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The incompetence of economic policy makers: why U.S. women are leaving the labor force

December 15, 2014 Leave a comment

from Dean Baker

The NYT seems intent on hiding the elephant in the living room. Yesterday it gave us a piece on why men are leaving the labor force, today it gives us a piece on why women are leaving the labor force.

Both articles raise some interesting and important issues. The article on women and work in particular gives an excellent discussion of how most other wealthy countries are far ahead of the United States in providing support for working mothers in the form of paid family leave, paid sick days, and affordable child care. (These are all areas in which CEPR has done considerable research.) 

The failure of the United States to meet the needs of working parents largely explains why so many countries have passed the United States in the percentage of prime age (ages 25-54) women who are employed. This figure now stands at 69.9 percent in the United States. By comparison, it is 78.4 percent in Denmark, 76.1 percent in France, and 72.0 percent in Japan. Read more…

Categories: Uncategorized

Seven years after: why this recovery is still a turkey

November 27, 2014 1 comment

from Dean Baker

December will mark the seventh anniversary of the beginning of the recession brought on by the collapse of the housing bubble. Usually an economy would be fully recovered from the impact of a recession seven years after its onset. Unfortunately, this is not close to being the case now.

It would still take another 7-8 million jobs to bring the percentage of the population employed back to its pre-recession level. The 5.8 percent unemployment rate (compared to 4.5 percent before the recession) doesn’t reflect the true weakness of the labor force since so many people have dropped out of the labor force. Furthermore, more than 7 million people are working part-time who would like full-time jobs. This is an increase of almost 3 million from the pre-recession level.

It’s not just the labor market that shows the economy’s slack. According to the Congressional Budget Office (CBO), the economy is still operating close to 4.0 percentage points below its potential. This translates into roughly $700 billion a year being thrown in the garbage because we don’t have enough demand in the economy. That comes to more than $2,000 per year for every person in the country. Read more…

Categories: The Economy

Italy’s stagnation: the need to share the pain

November 15, 2014 6 comments

from Dean Baker

According to the plan designed for Italy by the European Commission, Italy must regain competitiveness with Germany by forcing down wages. A prolonged period of high unemployment is an essential part of this process.

There can be little doubt that the main problem with Italy’s economy is a lack of demand. When the housing bubbles that were driving the euro zone economies burst in 2008, there was nothing to replace this source of demand. Italy joined other countries in the euro zone and around the world in using fiscal stimulus to boost demand, but then was forced to revert to austerity in 2010.

Its economy has been shrinking ever since, as would be predicted by textbook Keynesian economics. GDP in 2014 is projected to be almost 9.0 percent less than the 2007 peak. According to the I.M.F.’s projections, which have consistently been overly optimistic, Italy’s GDP will still be 3.5 percent below the 2007 level in 2019. This would imply twelve years with cumulative negative growth, a performance far worse than any major country saw in the Great Depression.

The shrinkage of the economy has been disastrous for Italy’s workers. The employment rate for prime age workers is down by almost six full percentage points. The employment rate for young people is down by ten percentage points, translating into youth unemployment rates of close to 40 percent.

Of course the pain for workers is the strategy. The plan designed for Italy by the European Commission is have Italy regain competitiveness with Germany by forcing down wages. A prolonged period of high unemployment is an essential part of this process. Read more…

Categories: Uncategorized

If shareholders stopped letting CEOs rip them off it would reduce inequality

November 12, 2014 2 comments

from Dean Baker

Eduardo Porter has an interesting discussion of inequality, based in large part on the views of M.I.T. Professor Robert Solow. Solow views it as unlikely that it will be possible politically any time soon to have tax and transfer policies that do much to lesson inequality. However he does hold out the hope that changes in corporate practices could lessen before tax inequality.

This is an extremely important point. There is considerable research showing that CEOs and other top management essentially ripoff shareholders, taking advantage of their insider power to give themselves pay that has little to do with their productivity, measured as the return they give to shareholders. (Lucian Bebchuk has a good summary of the issues.) If shareholders can better gain control of their companies, they might cut pay by 50 percent or more, bringing CEO pay in the United States in line with pay in other wealthy countries. Read more…

Categories: income inequality

The reality is that changes in productivity swamp the impact of demographic change.

November 10, 2014 2 comments

from Dean Baker

Tyler Cowen is worried that rich countries won’t have enough people to do the work. This concern seems more than a bit off the mark given that almost every rich country continues to have large numbers of unemployed and underemployed workers, but I suppose pondering this question can at least create some jobs for economists. Anyhow, two of the countries Cowen highlights are Japan, which he tells us has seen a declining working age population since 1997 and China, where he warns about the difficulties that working couples will face supporting four parents as well as their own children.

Taking these in turn, a key part of the story that Cowen leaves out is hours worked. These vary hugely across countries and across time within countries. For example, the OECD reports the average work year in Germany at 1388 hours in 2013. By comparison South Korea, which has a comparable per capita income, had an average work year of 2163 hours in 2012.

This means that in terms of hours worked, each worker in Korea puts in 55 percent more hours than a worker in Germany. If Germany felt it was short of workers, obviously they could try to encourage their workforce to put in more hours. If they just made up half the difference with Korea it would be equivalent to a 28 percent increase in their workforce. That is equivalent to an awful lot of additional kids.

This is directly relevant to the Japan story, since the OECD reports that the average work year in Japan has declined by 7.0 percent since 1997, the year its working age population began to decline. This doesn’t suggest that a shortage of workers has been a major problem for Japan. Read more…

Categories: jobs

Full employment: The recovery’s missing ingredient

November 4, 2014 5 comments

from Dean Baker

Federal Reserve Chairman Janet Yellen gave a speech a few weeks ago that was doubly unusual.

First, she provided a welcome and trenchant analysis of inequality, focusing on the stagnant income and wealth of middle- and low-income families relative to the top few percent. For the nation’s chief economist to elevate this issue is an important contribution in its own right.

Second, she declined to mention the critical role of slack labor markets in these outcomes. In what is a rare case for her, the word “unemployment” was not even mentioned in the speech. The omission was especially noticeable as Yellen, to her credit, has so consistently pointed out the extent of remaining slack in the U.S. job market.

Unemployment is down and gross domestic product is up, yet there isn’t much progress in real wages and incomes of most working families. While many reasons have been set forth to explain this unfortunate disconnect, including globalization and technological change as well as unmet skill demands and the Federal Reserve’s asset-buying program, our research suggests that the main factor behind both stagnant real wages and rising inequality is the absence of full employment. Truly tight labor markets — an unemployment rate closer to 4 percent than 6 percent — would not only boost real wages, but would give a larger lift to the lowest-paid workers and those with the least bargaining clout, pushing back on stagnation and inequality. Read more…

Categories: The Economy, unemployment

World’s richest man tries to defend wealth inequality

October 24, 2014 4 comments

from Dean Baker

A review of French economist Thomas Piketty’s best-selling book “Capital in the 21st Century” by the world’s richest man is too delicious to ignore. The main takeaway from Piketty’s book, of course, is that we need to worry about the growing concentration of capital, in which people like Microsoft co-founder turned megaphilanthropist Bill Gates and his children will control the bulk of society’s wealth. Gates, however, doesn’t quite see it this way.

From his evidence, he actually has a good case. If the issue is the superrich passing their wealth to their children, who will become the next generation’s superrich, he is right to point out that the biographies of the Fortune 400 — the richest 400 Americans — don’t seem to support this concern. We find many people like Gates, who started life as the merely wealthy (his father was a prosperous corporate lawyer), who parlayed their advantages in life into enormous fortunes. The ones who inherited their vast wealth are the exception, not the rule.

Gates tells readers of his plans to give away the bulk of his fortune. His children will have to get by with the advantages that accrue to the children of the ultrarich, along with whatever fraction of his estate he opts to give them. That will undoubtedly ensure that Gates’ kids enjoy a far more comfortable life than the bottom 99 percent can expect, but it likely will not guarantee a place among the Fortune 400.

Read more…

Defending Germany from Paul Krugman

October 15, 2014 4 comments

from Dean Baker

I would not typically defend Germany’s economic policies against Paul Krugman, but I will say a word in its favor this morning. Krugman trashes Germany for running large trade surpluses, telling us that Germany actually has a weak domestic economy. He concludes a short post by saying that Germany can’t be any sort of model, since we can’t all run large trade surpluses.

While there is much truth to Krugman’s comments, it is worth stepping back for a moment. First, the claim that Germany’s domestic economy is weak means that Germans don’t want to buy lots of stuff. While Germany does certainly have problems of poverty and inequality, they are nothing like what we see in the United States. It would be great for Germany to spend more to address these problems, both because of the direct benefit and also because of the demand it would provide to the world economy, but it is not necessarily a bad thing that a country doesn’t want to buy more stuff.

A really good way to deal with a problem of insufficient demand is to design policies that encourage less supply. Germany has done this to some extent with work sharing, long vacations, paid parental leave, and other policies that have the effect of dividing the available work more evenly among the population. The average work year in Germany is 20 percent shorter than in the United States. Germany can certainly do more to spread the work more evenly and hopefully the income goes with it, but weak domestic demand need not be a problem. Read more…

Categories: The Economy

Eric Holder: The reason Robert Rubin isn’t behind bars

October 2, 2014 1 comment

from Dean Baker

The big news item in Washington last week was Attorney General Eric Holder decision to resign. Undoubtedly there are positives to Holder’s tenure as attorney general, but one really big minus is his decision not to prosecute any of the Wall Street crew whose actions helped to prop up the housing bubble. As a result of this failure, the main culprits walked away incredibly wealthy even as most of the country has yet to recover from the damage they caused.

Just to be clear, it is not against the law to be foolish and undoubtedly many of the Wall Streeters were foolish. They likely believed that house prices would just keep rising forever. But the fact that they were foolish doesn’t mean that they didn’t also break the law. It’s likely that most of the Enron felons believed in Enron’s business model. After all, they held millions of dollars of Enron stock. But they still did break the law to make the company appear profitable when it wasn’t.

In the case of the banks, there are specific actions that were committed that violated the law. Mortgage issuers like Countrywide and Ameriquest knowingly issued mortgages based on false information. They then sold these mortgages to investment banks like Citigroup and Goldman Sachs who packaged them into mortgage backed securities. These banks knew that many of the mortgages being put into the pools for these securities did not meet their standards, but passed them along anyhow. And, the bond-rating agencies rated these securities as investment grade, giving many the highest possible ratings, even though they knew their quality did not warrant such ratings.  Read more…

Categories: corruption

The Vicissitudes of the Market Would Be a Big Improvement

October 1, 2014 2 comments

from Dean Baker

Bob Kuttner has a good column in the Huffington Post comparing the progress made in improving the living standards of ordinary people in the forty years following the New Deal with the deterioration of the last three decades. However the piece doesn’t go far enough in contrasting the former period with the latter period.

After noting the lack of progress in recent years he comments:

“You wonder why people are turning away from the Democrats’ proposition that affirmative government can buffer people from the vicissitudes of the marketplace? You wonder why millennials are attracted to the libertarian proposition that we’re all on our own anyway?”

Of course the problem of the last three decades is not the “vicissitudes of the marketplace,” but rather deliberate actions by the government to redistribute income from the rest of us to the one percent. This pattern of government action shows up in all areas of government policy.  Read more…

The mysteries of inequality are only mysterious to elites

September 23, 2014 4 comments

from Dean Baker

Developing explanations for the growth in inequality over the last three decades has been a huge growth industry in economics and policy circles. Many economists have made their careers with a novel explanation of how the natural development of technology and the market has concentrated income and wealth in the top one percent. It’s even better if you can show that inequality hasn’t risen. While the explanations that blame inequality on technology can get complicated, there were three items in the last week that painted the picture very clearly for the rest of us.

First, we got new data from the Federal Reserve Board and the Census Bureau, both of which showed that typical families are still seeing very little benefit from the recovery to date. The Fed released the 2013 Survey of Consumer Finance which showed median family wealth was still below the 2010 level in spite of the run-up in the stock market.

The Census Bureau released its annual data on income, poverty, and health insurance coverage. While there was some good news on the latter two, median income remained flat. The story in both the Fed and Census analysis remains the same; those at the top continue to get the bulk of the benefits from economic growth. Read more…

Categories: New vs. Old Paradigm

The myth that sold the financial bailout

September 17, 2014 4 comments

from Dean Baker

If there had been political support for massive spending in these areas, the Depression could have ended in 1931 instead of 1941.

Today marks the sixth anniversary of the collapse of Lehman Brothers. The investment bank’s bankruptcy accelerated the financial meltdown that began with the near collapse of the investment bank Bear Stearns in March 2008 (saved by the Federal Reserve and JPMorgan) and picked up steam with Fannie Mae and Freddie Mac going under the week before Lehman’s demise. The day after Lehman failed, the giant insurer AIG was set to collapse, only to be rescued by the Fed.

With the other Wall Street behemoths also on shaky ground, then–Treasury Secretary Henry Paulson ran to Capitol Hill, accompanied by Federal Reserve Chairman Ben Bernanke and New York Fed President Timothy Geithner. Their message was clear: The apocalypse was nigh. They demanded Congress make an open-ended commitment to bail out the banks. In a message repeated endlessly by the punditocracy ever since, the failure to cough up the money would have led to a second Great Depression.

The claim was nonsense then, and it’s even greater nonsense now.  Read more…

Robert Rubin and Martin Feldstein discover bubbles

August 19, 2014 2 comments

from Dean Baker

Last week Martin Feldstein and Robert Rubin made their case for the gold medal in the economic policy category of the “show no shame” contest. Their entry took the form of a joint op-ed in the Wall Street Journal warning that the Fed needs to take seriously the risk of asset bubbles growing in financial markets.

Those familiar with Feldstein and Rubin will instantly appreciate the bold audacity of this entry. They are, respectively, the leading intellectual lights of the Republican and Democratic Party economic policy establishments.

Feldstein was the chair of the Council of Economic Advisors under President Reagan. He also was president of the National Bureau of Economic Research for thirty years and a professor and chair of economics department at Harvard. Almost all of the country’s top conservative economists have either directly studied with Feldstein or one of his protégées.

Robert Rubin was instrumental in creating a solid Democratic base among the Wall Street set. He was rewarded for his efforts with top positions in the Clinton administration, including a stint as Treasury Secretary from 1995 to 1998. Larry Summers and Timothy Geithner both advanced under his tutelage and he continues to be a source of economic wisdom for President Obama and other top figures in the party.

Given their enormous stature, Feldstein and Rubin undoubtedly expected their joint bubble warning to have considerable weight in economic policy circles. Of course this raises the obvious question, why couldn’t Feldstein and Rubin have joined hands to issue this sort of bubble warning ten years ago in 2004 about the housing bubble? If they used their influence to get a column about the dangers of the housing bubble in the Wall Street Journal in the summer of 2004 it might have saved the country and the world an enormous amount of pain.    Read more…

How the incipient inflation freak-out could wreck the recovery

August 11, 2014 1 comment

from Dean Baker and Jared Bernstein

As predictable as August vacations, numerous economists and Federal Reserve watchers are arguing that the nation’s central bank must raise interest rates or risk an outbreak of spiraling inflation. Their campaign has heated up a bit in recent months, as one can cherry pick an indicator or two showing slightly faster growth in prices or wages.

But an objective analysis of the recent data, along with longer-term wage trends, reveals that the stakes of premature tightening are unacceptably high. The vast majority of the population depends on their paychecks, not their stock portfolios. If the Fed were to slam on the breaks by raising interest rates as soon as workers started to see some long-awaited real wage gains, it would be acting to prevent most of the country from seeing improvements in living standards.

To understand why continued support from the Fed is unlikely to be inflationary, consider three factors: the current state of key variables, the mechanics of inflationary pressures and the sharp rise in profits as a share of national income in recent years, along with its corollary, the fall in the compensation share. (See figure.)

Source: BEA.

Source: BEA.

Read more…

Categories: The Economy, Uncategorized

Inflation hawks: The job killers at the Fed

August 7, 2014 Leave a comment

from Dean Baker

Discussions of inflation and Federal Reserve Board policy take place primarily in the business media. That’s unfortunate, because these discussions can have more impact on the jobs and wages of most workers than almost any other policy imaginable.

The context of these discussions is that many economists, including some in policy making positions at the Fed, claim that the labor market is getting too tight. They argue this is leading to more rapid wage growth, which will cause more inflation and that this would be really bad news for the economy. Therefore they want the Fed to raise interest rates.

The part of this story that few people seem to grasp is that point of raising interest is to kill jobs. If that sounds like a bizarre accusation to make against responsible people in public life then you need to pick up an introductory economics text.

The story line there is that we get inflation if too many people are employed. There are all sorts of ways of making the story more complicated, and many people get PhDs in economics doing just that, but the basic point is a simple one: at lower rates of unemployment workers have more bargaining power and are therefore able to push up their wages. Read more…

Finance in America: Promoting inequality and waste

August 1, 2014 1 comment

from Dean Baker

In the crazy years of the housing boom the financial sector was a gigantic cesspool of excess and corruption. There was big money in pushing and packaging fraudulent mortgages. The country paid a huge price for the financial sector’s sleaze.

Unfortunately, because of the Obama administration’s soft on crime approach to the bankers who became rich in the process; the industry is still a cesspool of excess and greed. Just to be clear, knowingly issuing and packaging a fraudulent mortgage is a crime, the sort of thing for which people go to jail. But thanks to the political power of the Wall Street, none of them went to jail, and in fact they got to keep the money.

Since the penalties for ripping off people are trivial to non-existent, the financial sector finds this to be a much more profitable line of business than actually providing financial services. The New York Times recently reported on the boom in the subprime market for auto loans featuring many of the same abusive practices we saw in the subprime mortgage market during the bubble years. Lenders are slapping on extra fees, changing the terms after contracts are signed, and doing all the other fun things we have come to expect from leaders in finance. The used car industry was sufficiently powerful that it was able to gain an exemption from being covered by the Consumer Financial Protection Bureau. Read more…

US median wealth is down by 20 percent since 1984

July 29, 2014 7 comments

from Dean Baker

A NYT article reported on a study from Russell Sage reporting that median household wealth 36 percent lower in 2013 than 2003. While this is disturbing, an even more striking finding from the study is that median wealth is down by around 20 percent from 1984.

This is noteworthy because this cannot be explained as largely the result of the collapse of house prices that triggered the Great Recession. This indicates that we have gone thirty years, during which time output per worker has more than doubled, but real wealth has actually fallen for the typical family. It is also important to realize that the drop in wealth reported in the study understates the true drop since a typical household in 1984 would have been able to count on a defined benefit pension. This is not true at present, so the effective drop in wealth is even larger than reported by the study. (Defined benefit pensions are not included in its measure of wealth.)

Did the banks have to commit fraud?

July 21, 2014 5 comments

from Dean Baker

Floyd Norris has an interesting piece discussing Citigroup’s $7 billion settlement for misrepresenting the quality of the mortgages in the mortgage backed securities it marketed in the housing bubble. Norris notes that the bank had consultants who warned that many of the mortgages did not meet its standards and therefore should not have been included the securities.

Towards the end of the piece Norris comments:

“And it may well be true that actions like Citigroup’s were necessary for any bank that wanted to stay in what then appeared to be a highly profitable business. Imagine for a minute what would have happened in 2006 if Citigroup had listened to its consultants and canceled the offerings. To the mortgage companies making the loans, that might have simply marked Citigroup as uncooperative. The business would have gone to less scrupulous competitors.”

This raises the question of what purpose is served by this sort of settlement. Undoubtedly Norris’ statement is true. However, the market dynamic might be different if this settlement were different. Read more…

Categories: financial markets

Full employment and the path to shared prosperity (3 graphs)

July 2, 2014 7 comments

from Dean Baker and  Jared Bernstein

There are many policies that can reduce inequality, but there is none as straightforward conceptually and as difficult politically as full employment. The basic point is simple: at low rates of unemployment, the demand for labor allows workers at the middle and bottom of the wage distribution to achieve gains in hourly wages, annual hours of work, and thus income.

Levels of unemployment are not the gift or curse of the gods; they are the result of conscious economic policy. The decision to tolerate high rates of unemployment is a choice. It is one that has enor-mous implications not just for the millions of people who are needlessly unemployed or underemployed but also for tens of millions of workers in the bottom half of the wage distribution whose bar-gaining power is undermined by high unemployment.

Unemployment and Wage Growth

In discussions of inequality and low wages, many on both the left and the right claim that what we need is a better educated workforce. Their argument is that because educated workers are more productive and workers’ pay reflects their productivity, they will earn more if we can persuade them to get more education. However, while more education is generally associated with higher wages, this is just part of the story. In most jobs, the value of workers’ labor depends on the demand for their labor. A retail clerk in a store or a waiter in a restaurant is far more productive, meaning they are generating far more revenue, when business is strong than when it is weak. This means that, in a strong economy, employers can afford to pay a worker with the same level of education and training a higher wage.  Read more…

Categories: Uncategorized

Will India be the Uber of the Pharmaceutical Industry?

June 30, 2014 3 comments

from Dean Baker

Many self-styled libertarians have been celebrating the rise of Uber. Their story is that Uber is a dynamic start-up that has managed to disrupt the moribund cab industry. The company now has a market capitalization of $17 billion.

While Uber’s market value probably depends mostly on its ability to evade the regulations that are imposed on its competitors, the company has succeeded in transforming the industry. At the least we are likely to see a modernized regulatory structure that doesn’t saddle cabs with needless regulations and fees.

Unfortunately, the taxi industry is not the only sector of the U.S. economy that can use modernization. The pharmaceutical industry makes the taxi industry look like cutting edge social media. The government imposed barriers to entry in the pharmaceutical industry don’t just raise prices by 20 or 30 percent, as may be the case with taxi fares, they raise prices by a factor or ten, twenty, or even one hundred (that would be 10,000 percent).  Read more…

Categories: health
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