Author Archive

Job growth in the US weakens in September

October 2, 2015 1 comment

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

Biggest lesson from Financial Crisis: Wall Street gets what it wants

September 18, 2015 40 comments

from Dean Baker

Seven years ago this week, the world’s financial system was teetering on the brink of collapse. The bankruptcy of Lehman Brothers had completely shaken confidence in the banking industry. First, no one could trust the banks books; no one knew how much bad debt banks were concealing. Second, the too big to fail insurance seemed not to exist. After all, if Lehman was not too big to fail, who was?

At that point, policy could have gone two directions. One direction would have been to take advantage of this moment and let the market work its magic. The bloated financial structure that had developed over the last three decades was collapsing from its own excesses. The industry would have paid the price for the issuing and packaging of hundreds of billions of dollars of fraudulent loans, as they finally ran out of suckers to buy the junk. Read more…

Lehman Day: Making fun of the Second Great Depression Crowd

September 16, 2015 3 comments

from Dean Baker

This week marks the 7th anniversary of the collapse of Lehman Brothers, the huge investment bank. This collapse set off the worldwide financial panic that brought Wall Street to its knees. The anniversary of this collapse, September 15th, is the day set aside to ridicule the people who warned of a second Great Depression (SGD) if the Treasury Department and the Federal Reserve Board didn’t rescue the Wall Street banks.

Just to recount the basic story, there is no doubt that without a government bailout most of the big Wall Street banks would have gone under. Citigroup and Bank of America were both effectively bankrupt and remained on life support with hundreds of billions of dollars of government subsidized loans well into 2010. The remaining investment banks, Merrill Lynch, Morgan Stanley, and Goldman Sachs were all facing bank runs. These would have been unstoppable without the helping hand of big government. Many other financial institutions also would have been brought down in the maelstrom, but these giants were for sure dead ducks at the time of the bailouts.   Read more…

What Americans need: An ‘idiot-proof’ retirement system

September 1, 2015 3 comments

from Dean Baker

Volatility in the stock market over the last couple of weeks has caused enormous unease among investors big and small. Tens of millions of people with much of their retirement money in the market are worried about seeing a sudden plunge in prices. Many of these people will sell their stock to protect themselves from further losses, which demonstrates the basic problem with making retirement income dependent on an unstable, unpredictable exchange.

The story is that people tend to make bad decisions when they manage their money in the stock market. They are likely to sell at a low point after the market has just taken a big tumble, as has happened in the last two weeks. Then they buy back in during a run-up, paying much more than if they’d just held on to their stock. Read more…

Quick thoughts on the stock market and the economy

August 26, 2015 15 comments

from Dean Baker

We are seeing the usual hysteria over the sharp drop in the markets in Asia, Europe, and perhaps the U.S. (Wall Street seems to be rallying as I write.) There are a few items worth noting as we enjoy the panic.

First and most importantly, the stock market is not the economy. The stock market has fluctuations all the time that have nothing to do with the real economy. The most famous was the 1987 crash which did not correspond to any real world bad event that anyone could identify.

Even over longer periods there is no direct correlation between the stock market and GDP. In the decade of the 1970s the stock market lost more than 40 percent of its value in real terms, in the decade of the 1980s it more than doubled. GDP growth averaged 3.3 percent from 1980 to 1990 compared to 3.2 percent from 1970 to 1980.

Apart from its erratic movements, the stock market is not even in principle supposed to be a measure of economic activity. It is supposed to represent the present value of future profits. This means that if people are expecting the economy to slowdown, but also expect a big shift in income from wages to profits, then we should expect to see the market rise. So there is no sense in treating the stock market as a gauge of economic activity, it isn’t.

advertisement    WEA eBooks

Green Capitalism: The God that Failed

by Richard Smith    $20
“This book is essential reading for  anyone opposed to planetary suicide.”   David Klein, Truthout

The problem is not globalization, it is selective protectionism

August 19, 2015 3 comments

from Dean Baker

In an interesting piece on the decline of the political center, E.J. Dionne wrongly lists globalization as a villain. He tells readers:

“Globalization weakens the ability of moderate governments of both varieties to deliver on their promises. Capital can flee easily to more congenial climes, undercutting a nation’s tax base and its regulatory efforts.”

Globalization should also have the effect of reducing inequality by making it easier to take advantage of lower cost professional services (e.g. physicians services, lawyers’ services, dentists’ services) except that the United States has acted to maintain or even increase barriers to trade in these areas. It should also make it easier to circumvent patent and copyright monopolies that redistribute income upward, except we have consciously pursued policies to strengthen these forms of monopolies to limit the extent to which developing countries might provide vehicles for avoidance (in contrast to tax policy). Read more…

Disciplining corporate directors: The real culprits in CEO pay

August 10, 2015 3 comments

from Dean Baker

More than five years after the passage of Dodd-Frank the Securities and Exchange Commission (SEC) finally issued rules on disclosure of CEO pay last week. The financial reform law required that corporations make public the ratio of CEO pay to the pay of a typical worker at the company. Corporate lobbyists have spent the last five years complaining that this disclosure would impose an enormous burden. After much delay, the SEC finally decided to carry through with the requirements of the law and issued specific rules for the disclosure.

This is likely to provide useful information for people interested in trends in inequality, but it does not directly address the issue. At most it will serve to provide some degree of embarrassment to the companies where this ratio is most out of line. It’s worth thinking more carefully about why CEO pay got so ridiculous and how it can be reined it. Read more…

What the Export-Import Bank debate tells us about economists

July 30, 2015 2 comments

from Dean Baker

In the recent debate on trade policy most reputable economists argued for fast track trade authority and the approval of Trans-Pacific Partnership (TPP), which is likely to be the first trade deal to be covered by the new fast-track rules. Their argument was simple; the reduction of tariffs and other trade barriers will increase efficiency and economic growth. This is the standard argument for free trade.

Given the general view within the economics profession that TPP is good policy, it is striking that so few economists have been outspoken in opposition to the reauthorization of the Export-Import Bank. The reason is that the whole point of the Export-Import Bank is to have the government subsidize selected companies by giving them access to credit at below market interest rates. This is 180 degrees at odds with free trade. It means the government is allocating credit rather than markets. It would be expected to lead to the same type of economic distortions as tariffs and quotas.

The arguments put forward in support of the Ex-Im Bank should have been especially painful to economists since they are exactly the same arguments made in support of protectionist trade measures. For example, proponents of the Ex-Im Bank routinely talked about the number of jobs supported by the bank’s loans, implying that all of these jobs would somehow disappear without subsidized loans from the Ex-Im Bank. Read more…

An $18.42 Minimum Wage? (graph)

July 29, 2015 3 comments

from Dean Baker and Nicholas Buffie

Last year, President Obama called for increasing the federal minimum wage to $10.10 an hour by the end of 2015. He argued that after 2015, increases in the minimum wage should be tied to inflation, with the minimum wage rising in line with the consumer price index.

The purchasing power of the minimum wage peaked in the late 1960s at $9.54 an hour in 2014 dollars. That is over two dollars above the current level of $7.25 an hour. While raising the minimum wage to $9.54 would provide a large improvement in living standards for millions of workers who are currently paid at or near the minimum wage, it is worth asking a slightly different question: what if the minimum wage had kept in step with productivity growth over the last 44 years? In other words, rather than just keeping purchasing power constant at the 1968 level, suppose that our lowest paid workers shared evenly in the economic growth over the intervening years. Read more…

Wolfgang Schauble, the hero of the Greek austerity crisis?

July 21, 2015 19 comments

from Dean Baker

Like many people following the negotiations between Greece and its creditors, I was inclined to see Wolfgang Schauble, Germany’s finance minister, as the villain of the story. After all, Mr. Schauble insisted on severely punitive measures for Greece as a condition for continuing support from the European Central Bank (ECB). He appeared to be the bad cop relative to others in the negotiations, such as German Chancellor Angela Merkel, who was willing to make at least some concessions to keep Greece in the euro. But a more careful analysis arguably leads to the opposite conclusion.

Schauble did not argue for throwing Greece out of the euro simply as a punitive measure, although he quite obviously disapproved of the way Greece had run its budget and its economy. He argued, quite possibly sincerely, that at least a temporary departure from the euro zone would be the best path forward for Greece.  Read more…

Why people aren’t working; can we talk about the Fed?

July 17, 2015 2 comments

from Dean Baker

In her WaPo column Catherine Rampell points to the sharp decline in labor force participation rates for prime age workers (ages 25-54) in recent years and looks to the remedies proposed by Jeb Bush and Hillary Clinton. Remarkably neither Rampell nor the candidates discuss the role of the Federal Reserve Board.

There is not much about the drop in labor force participation that is very surprising. It goes along with a weak labor market. When people can’t find a job after enough months or years of looking, they stop trying. Here’s what the picture looks like over the last two decades.

prime age lfpr

Read more…

Damn, China has too few people again

June 15, 2015 1 comment

from Dean Baker

Regular readers of the NYT opinion pages must really be wondering what is going on in China. Just a few days ago the paper ran a piece giving us the terrible news that robots are taking all the jobs. According to a column by Martin Ford, China is rapidly bringing robots into its factories, leading to massive displacement of manufacturing workers. Ford tells readers:

“Chinese factory jobs may thus be poised to evaporate at an even faster pace than has been the case in the United States and other developed countries.”

This left us all wondering what China would do with all these workers displaced by robots. But today we discover that China is relaxing its one-child policy, not out of human rights considerations but because it doesn’t have enough people: Read more…

Krugman, inequality, and growth

June 8, 2015 7 comments

from Dean Baker

Paul Krugman questions whether there is an existence of positive relationship between equality and growth. He rightly cautions those on the left against being too quick to accept the existence of such a relationship.

He uses a simple graph showing the relationship between inequality and growth per working age person in the years 1985 to 2007. His takeaway is that there is not much a positive relationship, but there clearly is no negative relationship between equality in growth. In other words, the people who are that we need to have more inequality to support stronger growth have a hard case to make using this simple comparison.

I would suggest taking the analysis one step further. One big difference between countries over this period is the extent to which they opted to take the benefits from growth in more leisure time. There are large differences in the decline in the length of the average work year across countries.  Read more…

U.S. lags badly in employment of prime-age workers

May 13, 2015 3 comments

from Dean Baker

In 2006, before the recession hit, there was not much difference in the employment rate for prime-age (ages 25–54) workers in the United States and other wealthy countries. The employment to population ratio (EPOP) for prime age workers in the United States was 79.8 percent. That was slightly below the 81.2 percent rate in France and the United Kingdom, but slightly above the 78.8 percent rate in Germany.

However, the recession has seriously altered the patterns of employment of prime age workers. According to the latest OECD quarterly data, Germany and Japan both now have EPOPs for prime age workers that are well above their pre-recession levels, at 83.4 percent and 82.6 percent, respectively. The EPOP for prime age workers in the U.K. has risen slightly to 82.3 percent, while it has fallen slightly to 80.4 percent in France.

Read more…

Pain versus gain: Argentina, Greece, and Paul Volcker

May 7, 2015 1 comment

from Dean Baker

The NYT has a column by Uki Goni, warning of the bad things that will face Greece if it defaults. The default by Argentina in December of 2001 provides the basis for his warnings.

“Economic activity was paralyzed, supermarket prices soared and pharmaceutical companies withdrew their products as the peso lost three-quarters of its value against the dollar. With private medical insurance firms virtually bankrupt and the public health system on the brink of collapse, badly needed drugs for cancer, H.I.V. and heart conditions soon became scarce. Insulin for the country’s estimated 300,000 diabetics disappeared from drugstore shelves.

“With the economy in free fall, about half the country’s population was below the poverty line.”

There is no doubt that the people of Argentina suffered serious hardship due to the default. However it is important to recognize that they were suffering severe hardship even before the default. The economy contracted by 8.4 percent since its peak in 1998, and contracted by 4.4 percent in 2001 alone. The unemployment rate had risen to more than 19.0 percent. Even worse, there was no end in sight.  Read more…

The man who completely missed the housing bubble and was convinced financial disruption would be restricted to the subprime market deserves two seven-figure sinecures?

May 6, 2015 2 comments

from Dean Baker

I hate to be picking on Matt O’Brien again, but come on, this is setting the bar pretty goddamn low. He began a piece reporting on a consulting gig that Bernanke will have the bond fund Pimco by telling readers:

“If anyone deserves two seven-figure sinecures, it’s Ben Bernanke.”

I won’t go over the full indictment of Ben Bernanke and will give him credit for a reasonably good job trying to boost the economy post-crash in the wake of the outraged opposition of the right-wing, but let’s get real. The housing bubble and ensuing crash were not natural disasters like Hurricane Katrina. Read more…

Is the stock market in another bubble?

May 1, 2015 5 comments

from Dean Baker

The stock market has recovered sharply from the lows hit in the financial crisis. All the major indices are at or near record highs. This has led many analysts to worry about a new bubble in the stock market. These concerns are misplaced.

Before going through the data, I should point out that I am not afraid to warn of bubbles. In the late 1990s, I clearly and repeatedlywarned of the stock bubble. I argued that its collapse was likely to lead to a recession, the end of the Clinton-era budget surpluses, and pose serious problems for pensions. In the last decade I was yelling about the dangers from the housing bubble as early as 2002. 

I recognize the dangers of bubbles and have been at the forefront of those calling attention to them. However, it is necessary to view the picture with clear eyes, and not scream “fire” every time someone lights a cigarette.  Read more…

Correction to Mankiw: Economists actually agree, just because you call something “free trade” doesn’t make it free trade

April 29, 2015 2 comments

from Dean Baker

Greg Mankiw joined the parade of prominent people saying silly things to help push fast-track trade authority through Congress. He headlined a column:

“Economists actually agree on this point: The Wisdom of Free Trade.”

The piece then goes on to argue for fast-track trade authority to allow for the passage of the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Pact (TTIP).

It’s nice that Mankiw has apparently gotten out his bag of economist’s holy water and blessed them both as free trade agreements, but that doesn’t make it true. (Hey, I want to have the Congress Gives $1 Trillion to Dean Baker Free Trade Act. As an economist in good standing, Mankiw will have to support this free trade measure.) Read more…


Get every new post delivered to your Inbox.

Join 12,421 other followers