffs will cost jobs we can ill afford to lose in this economy.

While apparel and footwear manufacturing has largely moved offshore, there are still a few hundred thousand U.S. workers in those industries, according to Robert Scott, an economist with the Economic Policy Institute, who says removing tariffs on cheap clothes and shoes would put these (generally low-income) Americans out of work. He also contends that even the high tariffs aren’t as onerous as they appear.

“If you look at expenditures as a share of total consumer spending for the bottom quintile of Americans, it still ends up being a fairly small number,” only a small fraction of a percentage point more than the average for all Americans, he said. Scott added that the globalization of trade, along with the resulting downward pressure on prices, has hurt low-income Americans more than it has helped them.

Griswold of the Cato Institute says this worry is overblown, sometimes deliberately for political gain. “Less than one-third of one percent of workers make clothing of any kind in the U.S.,” he said. “The self-interest of these producers and trade organizations gets wrapped up in rhetoric about saving jobs, which appeals to public perceptions. It’s much harder to visualize the benefits to families able to buy more affordable shoes.”

For William Marshall, president of the Progressive Policy Institute, the argument that lowering or abolishing tariffs on low-cost products will cost jobs speaks more to the need to invest in training programs for low-skilled American workers. “It’s a challenge to protectionists. It does redistribute the pattern of job creation,” he acknowledged. But the genie is already out of the bottle when it comes to globalization, he said, and companies have already moved the bulk of their labor-intensive production offshore. Leaving high tariffs on cheap imported goods isn’t going to stop them from appearing on discount and dollar-store shelves, it’s just going to penalize the consumers who buy them.

“It’s easy to overlook, easy to ignore because people without political voice or power are the most affected,” he said.

When House Speaker Nancy Pelosi told Charlie Rose last October that a value-added tax was “on the table” as a possible way to solve the nation’s fiscal woes, the remark didn’t generate much interest. But as recent budget figures have put the depth of America’s problem into black and white, and with former Federal Reserve Chairman and White House adviser Paul Volcker nearly seconding Pelosi’s view recently, the idea of a VAT — already in use in nearly 160 countries — is gaining traction. And some progressives are sounding an alarm.

[Economy1] The prospect of a VAT is likely to be discussed by the fiscal commission established by President Obama. The Wall Street Journal’s opinion page has already sarcastically labeled the consortium the “VAT Commission.” At a recent event organized by the Scholars Strategy Network, a left-leaning think tank, an MIT political scientist floated the prospect of VAT as a solution to the federal revenue crunch. Volcker just last week fueled the fire even more, noting that a VAT tax was not as toxic an idea as it once had been. (Sen. Charles Grassley, R-Iowa, responded this week by coming out against the tax.) All the attention has not been welcomed by progressive groups, who worry that a VAT would unfairly burden the already-struggling working poor. “It crushes the low-income and the elderly,” said Robert McIntyre, director of Citizens for Tax Justice.

Since VAT is a tax on consumption rather than income or investments, it’s considered a regressive tax. Poor people, who tend to spend a higher percentage of their income than wealthier ones, are disproportionately affected by consumption-based taxes. In the U.S., regressive sales taxes are balanced out by a progressive income tax structure.

Proponents of a VAT, though, contend that it wouldn’t hurt lower-income Americans if implemented properly, and that the additional revenue it generates would prevent cuts to social-service and welfare programs.

Left-leaning think tanks such as the Center for American Progress express concern that adding a VAT to the country’s existing tax code or using it to replace the majority of the income tax, as Michael Graetz, Columbia University School of Law professor and author of “100 Million Unnecessary Returns: A Simple Fair and Competitive Tax Plan for the United States,” proposed to the Senate Finance Committee in 2008, would tip the balance in favor of the rich and drop a staggering weight on an already-struggling demographic.

While value-added taxes are common throughout the rest of the world (including Europe, Canada and Australia), many Americans are still fuzzy about what exactly this tax is and how it works. A VAT is essentially a tax on all or nearly all goods and services. Many European countries exempt certain items such as groceries from VAT collection — a mistake, according to economists who counter that a laundry list of exemptions only serves to make the rate higher. What makes a VAT different from a sales tax is the way it’s collected.

The tax is levied on every company that participates in the development of a product, but each participant gets credit for the VAT that has already been paid. If a retailer in a country with a 10 percent VAT buys goods from a vendor, they pay an extra 10 percent on those goods. That retailer is then responsible for collecting 10 percent VAT on sales to customers. When each company in the supply chain pays taxes, though, they get to deduct the VAT they paid from what their customers paid. These somewhat complicated mechanics create a lengthy paper trail that thwarts would-be evaders. Since each company in a supply chain has to collect the tax, there’s also a certain degree of self-policing.

Although right-leaning lawmakers tend to favor regressive tax policies, some conservatives dislike the concept of a VAT because they worry it would inflate the size of the government. “Conservatives think VAT is a hidden tax and therefore a money machine,” said Gilbert Metcalf, professor of economics at Tufts University. In reality, analysts say that concern is overblown. The U.S. debt load has mushroomed so substantially that even adding a new revenue stream in the form of a VAT wouldn’t generate huge surpluses.

The cost of Social Security, Medicare and other entitlement programs is predicted to skyrocket in the coming decades. “The largest programs in the budget support older people,” said Eric Toder, a fellow at the Urban Institute and the Tax Policy Center.

For the nation’s working poor, that’s bad news, says Will Marshall, president of the Progressive Policy Institute. “What’s happening now is the automatic growth of entitlement spending is squeezing out space in the budget for everything else, which includes programs for low-income families.”

Toder and others dismiss the notion that ratcheting up existing taxes will be enough to fill the revenue gap. “You’re running against how high you can squeeze income tax. You don’t want to push it too much further. If you tax investment income too high, we’ll start seeing capital fleeing the U.S.”

If the administration and Congress do consider a value-added tax, some experts do hold out hope that it can be levied in such a way that doesn’t disproportionately impact the disadvantaged. While a VAT itself will never be progressive, there are ways to offset its burden on the poor. “There’s no reason low-income people should bear the burden of getting our nation’s finances in order,” said Columbia’s Michael Graetz. “There’s no inherent reason a VAT has to disproportionately burden low-income people,” he said.

Offering refundable tax credits for Americans living below a certain income threshold, for instance, would help equalize the burden. Graetz also proposed distributing debit cards similar to those on which food stamps are issued to lower-income consumers that would exempt a certain dollar amount of purchases from value-added taxation.

While many of the European VAT structures exclude necessities like food and clothing in the name of making the tax more progressive, many analysts say this just makes administration harder. Exempting certain categories of purchases also means that the rate on everything else is pushed higher. For instance, some European countries have VATs of up to 20 percent, a rate that can be attributed to numerous exemptions.

One of the most sweeping proposals is that put forth by Graetz, who suggests implementing a VAT of 10 to 14 percent and eliminating income taxes for households making less than $100,000 annually. Graetz, who also co-authored a book lambasting the 2001 repeal of the estate tax, maintains that his plan would simplify the tax process for 150 million Americans, and a combination of credits and offsets for lower-income people would keep them from bearing the brunt of the new tax.

While Graetz’s plan is revenue-neutral, he says it offers a better way to tackle the revenue crunch because a VAT is easier to increase than the current income tax. It would also relieve many current taxpayers of the annual burden of preparing and filing their returns. “Americans feel better about taxes that they feel they can pay without undue burden,” Andrea Louise Campbell, a political science professor at the Massachusetts Institute of Technology, wrote in a recent paper. “Easing payment not only helps public acceptance but also encourages compliance.” There’s also no way for the wealthy to avoid paying their share via tax shelters or accounting tricks, since the tax is collected at the point of purchase. This still isn’t convincing for some progressives. Yes, credits could offset the burden on America’s poor. But, they argue, those credits could be rescinded at the whim of a right-leaning Congress. “One concern has to be, will there be political pressure to eliminate those kinds of credits?” said Michael Linden, associate director of tax and budget policy at the Center for American Progress. “Having a VAT replace income tax entirely is a terrible idea,” he said. “If VAT becomes a solution it will have to be part of a larger tax system, ideally part of a larger tax reform effort.”

Graetz argues that draconian spending cuts in social and support programs would hurt low-income people more than an incremental tax increase. “You’ve got to look not just at the way revenues are collected but at the way those benefits are distributed,” he said. Credits or exemptions for the poorest Americans would protect them from paying a higher percentage of their income towards a VAT, and the revenues raised could keep social-service programs off the chopping block.

Despite years of efforts to rein in the practice, lightly regulated tax preparers will be permitted to continue peddling high-cost refund anticipation loans once again this tax season to the most vulnerable filers, as tougher rules to curb the practice languish in bureaucratic purgatory.

[Economy1] Refund anticipation loans, or RALs, promise near-instant refunds, but the catch is that they’re very short-term and very expensive loans, according to Christopher Kukla, senior counsel for government affairs at the Center for Responsible Lending. “In terms of APR, these things carry a rate of 50 up to 1,000 percent,” he said, adding that the rate is often hidden in a bevy of ancillary fees. Watchdog groups have been waging a policy battle against RALs for years, working with agencies like the IRS and the Office of the Comptroller of the Currency. The government has been slow to respond to concerns, despite an ever-growing body of evidence about the harm these loans cause low-income filers.

Groups including the National Consumer Law Center and the Consumer Federation of America have mounted multifaceted campaigns to remove refund anticipation loans from the marketplace, but reform efforts have only crept forward. The OCC, which oversees many of the banks that provide the loan funding — including industry giants like HSBC and JPMorgan Chase — issued internal guidance for its examiners back in 2007 pertaining to the training and supervision of third-party tax prep firms, but it wasn’t declared public policy until this year. The office also waited until this year to issue a consumer advisory about RALs. “This was in direct response to the advocacy we’ve been doing, but it’s still really weak,” said Dory Rand, president of the Woodstock Institute.

The IRS has previously examined whether or not it should be legal for tax preparers to sell financial products. This January, though, in a move that frustrated watchdog groups, the agency decided to establish a task force to study RALs and the legality of allowing tax preparers to share filers’ financial information with lenders. Advocates like Jean Ann Fox, director of financial services for the Consumer Federation of America, are unhappy with the longer timeline creating this task force will entail. “We were disappointed this is as far as they went,” she said. “The IRS could have dealt with this to put a stop to it.” The IRS also announced plans in January to regulate the tax preparation industry, requiring tax preparers to follow ethical guidelines, undergo professional education and testing. Creating and implementing these standards will take a few more years, despite the six months’ worth of research that preceded the January announcement.

The stakes are so high because RALs prey on the most disadvantaged Americans. Groups like the Neighborhood Economic Development Advocacy Project, which offers assistance to low-income New York City residents, says RAL providers deliberately target poor, uninformed recipients of the Earned Income Tax Credit, many of whom are outside the realm of mainstream banking and rely on lightly regulated fringe products. In 2007, more than 80 percent of RALs in New York City were made to low-income citizens, and more than 60 percent went to EITC recipients. In some low-income neighborhoods, close to one in five taxpayers took out a refund anticipation loan. “These areas are some of the lowest-income areas in the country,” said Alexis Iwanisziw, NEDAP program associate. “This money should really be staying in the community and staying with the families.”

The primary concern is that tax preparers, especially independent shops, can play fast and loose with the facts they give consumers because they never come under scrutiny from the banks making the loans. According to the Woodstock Institute’s Rand, Chase, the bank responsible for supplying the loans to some 13,000 mom-and-pop tax prep outfits, only instituted a mystery shopping program this January, in response to Woodstock Institute queries about compliance with the OCC guidance.

In 2008, mystery-shopping programs conducted by watchdog groups found that customers received incomplete and sometimes inaccurate information about RALs and the costs they would incur. While new requirements on disclosures, marketing terminology and customer education have all been announced by the OCC, the agency is giving tax preparers another year to comply with these new regulations. Even the new disclosure requirements aren’t foolproof, points out Chi Chi Wu, staff attorney at the National Consumer Law Center. “The problem with any sort of written disclosures is they’re not that useful when [a customer] gets a RAL,” she said. “They get another piece of paper in the stack. It may not be something they look at right away.” By the time the tax filer looks through his or her paperwork, the charges have already been applied against their refund.

The big appeal of these loans, the Woodstock Institute’s Rand points out, is the prospect of instant money. Already, taxpayers who e-file and elect to receive their refund via direct deposit generally get their returns within two weeks. If the IRS sped up its payments to taxpayers outside the mainstream banking system and allowed them to receive that money on a debit card similar to those used for other benefits, the appeal of RALs would be diminished. “These improvements the IRS could make would eliminate a need for refund anticipation loans,” Rand said.

“We think as a federal policy change, one very obvious thing that needs to happen is that the EITC should be prohibited from being used as collateral in a loan,” said Sarah Ludwig, co-director of NEDAP. This practice is prohibited when it comes to other federal benefits like Social Security, and Ludwig says Congress should extend this prohibition to the EITC. “If that loophole was closed, it would to a large extent cut off RALs at the pass,” she said. The Consumer Federation’s Fox says legislation that would limit interest rates to 36 percent would protect taxpayers, but it has stalled in Congress. There is stiff resistance not only from fringe lenders but from mainstream financial services firms against a federal usury cap inclusive of fees and surcharges, since this would apply to other types of loans, such as credit cards, as well.

Both the number of RALs and the total cost of obtaining these loans has dropped slightly in recent years, in part due to market forces that made borrowing money everywhere harder to do. In 2006, 8.7 million RALs were issued at a cost of $833 million, which dipped to 8.4 million and $738 million in 2008. Fox says while this is heartening, leaving these loans on the marketplace makes too many taxpayers vulnerable to exploitation. “The volume’s been dropping over the years, but it’s time to take care of this at the policy level. This is deviating taxpayer money. Do you want to give part of your tax refund to a big bank?”

Obama delivers his first State of the Union speech in January. (Xinhua/ZUMAPress.com)

With the unemployment rate hovering just shy of 10 percent and Washington focused on job creation, President Obama this month called on Congress to approve a plan that would take $30 billion in repaid TARP funds and make it available for small banks to lend to small businesses.

“We’re going to start where most new jobs do – with small businesses,” Obama said at a town-hall event in New Hampshire.

[Economy1]There’s just one problem: there’s little indication that these banks need the money — or that making it available would stimulate lending. Further, experts from both the left and the right express concern that the funds could be lost to waste or mismanagement without ever contributing to the nation’s job rolls.

Small banks, which write more than half the nation’s small business loans, have wanted their own pool of stimulus money for a while, though they shunned TARP because of executive pay restrictions and reporting requirements they claimed would be too onerous.  But with outrage building throughout 2009 over the behavior of the nation’s largest financial institutions on everything from failing to execute mortgage modifications to hiking credit-card interest rates and paying top executives outsized bonuses, the small banks saw an opportunity.

Members of the Independent Community Bankers of America, which represents nearly 5,000 community banks, met with the president in December to lobby for a pool of money that came without the strings attached by TARP. The group appeared to get what it wanted with the White House plan, which would allow banks with less than $10 billion in assets to borrow up to 5 percent of their asset base from the Small Business Lending Fund. They could be charged as little as 1 percent in interest if they increased their lending to small businesses by 10 percent.

The problem is, these banks aren’t hurting for funds. “The assumption seems to be that banks lack the capital, but in fact, that’s not the case,” said Bert Ely, owner of Ely & Company, a financial consulting firm. “Smaller banks are well-capitalized and have plenty of liquid funds. The problem is finding credit-worthy borrowers.”

According to the Federal Reserve Board’s Senior Loan Officer Opinion Survey released last month, banks did tighten their small-business lending; banks with total assets of less than $20 billion reported cutting off credit to a greater degree than their larger counterparts. Analysts like Ely say small banks’ greater-than-average exposure to potential commercial real-estate losses could be driving this pullback. However, the Fed survey also cited a decrease in demand for loans, leading some analysts to worry that dangling an unnecessary incentive in front of small banks will tempt them to loosen their lending standards too far and make risky loans.

ICBA president and CEO Camden Fine seemed to back up this assertion, telling The Washington Post just two months ago, “We’ve got plenty of money to lend.” The problem, he told the paper, was a lack of demand from businesses.

Where did all the good borrowers go? Blame two closely related factors for the dearth of credit-worthy small businesses: The length of the recession and the commercial real-estate crash. By now, even business owners who had the foresight to build up their equity during the boom years have burned through that cushion. Those who own real estate have to deal with the fact that this collateral is now worth a whopping 40 percent less than it was in 2007, according to a new report from the Congressional Oversight Panel.

“The intent of the policy is for banks to lower their lending standards, but of course no prudent bank wants to do that,” said Joseph Mason, a professor of finance at Louisiana State University. Mason pointed out that most of the tepid economic growth the country has seen in recent months comes from manufacturing companies replenishing inventory levels, betting on an as-yet-unrealized turnaround. As a result, he said, “A loan to one of these companies is inherently very risky.”

The administration initially indicated it would only make the program funds available to healthy banks, but the ICBA’s leader is already challenging that, calling on the president this month in The Washington Post to allow what he characterizes as “less well-capitalized banks” to participate. Critics counter that this would only mean more taxpayer funds will be irretrievable if any of these banks fail and are placed into receivership by the FDIC, and many are doubtful that Congress — which would be tasked with crafting the small-business fund legislation — will acquiesce to this plea.

Opening the door to all small banks regardless of health is a risky proposition, says Gary Burtless, senior fellow in economic studies at the Brookings Institution. Burtless points out that the health of small banks correlates closely to their local commercial real-estate markets. With economists predicting that commercial real estate still has further to fall, it’s almost certain that more small banks in hard-hit parts of the country will succumb.

What’s more, the very reason small banks are as well capitalized as they are today is that they exercised caution during the go-go years, Burtless adds. These institutions passed up a quick buck in favor of what seemed at the time to be old-fashioned lending and underwriting practices. “What worked for these banks is being cautious,” he said. “Are you going to make that zebra change its stripes?”

LSU’s Mason labels the program as a cynical political move aimed more at assuaging voter anger over big bank bailouts than actually helping small banks lend or small businesses hire. “If these guys are going to go to the polls having done nothing for small banks, they really can’t evade the charge that they were a part of the large bank-centric policy that’s at the heart of this crisis,” he said. The plan is about little more than appearances, he charges. “They’re trying to throw a bone here, not a very economically effective bone, to give the appearance of a balanced policy after the fact.”

Supporters of the small-bank plan say the nation’s regional and community banks are better equipped to handle an influx of small-business loan requests than the Small Business Administration. Although Mary Landrieu (D-La.), chair of the Senate Committee on Small Business and Entrepreneurship, spoke positively of the president’s plan to increase SBA funding in a post-State of the Union release, she pointed out that this aid comes after eight years of cutbacks the SBA sustained during the Bush administration.

But even left-leaning analysts like Dean Baker, co-director of the Center for Economic and Policy Research, are skeptical that the banks would be more efficient distributors of these funds intended for small businesses. “The bank’s goal, of course, isn’t job creation,” he says, expressing concern that the real goal here — reducing a jobs gap some analysts have put as high as 11 million — could be fall by the wayside in pursuit of profits. “What you worry is, can this be gamed?” he said. “I’m not very confident that you could police it.”

An ambitious plan to update the Carter-era Community Reinvestment Act that supporters hope to see signed into law in 2010 comes amid charges that this legislation was responsible for nothing less than the subprime crisis and the resulting collapse of the residential real estate market.

The plan, sponsored by Rep. Eddie Johnson (D-Tex.), would close some loopholes in the original act that let non-bank financial firms operate with relative impunity. It would levy negative ratings on a much wider array of institutions that practiced predatory or discriminatory lending, and it would require that non-bank entities like mortgage providers and insurance companies comply with all CRA tenets.

[Economy1] Why this piece of legislation is still such a lightning rod more than 30 years after its introduction is something both its supporters and detractors struggle to explain from their respective camps. “The idea that this was just some sort of carrot-stick regulation that didn’t work is a perception that goes very much in hand with a right-wing agenda,” said Jose Garcia, associate director for research and policy at advocacy group Demos. Demos is one of several progressive groups seeking to have the bill, the Community Reinvestment Modernization Act of 2009, made into law.

On the other hand, Mark Calabria, director of financial regulation studies at the Cato Institute, asserts that political pressure drives CRA support. “It fundamentally gets to some very emotional issues. [Supporters] see this as an issue of racism and social justice,” he said. The Cato Institute held a forum in November that was broadly critical of the CRA, asserting that the financial models at its core are faulty.

Federal Reserve chairman Benjamin Bernanke called the CRA a “catalyst” in 2007, although he touched on the trouble already brewing in the subprime mortgage sector as an imperative to revisit the Act in the wake of significant changes in the banking industry since its implementation.

At its heart, the CRA was created to try and legislate out some of the institutional discrimination in the financial services industry. It was conceived in a very different era from today’s world of global banking behemoths. In the wake of the civil rights movement, most banks were still small, often single-branch operations. Many would operate selectively in low-income and minority neighborhoods, accepting the deposits of local residents but only writing home or business loans in more affluent communities.

Regulatory changes in banking plus an agenda embraced by Fannie Mae and Freddie Mac to boost homeownership cracked the mortgage market wide open beginning in the 1990s, and the CRA was initially credited with higher rates of homeownership among low-income and minority Americans. According to Kathleen Day, spokesperson for the Center for Responsible Lending, “The purpose of the CRA is to go into underserved areas and look for credit-worthy borrowers you overlooked because of red-lining,” she said, referring to the bank practice of categorically refusing to lend in certain neighborhoods.

The result of reckless lending practices is by now apparent to everyone, although concerns were swept under the rug in the go-go years of the mid 2000s. CRA supporters say brokers and non-bank mortgage outfits wrote nearly 95 percent of the bad loans, while the Act took the fall when these loans turned out to be unsustainable.

“Nine out of 10 of the people who got bad loans already had homes,” said the Center’s Day. “Six out of the 10 were refinances and three were selling one home and buying another.”

Often, Day adds, the unscrupulous vendors that preyed on subprime mortgage candidates cloaked their malfeasance in the language of the CRA’s mission, a sleight of hand that muddied the waters and assigned undue blame on the regulation when mortgages — and the huge numbers of securities backed by them — began to sour.

Even Lawrence White, a New York University who wants to see the CRA scrapped, says it’s not to blame for the financial meltdown. “The CRA has very little to do with the subprime lending debacle,” he said.

Aside from mortgage lending, the other goal of the CRA is to provide basic banking services to low-income and minority citizens. In these locations, “Pawnshops and the like literally became the banking services,” said John Taylor, president and CEO of the National Community Reinvestment Coalition, the organization spearheading the modernization of the CRA.

“In some communities there are no financial institutions,” asserted Demos’s Jose Garcia. Geographic impediments and language barriers create a two-tier system that leaves low-income Americans, minorities and immigrants without access to the banking and lending services the middle class takes for granted.

If the legislation were better-enforced — something the NCRC’s Taylor believes the modernization bill would facilitate — banks wouldn’t be able to do things like close branches in these communities without repercussions. But preventing closures would just be the beginning.

In a 12-page statement, the NCRC spelled out major features of modernization. Key among them are inclusion of non-bank financial firms under the umbrella of CRA oversight, and a greater emphasis on the neighborhoods in which institutions write loans, not just the locations where their branches or offices are located. This is partially due to the rise of online and branchless financial institutions, but Taylor says the switch will also prevent companies like subprime mortgage-peddlers from operating under the radar.

Advocates also want to see enforcement of the CRA transferred to the not-yet-created Consumer Financial Protection Agency. The CFPA, as its supporters envision it, would consolidate regulatory oversight and enforcement of banking and lending activities in a single agency, rather than the patchwork of regulators some say let ruinous business practices slip through the cracks.

The modernization effort isn’t without roadblocks, though. The current House bill has yet to progress to the Senate, although Taylor says the NCRC’s goal is to have the modernization signed into law sometime this year. The CFPA doesn’t even exist yet, and might never come to fruition. Last week, Senate Banking Committee Chair Christopher Dodd (D-Conn.), the lawmaker who has championed the idea, indicated he may be willing to abandon the idea of a consumer protection agency.

In the end, it’s not clear what is ahead for the CRA. Some, like the Cato Institute’s Mark Calabria, think the need has run its course. “There was a logical raison d’être for the creation of the CRA at the time but that justification is no longer there,” he said. He admits that an outright repeal of the Act is unlikely, though. NYU’s Lawrence White also wants to get rid of the CRA, although he wants to replace it with a cap-and-trade system of credits similar to the protocol used to eliminate acid rain-causing sulfur dioxide in the 1980s.

Progressive and social-justice groups say that the CRA, while not perfect, needs to be improved, not thrown out. “We’re talking about trillions of dollars of private resources that could be available to low- and moderate-income neighborhoods,” said the NCRC’s Taylor. “We believe in banks. If we don’t have them active in these neighborhoods, it’s very unlikely they’re going to prosper. We want banks to see these neighborhoods as an important part of the economic future of this country and of their business plans.”

In the end, it might come down to that. If the notoriously profit-hungry banking industry sees economic potential in lower-income areas, this would go a long way towards keeping the predatory players out of the arena.

Former President George W. Bush (Gamma/Eyedea/ZUMA Press)

A decade’s worth of cuts in federal aid combined with states moving to copy Bush administration tax cuts have led to states filling revenue shortfalls with regressive tax policies that disproportionately affect the poorest Americans. According to “Who Pays?” a report issued in November by the Institute on Taxation & Economic Policy, the poorest 20 percent of Americans pay nearly 11 percent of their income in state and local taxes, the majority of which is in the form of sales and excise taxes. Those in the top 1 percent, by contrast, pay just over 5 percent of their income in state and local taxes, and the majority of that is income tax.

[Economy1] “To the extent that states rely on sales tax, they’re going to be regressive,” said Howard Abrams, professor at Emory University School of Law, pointing out that the most regressive states in the ITEP report depend on sales and excise tax revenues to a great degree. Since poor individuals spend rather than save more — or all — of their income, sales tax as well as excise taxes on goods like gasoline and cigarettes impact them to a greater degree. Their wealthier counterparts, by contrast, tend to save and invest, which means every dollar they make isn’t going towards taxable purchases. A graduated income tax is designed to balance this burden by taxing wealthier occupants at a higher rate, but some states have such low thresholds for their top rates, or their rate spread is in such a narrow range, that any benefit to lower-income residents is lost.

The poorest Americans are also burdened by regressive property taxes, said Philip Harvey, professor at Rutgers School of Law. Two factors contribute to this: One, they may live in less-wealthy municipalities that have to tax at a higher rate to provide services. Secondly, many lower-income individuals rent rather than own property. “Economists generally know property taxes tend to be regressive because rent includes taxes indirectly,” Harvey said. Since lower-income people statistically spend a higher percentage of their income on housing, this translates to yet another higher tax burden.

In theory, federal income tax balances out this disparity to an extent because it relies on a graduated formula, but critics of the status quo say the country’s poorest citizens are still suffering from the effects of the Bush tax cuts. “Unambiguously, federal taxes have become less progressive over the last 10 years,” said Kim Rueben, public finance economist at the Urban Institute-Brookings Institution Tax Policy Center.

“One of the big changes during the Bush administration was a substantial reduction on capital gains and dividends,” said Emory’s Howard Abrams. “The only people that got the benefit were the extraordinarily wealthy.” Not only does this rob federal coffers of funds, but it also sets a precedent for states, several of which followed suit with tax cuts of their own.

States’ tendency to mimic federal actions does have a silver lining in that 23 states and Washington, D.C., offer earned-income tax credits modeled after the federal credit. Matthew Gardner, executive director of the ITEP, said credits like these, especially when they are refundable, go a long way towards leveling the playing field for low-income people. These credits aren’t enough, though. “The credits that were introduced under Bush for the poor families were dwarfed by declining tax rates at the top,” said the Tax Policy Institute’s Rueben.

Bush-era cutbacks on federal monies sent to states are equally harmful to poor residents. “There isn’t a lot of redistribution being done at the state and local level,” said Alan Viard, resident scholar at the American Enterprise Institute. “You expect that and want it to be done at the federal level.” Problems crop up when the federal government scales back this involvement. With less aid coming from Washington, states must rely solely on their own residents for funding, which nearly always leads to an increased reliance on regressive tax policies.

The ITEP’s Gardner says he is hopeful that the recession-prompted emergency aid to states will become the new status quo. If the federal government becomes involved to a greater degree in redistributing the tax dollars it takes in, states would have the breathing room to roll back some of their sales and excise tax increases.

Progressive groups are hopeful that the Obama administration will reverse some of these disparities by allowing provisions that cut taxes for the wealthiest Americans to expire next year and in 2011. While this wouldn’t directly change states’ tax structures, these changes to the federal tax code would create a healthier balance for poor as well as middle-class citizens.

According to a report published by the Tax Policy Center, Obama administration proposals would lower the federal tax rates for all but the wealthiest 20 percent of citizens. The net tax rates for all Americans would be the same under Obama’s plan as under an alternate model that assumes the extension of the provisions implemented by Bush; however, the costs in the former case would be shouldered to a much greater degree by the wealthiest citizens. With a federal program like that in place, the inherently regressive nature of most state and local taxes would be less of a burden on those who have already borne an outsized share of this recession’s pain.

While the national unemployment rate of 10.2 percent is a sobering reminder of the depth of this recession and the protracted timeline a recovery will take, the challenges posed by long-term unemployment are far greater.

“We are breaking every record post-Great Depression on long-term unemployment,” said Heidi Shierholz, an economist with the Economic Policy Institute. Right now, around 35 percent of those without jobs have been unemployed for more than six months, a figure that adds up to 3.6 percent of our country’s labor pool.

[Economy]The result is a crisis unlike anything seen since the 1930s. “The numbers are unprecedented,” said John Challenger, CEO of Challenger, Gray & Christmas, a human resources consulting firm. “What it suggests and it bears out in reality is that as people become long-term unemployed, they become damaged goods in the job market.”

While economists are divided about the best way to combat this growing problem, most agree on how it happened. The current recession exacerbated an ongoing economic shift from manufacturing to a service base. Troubles faced by Detroit’s Big Three automakers fanned the flames, rendering the skills of many workers obsolete. Even as local economies withered on the vine, workers were rendered immobile, locked into their homes by the real estate crash.

Long-term unemployment is dangerous because it can have a snowball effect, says Kevin Lowden, managing economist at the Milken Institute. The longer someone is out of work, the more likely he or she is to default on his or her mortgage, even low-risk borrowers at the time when the loan was originated.

“You also see significant issues in terms of the effect on consumer demand due to the dramatic increase in savings rate,” he said. While this increase in savings is good for the economy long-term, right now that frugality comes at the expense of consumer spending that could lead to employers hiring more workers.

This epidemic of long-term unemployment also puts an added burden on government coffers. “This is direct drain on budgets in two ways,” said Dean Baker, co-director of the Center for Economic and Policy Research. Government doesn’t collect income tax on laid-off employees, and when these workers go onto unemployment or disability rolls, this creates an additional drain on the system.

For instance, the increase in workers applying for disability has shot up. Currently, some 7 million adults are on disability, an influx so overwhelming that the trustees of the Social Security program predict that the disability fund will be emptied by 2017 if nothing changes.

This mass migration to disability status is primarily a function of our employer-based health care system, according to Lawrence Katz, a professor at Harvard University. “If you have a pre-existing condition, even if you get another job there will be problems with your coverage,” he said. “The one place you can go is disability, where you get onto Medicare. And once they go on, they basically never come off.” Health plans currently under debate in Congress would subsidize low-income citizens and families, which would include the unemployed, as well as ban insurers from eliminating pre-existing conditions, which make going off disability feasible. Currently, those jobless for a long period of time have nothing to fall back on after their COBRA benefit expires.

Even if those who have been unemployed long-term make it back into the workforce, their future earning power suffers. There’s some evidence that post-layoff retraining can mitigate this, but only under certain circumstances. A study out of the University of Chicago’s Harris School of Public Policy Studies found that attending one year of community college gave displaced workers a 5 percent wage boost. Unfortunately, the vast majority of workers enrolled in such programs don’t stick around for even a semester, let alone a whole year.

However, for workers that stick it out and specialize in vocational training, science or mathematics, the returns can be even greater. The study’s authors found a 10 to 15 percent jump in wages for this subset of workers, as well as higher returns for those who already had some degree of college education prior to their participation in the program.

To this end, much of the work that is being done to combat long-term unemployment focuses on retraining workers so that their skills are more in alignment with today’s service-based economy. “The economy has changed fundamentally and our workforce system has not,” said Andy Levin, Michigan’s chief workforce officer, who runs that state’s No Worker Left Behind program. “Most people who lose their jobs can’t replace their standard of living without getting significant training because of the rapid and ongoing march of technology and globalization,” Levin said.

No Worker Left Behind began operating in August 2007 and is funded primarily by the Workforce Investment Act, which was created in the 90s and received $1.25 billion in stimulus funding to help dislocated workers. Since then, No Worker Left Behind has trained 102,000 at-risk or jobless Michigan residents for jobs in growing industries like health care, technology and transportation.

Levin has put into place bureaucratic efficiencies, such as standardizing which types of jobs are eligible for training subsidies throughout the state and streamlining the process that lets jobless workers continue to receive unemployment benefits while pursuing additional education. When the program conducted a survey this April, they found that nearly half of the workers who had completed training had landed a job, 86 percent in a field that related to their training.

Other economists say that programs such as No Worker Left Behind, while helpful, don’t do enough to address the root of the problem: the overwhelming lack of jobs. Although the pace at which companies are laying off workers has slowed, companies aren’t rehiring, which means there are still too few jobs to go around. Traditionally, small businesses are the first to hire when the economy picks up steam after a recession; however, small-business financing has dried up due to the credit crunch, preventing entrepreneurs from expanding and adding employees.

“The crisis is just so big at this point with 10.2 percent unemployment that we’re thinking about new direct job creation proposals because the scale of the problem is so large,” said Allegra Baider, senior legislative associate at the Center for Community Change. That group, along with a host of other advocacy and labor organizations, recently released a joint statement calling for new investment in job creation in fields such as infrastructure and education.

“A top priority ahead of job training is we’ve got to fix the labor market and start generating jobs,” said the Economic Policy Institute’s Heidi Shierholz. The Obama administration plans to hold a jobs summit next month examining incentives like tax credits to encourage businesses to hire new workers.

John Challenger of Challenger, Gray & Christmas acknowledged that even if such programs succeed, many Americans will have to make adjustments. “One of the things that’s happening is a steady career at one large company or in a company town is no longer available, and people at all levels can no longer think of their careers as always progressing upwards in income.” Even as they learn new skills, employees also have to be taught how to be flexible so they can adapt to the twists and turns of the 21^st-century economy.

Federal Reserve Chairman Ben Bernanke (WDCpix)

Federal Reserve chairman Ben Bernanke announced last month that the recession was “likely over” and that the economy was in the early stages of a recovery. The problem is, many Americans don’t look around and see a recovery due to the still-abysmal unemployment rate. What’s scarier is that those numbers are probably going to get worse before they get better. The Congressional Budget Office predicts unemployment peaking at 10.2 percent next year and remaining at a very high 9.1 percent in 2011.

Illustration by: Matt Mahurin

“What people care about is numbers that affect their lives — employment, pay, housing. The story in almost all those cases looks bad,” said Dean Baker, director of the Center for Economic and Policy Research. “In one sense the recession will be over, but for all practical purposes, it still will be a recession for most people.”

In other words, we’re looking at a jobless recovery. “What it means is that the economy is recovering for Wall Street and business profits but it’s not distributing that prosperity effectively, and that’s not the recovery we need,” said Andrew Stettner, deputy director of the National Employment Law Project. “It’s not a true recovery until it lifts the fortunes of average Americans,” he added. Waiting for that could take a while: the Congressional Budget Office estimates it could take another five years to get back to America’s pre-crash unemployment rate.

Unlike recessions from roughly the end of World War II until the 1980s, a bounce-back in U.S. jobs isn’t going to come from the nation’s giant manufacturing sector cranking itself back up. While America still does produce goods both for export as well as for consumption at home, the 20th-century manufacturing-based economy has shifted to a service-oriented one, and roughly 70 percent of our economy these days is driven by consumer spending. As a result, recent recoveries have tended to be jobless ones in which the employment rolls take much longer to catch up with the rise in GDP that signals a recovery. After the 2001 recession, it took 17 quarters — more than four years — for the labor market to recover.

The severity of this recession as well as the enormous number of jobs lost is already creating a strain on the nascent recovery, and experts say it presents a number of challenges for average Americans as well as policy-makers. One of the most glaring is the issue of health care. The importance of the ongoing health care debate — and the need for reform — is highlighted by the plight of the unemployed when it comes to health insurance.

Currently, laid-off employees are eligible to remain in their employer’s group pool through the COBRA program for up to 18 months. Historically, many people who lose their jobs turn down the COBRA coverage because it requires individuals to shoulder the entire cost of the premium by themselves. In an acknowledgement that this is no ordinary recession, the federal $787 billion stimulus package includes a provision providing unemployed workers with a 65 percent subsidy of their COBRA premiums for nine months.

This is unprecedented, and yet many economists say it’s not nearly enough. “A lot of the people who start being unemployed aren’t reemployed after nine months,” Burtless said. The number of Americans on the jobless rolls for months or even years at a time is already swelling and expected to grow, which means it’s increasingly likely that the unemployed will run through their COBRA benefits by the time they land a new job. Even if a worker is lucky enough to land a job that includes health insurance (which is no guarantee these days, either), restrictions on pre-existing conditions kick in, leaving an untold number of Americans without a healthcare safety net.

Health insurance isn’t the only issue, though. “It’s a desperate situation because it’s going to be long term,” warned CEPR’s Baker. “Today you have people getting benefits, but people might be out of work for two or three years, and we’re not set up for having high rates of unemployment.” Baker points out that other developed nations are better equipped for a situation like this because of programs like long-term unemployment insurance, housing assistance and health care.

Prolonged unemployment is a double-whammy for those stuck without jobs for extended periods; not only are they out of work, but when the economy rebounds, they’re more likely to be passed over by the companies doing the rehiring in favor of people who have exited the workforce more recently. According to Lawrence Katz, a professor of economics at Harvard University, the unintended consequence of this escalation will be to push more workers into disability and early Medicare programs. “That becomes the only option and the difficulty with that is once people go on disability programs they basically never leave, which becomes very expensive,” he warned.

Benefits like unemployment payments are also facing a similar strain that’s likely to get worse before it gets better. Right now, laid-off workers in the states most severely impacted by the recession can draw up to 79 weeks of unemployment benefits. As with the COBRA subsidy, this is already an extension above and beyond the norm, but it’s not clear how much more of an appetite the federal government has to subsidize long-term joblessness.

There are a couple of encouraging signs that the government does understand the severity of the problem and is taking steps to address it. Support for a payroll tax credit, one oft-cited measure for increasing employment, is gaining support among both parties in Congress. One suggested version would give companies a credit of double the payroll tax for every employee hired or converted from part- to full-time. “We did a new jobs tax credit in the ‘70s that had some impact,” said Harvard’s Katz, adding that a broader wage subsidy would have a similar impact on the private sector but also offer employment support to nonprofits, as well.

The government could take a more direct role in boosting employment, Brookings’ Gary Burtless suggests. “I expect that if job creation is very anemic on private payrolls and continue to have a Democratic administration, there’s going to be a lot of initiative to somehow increase the share of the government’s stimulus efforts on job creation.”

It’s also possible that job-creation programs in stimulus bill may yet play a role in shoring up payrolls, although even pro-stimulus economists think that role will be minor. “It’s probably to date created between 700,000 to a little over a million jobs,” said CEPR’s Dean Baker. “It will make more of a difference, but it’s not big enough.”

There are still a couple of factors that could turn the tide in workers’ favor. Andrew Stettner points out that the stimulus-led investment in clean energy and “green” technology has the potential to put the U.S. back in the manufacturing game. “Right now, we’re borrowing and consuming. We need to move our economy more broadly to producing and inventing by investing in it to make it more competitive,” he said.

On a somewhat grimmer note, if America’s recovery lags behind that of our major trade partners or if the dollar is weak for a prolonged period, a surge in demand for exports could be a silver lining for the employment rate. Similarly, inventories in this country have been pared down so far that a big uptick in demand could lead to hiring, but since so much of what we consume comes from overseas, any employment boost there would be shared with other countries.

The worst-case scenario, says Brookings’ Gary Burtless, is that we experience a recession on par with the very steep one in 1981-82, but without the jobs recovery that followed. If this happens, Andrew Stettner of NELP predicts a societal fragmentation of nearly unprecedented magnitude. “I think you’ll start seeing a divided consciousness between the haves and have-nots by next year. Those who did lose their jobs and their savings will be increasingly isolated.”