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Getting high on interest rates: What’s new at the Fed

May 23, 2016 3 comments

from Dean Baker

The minutes from the most recent Federal Reserve Board Open Market Committee (FOMC) meeting indicate that many of its members are anxious to move forward with more interest rate hikes. The next hit could come as soon as June. This should have the country very worried.

Just for some basic orientation, the point of raising interest rates is to slow the economy and keep it from creating too many jobs. The members of the FOMC are worried that the labor market is becoming too tight, with the unemployment rate falling too low. This would give workers more bargaining power, allowing them to get larger wage gains, which could be passed on in higher prices, kicking off an inflationary spiral. If that doesn’t sound like the economy you see, then it’s probably because you have a better idea of the data than the folks at the FOMC.

Starting at the basics, by many measures the labor market is still far from recovering to its pre-recession level, in spite of a recovery that will soon be entering its eighth year. Most notably the employment to population ratio (EPOP), which is the percentage of adults with jobs, is still more than 3 percentage points below its pre-recession level.  Read more…

Yes, the economy is rigged, contrary to what some economists try to tell you

May 11, 2016 8 comments

from Dean Baker

I see Greg Mankiw used his NYT column to tell folks that politicians are spinning tales when they say the economy is rigged. I would say that economists spin tales when they tell you it is not. (Mankiw and I just ran through this argument on a panel in Boston last week.) Let’s quickly run through the main points.

First, the overall level of employment is a political decision. We would have many more people employed today if the deficit hawks had not seized control of fiscal policy back in 2011 and turned the dial toward austerity. The beneficiaries of higher employment are disproportionately those at the middle and bottom of the income distribution: people with less education and African Americans and Hispanics. So the politicians pushing austerity decided that millions of people at the middle and bottom would not have jobs.

Furthermore, in a weaker labor market, it is harder for those at the middle and bottom to get pay increases. So the shift to austerity also meant that tens of millions of workers would have to work for lower pay. Read all about it in my book with Jared Bernstein (free, and worth it).

Read more…

Reining in CEO pay: market discipline at the top

April 13, 2016 3 comments

from Dean Baker

Ever wonder how top executives like former Republican presidential candidate Carly Fiorina can walk away with $100 million after nearly wrecking a major corporation? The answer is that the market doesn’t work the same way at the top as it does for the rest of us. While most of us expect our pay to bear some relationship to our performance, at the top it’s mostly a story of play money among friends.

Corporate executives get patted on the back when they announce plant closings, layoffs, and pay cuts. This is seen as good news for corporate profits and stock prices. But there is no one to applaud when the CEO gets their pay cut because they are not worth the money. That would be a decision of corporate boards, and these boards tend to have more loyalty to CEOs and top management than to the shareholders they ostensibly represent.

After all, top management often played a role in getting the directors their job. And being a director is a very good job. Typically it means getting paid several hundred thousand dollars a year for showing up at 6–10 meetings. Many corporate directors find the time to sit on three or four boards while still holding down full time positions of their own.   Read more…

The Reign of the Robots: Economists getting it badly wrong

March 31, 2016 22 comments

from Dean Baker

A standard fear raised in Washington policy debates is that the development of robots and other forms of technology will displace tens of millions of workers, leaving much of the workforce without jobs. This is remarkable story both because it is not supported by any evidence, but also because it goes in the opposite direction of virtually all the main concerns raised in debates over economic policy.

The story of the rising robots should mean that we are seeing a rapid increase in the amount of output per hour of work. The logic is that the robots are doing work that humans used to do, so we have more output for every hour of human labor.

In fact, we are seeing the exact opposite. The rate of productivity growth, which measures output per hour of work, has slowed sharply in recent years. In the last five years productivity growth in the United States has averaged just 0.4 percent annually, the slowest five year stretch on record. This compares to a rate of close to 3.0 percent annually from 1995 to 2005, which was also the rate of productivity growth during the long post World War II Golden Age, from 1947–73.
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Fools or liars on the Trans-Pacific Partnership?

March 24, 2016 2 comments

from Dean Baker

Given the recent flood of op-eds and editorials on the wonders of the Trans-Pacific Partnership (TPP), the Obama administration must be about to present the deal to Congress for approval. Otherwise, it’s hard to see why so many pieces would spontaneously appear on the TPP. Since there is real money at stake, we can expect the debate to get pretty low and nasty, with the pro-TPP forces liberally substituting ad hominems and claims to expertise for serious arguments.

My favorite on the lack-of-argument side is the exciting news that if the TPP were approved it would eliminate 18,000 tariffs on U.S. exports to the countries in the deal. That sounds like a huge boon to trade, right? Public Citizen looked up the 18,000 tariffs that would be eliminated. It found that the United States is not currently exporting in more than half of the categories in which these tariffs apply. Included in the list of tariffs to be removed are Malaysia’s shark fin tariffs, Vietnam’s whale meat tariffs, and Japan’s ivory tariffs.

The overwhelming majority of these tariffs are of little consequence in very narrow product categories, like Brunei’s tariff on ski boots. So when the proponents of the TPP tout the 18,000 tariffs, is this because they have no clue what they are talking about, or are they deliberately trying to deceive the public?

Read more…

Is the ‘Gig Economy’ here to stay?

March 20, 2016 Leave a comment

from Dean Baker

The “gig economy” is one of the many trendy revolutions capturing the news media’s attention. But some simple realities apply to the gig economy, buried in a great deal of hype.

“Gig economy” work is the same sort of casual labor that has always existed. It’s a variation on the day-labor centers where workers go in the morning in the hope of finding work for all or part of a day. The only difference is that the gig economy operates over the Internet and involves workers in a wider range of occupations, some relatively skilled. However, just as some day-labor companies hope to profit by evading regulations and cheating workers, many gig economy companies hope to legally skirt labor laws that apply to other employers.

The survival of gig economy companies depends on the overall state of the economy. It is no accident that the gig economy exploded following the recent steep recession. More than eight years after the onset of the recession, the economy is still down more than 3 million jobs from trend levels.
Read more…

The rise of Donald Trump

March 2, 2016 16 comments

from Dean Baker

It is undoubtedly scary to many people living outside the United States to see Donald Trump as the leading candidate for the Republican presidential nomination. He has repeatedly made xenophobic and racist comments and promises to deport 11 million people who immigrated to the United States without proper documentation. This should provide cause for concern, but it is important to understand the basis of Trump’s appeal.

First, Trump’s support is coming overwhelmingly from white men with less than a college education. These are people who likely see themselves as losers in the economy over the last few decades. While an earlier generation of non-college educated white men could count on a reasonably good paying job in manufacturing, trucking, and other sectors requiring limited education, this is no longer true. Pay for men without college degrees has been largely stagnant over the last thirty five years.

These men are angry about not enjoying the living standard and economic security that their parents could largely take for granted. This leaves them looking for villains to blame, real or imagined.

Read more…

Bernie Sanders, Hillary Clinton, and the Money

February 20, 2016 8 comments

from Dean Baker

Bernie Sanders has made the corrupting role of money in politics a centerpiece of his campaign. He has argued that because campaign contributions by the rich pay for political campaigns, they are able to control the political process. This gives us a political system that is very effective at serving Wall Street and the insurance and pharmaceutical industries. It is much less effective at serving the needs of ordinary people.

This has created an interesting dynamic in the race for the Democratic nomination. Secretary Clinton has flipped Sanders’ claim around and challenged him to show where she has reversed a position to serve the moneyed interests. This might be a useful campaign tactic, but it misrepresents the way in which money affects campaigns.

Read more…

Financial reform: It’s about improving the financial system, not 2008

February 11, 2016 3 comments

from Dean Baker

As the Democratic presidential race heats up, the debate on financial reform has taken a bizarre twist. Somehow the measure of a good reform is its ability to prevent another 2008-type financial crisis.

While it is reasonable to subject a reform agenda to the 2008 test, this should be at most a side issue. After all, it is virtually certain that our next crisis will not look our last crisis. Financial reform first and foremost is not about preventing the last crisis, but rather about designing a financial system that more effectively serves the rest of the economy.

Finance is an intermediate good like trucking. It does not directly provide value like food or health care, the value in the financial sector depends exclusively on its ability to make the rest of the economy function better. This means effectively getting money to businesses and households who need to borrow. And it means providing safe investment vehicles for people to save for retirement or other purposes.

An efficient financial sector provides these services using as few resources as possible. With that in mind, it is hard to make the case that our financial system is efficient. It has exploded in size relative to the rest of the economy over the last four decades, with the narrow commodities and securities trading sector increasing fourfold.

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Paul Krugman, Bernie Sanders, and the Experts

February 3, 2016 17 comments

from Dean Baker

I have tremendous respect for Paul Krugman. I also consider him a friend. For these reasons I am not eager to pick a fight with him, but there is something about his criticisms of Bernie Sanders that really bothered me.

In a blog post last week, Krugman told readers:

“As far as I can tell, every serious progressive policy expert on either health care or financial reform who has weighed in on the primary seems to lean Hillary.”

While I already had some fun with the idea of Krugman revoking the credentials of everyone who works in these areas who does not back Clinton, the appeal to the authority of the “experts” is more than a bit annoying. The reason is that the “experts” do not have a very good track record of late and still have a long way to go to win back the public’s trust.

To start with the obvious, almost none of the experts saw the 2008 collapse coming. Almost all of them dismissed the idea that there was a housing bubble and even the few that grudgingly acknowledged the possibility of a bubble insisted that it could not have much consequence for the economy.

Read more…

Global Warming and Secular Stagnation

November 23, 2015 5 comments

from Dean Baker

As the world prepares for another round of climate negotiations, it is worth repeating a few simple points. First, it is becoming increasingly obvious that the world is already paying a substantial price for global warming.

Extreme weather events will never come with a stamp that says “caused by global warming.” We know that global warming will change weather patterns in ways that are not entirely predictable. That means that we will see unusual weather events where global warming was likely a factor, but we can never know for certain.

One of the leading candidates in this respect is the extreme drought that afflicted Syria in the last decade, destroying much of its agriculture and leading to a mass migration to its cities. This migration was likely a factor in the unrest that had led the country’s civil war. Syria’s civil war in turn has led to hundreds of thousands of deaths, the displacement of millions, and of course the rise of ISIS.

Read more…

Why the cure for a sluggish economy is actually longer vacations

November 13, 2015 6 comments

from Dean Baker

What if we could boost the economy with longer vacations? Or with paid family leave? With shorter workweeks?

It may sound too good to be true, but hear me out.

Economists have long dismissed the idea that an economy could suffer from a persistent shortfall in demand. While most acknowledged that in periods of recession, growth and jobs could be limited by inadequate demand, this was viewed as a temporary story. In the decades since World War II, the economy generally bounced back quickly from recessions. Once the economy recovered from recession, the basic constraint was supply. We would only have more growth and jobs if we could make the economy more productive and/or persuade more people to work. In this context, additional demand, such as a burst of consumption or increase in government spending, would only create inflationary pressures and undermine the effort to boost growth.

This view has been badly shaken by the Great Recession. Many prominent economists, including Paul Krugman and Larry Summers, now warn quite explicitly about the country facing a prolonged period of what’s known as secular stagnation. Secular stagnation means the main constraint on the economy is inadequate demand, not a lack of supply. If we are facing secular stagnation, policies that boost demand will lead to more growth and jobs.

Read more…

The TPP’s children’s table: Labor rights and currency

November 12, 2015 Leave a comment

from Dean Baker

The concept of the children’s table has moved from Thanksgiving dinner to presidential politics with the networks having a separate debate for the low-polling candidates for the Republican nomination. But the concept of the children’s table is also useful for understanding trade policy and the Trans-Pacific Partnership (TPP).

The TPP has two classes of issues. On the one hand, there are the issues that really matter to the drafters of the deal. These are issues like protection of patents and copyrights and other forms of investment. Disputes that arise over investment can be taken directly by foreign investors to the investor-state dispute settlement tribunals set up by the TPP.

The investor bringing the complaint gets to appoint one of the three judges hearing the complaint. A second judge is appointed by the country against whom a complaint is being brought. The third judge is jointly appointed by the investor and the government. This panel is then empowered to impose fines of whatever size it considers appropriate. This is entirely an extra-judicial process. The verdict is not appealable to any domestic court.

Read more…

The rationale for high drug prices: incredibly inefficient research

November 9, 2015 2 comments

from Dean Baker

Insanely high drug prices have been in the news lately. We are regularly hearing about new miracle drugs like the Hepatitis C drug Sovaldi. Sovaldi comes with an $84,000 price tag for a 3-month course of treatment. Many of the new cancer drugs cost well over $100,000 for a year’s dosage. And of course we had the case of Turing Pharmaceuticals, which raised the price of a Daraprim, an old but important anti-infection drug, by 5000 percent.

These stories of extraordinarily high drug prices are especially painful because they are unnecessary. In almost all cases drugs are cheap to produce. The reason they are expensive is because the government grants them a patent monopoly. (In the case of Daraprim, at the moment Turing is the only licensed manufacturer, even though the drug is off-patent.) Generic Sovaldi is available for just $300 a treatment in Egypt, less than one percent of the U.S. price. Most of the cutting edge cancer drugs would also be available for less than one percent of the U.S. price if they could be sold as generics in a free market. Read more…

The six-hour work day: Preparing for the Attack of the Robots

October 19, 2015 5 comments

from Dean Baker

We all have heard the stories about how the robots are going to take our jobs. The line is that innovations in computer technology will make robots ever more sophisticated, allowing them displace a rapidly growing number of workers. This could leave large numbers of workers with nothing to do, implying a massive amount of long-term unemployment.

There are two basic problems with this story. The first is a logical problem. The story of worker displacement by technology is not new, it goes back hundreds of years and it is ordinarily considered to be a good thing. This is what we call productivity growth. It means that workers can produce more goods and services in the same amount of time. This is the basis of rising wages and living standards.

If we see rapid productivity growth, as robots allow for the same output with fewer workers, this should allow the remaining workers to be paid more for each hour of work. This will allow them to spend more money, creating more demand in other sectors, which will allow displaced workers to be re-employed elsewhere.

Of course we have not seen workers getting the benefits of productivity growth in higher pay in recent years. This is due to policies and institutional changes that undermine workers’ bargaining power.  Read more…

Why is Donald Trump’s tax plan ridiculed but the TPP deal gets a pass?

October 7, 2015 2 comments

from Dean Baker

Trade deals seem to enjoy a special status among economists. While they are happy to use the economic toolbox to take apart policy proposals on minimum wage, financial regulation or almost anything else, for some reason they don’t like to use standard economic tools when it comes to the impact of trade deals like the Trans-Pacific Partnership (TPP).

There was no shortage of economists who were prepared to ridicule Donald Trump’s claim that his tax cut proposal would lead to 6% annual GDP growth. But where are the economists who will ridicule the Obama administration’s claims that the this new trade deal will lead to more rapid growth? Read more…

The Fed’s excuse makers still in high gear

October 6, 2015 5 comments

from Dean Baker

Remember when then Federal Reserve Board Chair Ben Bernanke assured the public that the problems in the financial system will be restricted to the subprime market? This one ranks, along with some comments from and about Alan Greenspan, as one of the worst economic predictions of all time. In other words, the folks at the Fed really missed it.

This is worth remembering because it seems that the Fed is trying to get the excuse making going in advance for the next economic crisis. The NYT reported on a Fed conference where they expressed skepticism as to whether they could stop the next crisis.

There are a range of views presented, not all of them silly. (Using interest rates as the primary tool against bubbles is not a good strategy.) However the idea that the Fed is helpless against bubbles looks like some serious lowering of expectations. Read more…

Job growth in the US weakens in September

October 2, 2015 2 comments

from Dean Baker

The Labor Department reported the economy created just 142,000 jobs in September, well below most forecasts. Furthermore, the prior two months’ numbers were revised down as well, bringing the average for the last three months to 167,000. In addition, there was a drop in the length of the average workweek of 0.1 hour causing the index of aggregate hours to decline by 0.2 percent. The household survey also showed a weak picture of the labor market. While the unemployment rate was unchanged at 5.1 percent there was a drop of 0.2 percentage points in both the labor force participation rate and the employment-to-population (EPOP) ratio. The drop in the EPOP brought the ratio back to its level of October 2014. Read more…

The epidemic of corporate crime

September 29, 2015 3 comments

from Dean Baker

Even those who have little respect for the state of corporate ethics must have been surprised by the news from Volkswagen. It turns out that the largest car company in world deliberately designed software to allow its cars to deceive emissions testing in the United States.

It’s hard to envision the process that led to this outcome. Did some bright and ambitious young executive suggest to his superiors that, rather than finding a way to comply with emission standards, it would be cheaper to design a software program to cheat on the test? They then presumably discussed what would be involved and gave a green light. The scene ends with the executive reporting back the success of cheating software and the German version of The Simpsons’ Mr. Burns rubbing his fingers together and saying, “excellent.”

We may never know the details of how the top brass at Volkswagen thought it would be a good idea to cheat on emissions tests, but they obviously decided that the savings from going this route was worth the risk of detection and the potential punishment. And, if the only punishment is a stretch of unemployment for people who have spent years in high-paying jobs, they are probably right.  Read more…

The success of austerity in Spain: The soft bigotry of incredibly low expectations

September 22, 2015 1 comment

from Dean Baker

Paul Krugman rightly criticizes the proponents of austerity for claiming Spain as a success story. As Krugman points out, its economy is growing, but it has a long way to go to make up the ground lost in its downturn.

He makes this point in a graph showing log GDP, but this picture is actually too generous. We should care about GDP per capita, and here the story is even worse.

Spain per cap GDP fredgraph
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