The NYT had an excellent editorial on the Fed and interest rates today that nailed the main points very well. The piece pointed out that if the Fed raises rates it will slow the economy and keep people from getting jobs. There are two points that would provide a useful addendum to this piece.

First, the Fed's actions on interest rates swamp the importance of almost every government spending program designed to help low and moderate income people. There were big battles in Washington in the last couple of years over Republican proposals to cut food stamps by $4 billion a year. If the Fed keeps the unemployment rate one percentage point higher than a level it could reach without triggering an inflationary spiral then it would be preventing close to 3 million people from working. (A rule of thumb is that for the number of people not currently in the labor force who find a job is roughly equal to the number of unemployed people who find a job.)

In addition to allowing millions more people to work, lower unemployment will vastly improve the situation of people at the lower end of the pay ladder by both allowing them to work more hours (for those who choose to do so) and also by giving them the bargaining power to get higher pay. The analysis by my colleague John Schmitt shows that a sustained one percentage point drop in the unemployment rate translates into 9.8 percent higher wages for workers in the bottom fifth of the wage distribution. For someone earning $20,000 a year, that means a pay increase of $2,000. In short, this is a huge deal for people who really need the money. It matters way more than the potential cut to food stamps, which is not to say people were wrong to fight that cut.

The second point is that the track record of the economists screaming about inflationary pressures and the need to clamp down before we get Zimbabwe-style hyper-inflation is nothing short of abysmal. As Paul Krugman regularly points out (here, for example), these people have been screaming about inflation for the last four years. However the track record is even worse than Krugman's complaints imply.

We have been here before. Back in the mid-1990s the absolute consensus in the economics profession was that the unemployment rate could not get much below 6.0 percent without triggering inflationary pressures. This was a view held not only by conservative economists, but by liberals like Janet Yellen, Alan Blinder, and Paul Krugman. Fortunately, Federal Reserve Board Chair Alan Greenspan was not a mainstream economist. He argued there was no evidence of inflationary pressures, therefore he saw no reason to keep the unemployment rate from falling below the 6.0 percent threshold. 

The unemployment rate fell below 5.0 percent in 1997 and was at 4.0 percent as a year-round average in 2000. Not only were millions of people to get jobs who would not have otherwise been able to work, workers at the middle and bottom of the wage ladder saw sustained real wage growth for the first time since the early 1970s. And, there was a huge swing from budget deficits to budget surpluses, giving the country the budget surpluses that the Clintonites always celebrate.

Anyhow, given the abysmal track record of nearly all economists in predicting the course of inflation and the general economy (can you say collapsed housing bubble?), any economist insisting that the Fed raise rates to prevent inflation should be asked one simple question: when did you stop being wrong about the economy?

Yes folks, apparently we apparently don't have enough people trained as truck drivers. Slate gives us yet another example of the skills shortage in the U.S. economy. Apparently there are not enough truck drivers.

The Bureau of Labor Statistics doesn't publish data directly on truckers' pay, but if we look at the larger category of transportation and warehousing, the data show the real average hourly wage has risen by 1.7 percent over the last seven years. This an annual rate of just over 0.2 percent. 

If we had more skilled people running trucking companies they would realize that they could bid away drivers from their competitors and get more people to learn to drive trucks if they offered higher pay.

Floyd Norris has an interesting piece documenting the surge in construction of multi-family units at the same time that construction of single-family homes remains weak. He attributes this to a weakness in the sales market with more people renting rather than owning.

This conclusion does not necessarily follow from the data. Many multi-family units are built as condos (come to DC and you will see what I mean). The price of condos in many markets has soared in recent years. The five cities for which the Case-Shiller condo index has data show increases in price since January 2012 of 42.1 percent in Los Angeles, 63.5 percent in San Fransisco, 28.7 in Chicago, 22.8 percent in Boston, and 22.1 percent in New York. It is certainly plausible that the rise in construction of multi-family units is an effort by builders to take advantage of this price surge. 

The media have been full of reports of employers who are too incompetent to raise wages and therefore can't find the workers they say they need (e.g. here). Today Talking Points Memo gave us a story of an employer that apparently doesn't even know the basics of the Affordable Care Act (ACA).

According to the story, the Chicago Cubs cut back the hours of their grounds crew to keep them under the 30 hour weekly limit above which employers are required to provide insurance or pay a fine. As a result of not having the crew available, the team was slow to get out a tarp to cover the field during an expected rainstorm. The poor condition of the field later led the umpires to call the game, which would have left the Cubs with a victory.

However the San Francisco Giants protested the decision, since the poor condition of the field was due to the failure of the Cubs to protect the field promptly. The league agreed with the protest; the first time a protest had been upheld in 28 years.

The problem with this story is that employer sanctions are not in effect for 2014. In other words, the Cubs will not be penalized for not providing their ground crew with insurance this year even if they work more than 30 hours per week. Apparently the Cubs management has not been paying attention to the ACA rules. This is yet another example of the skills gap that is preventing managers from operating their businesses effectively.

Floyd Norris had an interesting piece discussing the conflict of interest problems with company auditors and also the bond rating agencies that rate securities issued by banks. The basic problem is that since both are paid by the companies who hire them, they have a strong incentive to give a positive assessment regardless of the reality of the situation. This was a huge problem in the housing bubble years when the credit rating agencies gave trillions of dollars' worth of mortgage backed securities top investment grade ratings even though they were filled with dicey mortgages.

In fact, there is a relatively simple solution to the conflict faced by bond rating agencies which actually was put forward as part of Dodd-Frank. Senator Franken proposed an amendment, which was approved overwhelmingly in a bi-partisan vote, which would have had the Securities and Exchange Commission (SEC) pick the credit rating agency. (I worked with Senator Franken's staff on designing this plan.) This plan would have eliminated the conflict of interest since a negative rating would not reduce the probability of being hired for further work.

This amendment was stripped out in conference committee, with the support of the Obama administration, as Timothy Geithner indicated in his autobiography. The argument against the proposal said a great deal about the corruption underlying the debate on this issue.

The concern was supposedly that the SEC might choose a rating agency that wasn't qualified to rate a particular issue. The absurdity of this concern should be apparent on its face. The SEC would not be sending Bozo the Clown to rate these issues, they would be sending professional auditors. Of course the correct way for a professional auditor to respond if they see an issue they don't understand is to say that they can't rate it, which would then allow the SEC to pick an agency that has auditors who can rate it.

However there is an even more basic issue, why are banks securitizing issues that professional auditors can't understand? It is highly likely that if the professional auditors employed by credit rating agencies can't understand an issue then many of the investors who will buy the issue also will not be able to understand it. In that case, it is probably best for the economy that the issue not be marketed.

All of this should be pretty evident on a moment's reflection, but in a world where Wall Street controls the debate on such issues, this simple logic was completely excluded from the debate.

For some reason the folks at the NYT business desk are having a hard time understanding what is going on with the dispute over Argentine debt. An article today refers to the hedge funds that have forced Argentina into a second default as "holdout investors." It reports that Argentina refers to them as "vultures."

This hugely obscures the basic facts, which are not really in dispute. The funds that have pressed their suit in U.S. courts against Argentina did not hold its debt at the time of the default in December of 2001. They bought it up later at sharply reduced prices. Since purchasing the debt they have tried to use legal pressure to force Argentina to pay the full face value of the bonds.

This is exactly what "vulture funds" do. That is not a term that was invented by Argentina to denigrate these funds, it is a common term used to describe the type of activities that the Elliott Management Corporation (the lead actor in the lawsuit) is pursuing in this case. As a practical matter, there are almost no "holdout" investors involved in this action. Almost all of the original holders of Argentine debt accepted the terms offered by the government. Most of those who did not accept the terms sold their bonds to investors like Elliott Management.

There are tens of millions of people in the United States who completely reject the theory of evolution and believe that humans were created more or less in their current form in the recent past. Similarly, there are many people who completely reject modern economics and insist that countries cannot suffer due to a lack of demand. In their creationist economics view, the main reason that economies experience economic stagnation is government protections for ordinary workers. These economic creationists apparently control reporting on the French economy in the New York Times.

A piece headlined "France acknowledges economic malaise, blames austerity," effectively dismisses the idea that the economic malaise actually is attributable to austerity as a large body of economic research would suggest. While it does note that there is reason for believing that austerity has contributed to slow growth it concludes by telling readers that the real problem is France's rigid labor market.

"On Wednesday, Mr. Hollande called on European Union leaders to make growth their priority, saying that the focus on raising taxes and slashing spending amid downturns had proved a disaster for the European recovery.

"But some saw his move as little more than a public relations ploy.

"'Even though they’re taking so many painful measures, they have to explain to the French why the economy is not doing well and in fact is doing worse,' said Famke Krumbmüller, a Europe analyst at the Eurasia Group in London.

"As a result, Ms. Krumbmüller said, Mr. Hollande appeared to be trying to shift blame to Europe, rather than trying to tackle more difficult overhauls in areas like France’s notoriously rigid labor market, which employers say constrains hiring and investment.

"'The message is, we’ve done our job, now Europe needs to do its job, which is favoring growth,' Ms. Krumbmüller said. 'The interpretation is that is we’ve done everything we can do in the current political circumstances, and we won’t go further.'"

France's weak growth is exactly what would be expected given the spending cuts and tax increases that have been demanded by the European Union. It is difficult to see why anyone familiar with economics would differ with the view put forward by Mr. Hollande. It will be very difficult for the country to sustain much growth in a context where it is making large cutbacks to spending and also increasing taxes. The weakness of the economy is compounded by the slow growth of its major trading partners, many of whom are also practicing austerity.

It really should not be hard for Mr. Hollande to explain this reality to the French people. It would be expected that a country that cuts its budget deficit in a weak economy would further weaken its economy. This is not an effort to "shift blame" as asserted by the NYT's source, it is an effort to describe reality.

The piece also needlessly confused many readers by reporting quarterly growth rates instead of annualized growth rates. It told readers that Germany's economy contracted 0.2 percent in the second quarter. It is standard practice in the United States to report growth at annual rates. (The figure would be 0.8 percent as an annual rate.) It is likely that most readers thought this figure was an annual rate since it was never identified as a quarterly growth rate.

The Washington Post had an article on grassroots efforts to try to influence the Federal Reserve Board's decisions on monetary policy. It would have been helpful if the piece provided more background on the Fed's institutional structure and decision-making process.

The Fed's decisions on monetary policy (e.g. raising or lowering interest rates and quantitative easing) are made by the 19 member Federal Reserve Open Market Committee (FOMC). This committee includes seven governors who are appointed by the President and approved by Congress. The term is 14 years, although governors rarely serve out a full term. The chair is one of the seven governors, although their term as chair is just 4 years.

The other 12 members of the FOMC are the presidents of the district banks. These presidents are essentially appointed by the banks within the district. Only five of the 12 bank presidents have a vote. The president of the New York bank always has a vote, with the other 4 voting slots rotating annually among the other 11 bank presidents. This structure ensures that the banking industry's concerns will get a full hearing at Fed meetings. The concerns of workers whose jobs and wages depend on the Fed's decisions may not be heard.

At one point the article discusses public protests against Paul Volcker's decision to raise interest rates when he was chair of the Fed in the early 1980s. It tells readers that the protests did not affect Volcker's decisions at all. Whether or not this is true, that does not mean that the protests had no impact on the Fed's actions. Volcker had to get the support of the majority of the FOMC to get his way on monetary policy. If the protests affected the views of other members then Volcker would have been forced to take these views into account in setting policy. For this reason the focus on Volcker badly misleads readers on the potential impact of public protests.

In assessing the potential impact of public protests on Fed policy it is perhaps worth going back to the 1990s when there were also some public efforts, sponsored by unions and community groups, to influence Fed policy. In the years 1995-1996 the unemployment rate was falling below the 6.0 percent threshold that nearly all mainstream economists considered a floor. The conventional view held that if the unemployment rate fell below this level it would cause inflation to start to cycle upward.

Alan Greenspan, who was not a mainstream economist, was chair of the Fed at the time. He argued that there was little evidence of inflationary pressures and therefore no reason to raise interest rates and slow the economy. He had to overcome the opposition of several prominent FOMC members, including the current chair Janet Yellen, who was a governor at the time. Because there were public efforts to keep interest rates down, Greenspan did not have to worry about a strong consensus in the policy world for raising interest rates. This made it easier for him to carry the day and keep interest rates low.

The benefits from this decision were enormous. By allowing the unemployment rate to fall below 6.0 percent (it eventually hit 4.0 percent as a year-round average in 2000) more than 5 million people were able to get jobs. Furthermore, the tighter labor market allowed tens of millions of workers at the middle and the bottom of the wage distribution to see sustained wage gains for the first time since the early 1970s.

And, for those deficit cultists in Washington, the lower unemployment and more rapid growth led to a large improvement in the budget situation. Instead of the deficit of 2.3 percent of GDP projected by the Congressional Budget Office for 2000, back in 1996, the government actually ran a surplus of 2.5 percent of GDP. This shift from deficit to surplus of almost 5 percent of GDP would be the equivalent of $850 billion in 2014, or to use the full 10-year budget horizon, the equivalent of almost $10 trillion in deficit reduction.

The moral of the story is first, that public pressure on the Fed can have an impact on its decisions, which otherwise are likely to be far too responsive to bankers' concerns about inflation. The second, and at least as important, moral is that the consensus in the economics profession is often completely off the mark. This was certainly true in the 1990s when economists across the political spectrum agreed that the unemployment rate could not fall much below 6.0 percent without triggering inflation. The country would have paid an enormous price if mainstream economists had been able to determine policy back then. There is little reason to believe that the mainstream of the economics profession has a better understanding of the economy today. 

That's the complaint of Steven Davidoff Solomon in a NYT column today. His complaint is that three people, who are small shareholders, repeatedly bring resolutions that have to be voted on by all shareholders. His argues that these resolutions rarely pass, however they cost the companies tens of millions of dollars a year to field votes.

There are two problems with the logic of this argument. First, we have no sense of the potential payoffs from these resolutions. Since most corporations are largely controlled by top management they able to secure pay for themselves that is two or three times what they would get working in comparable positions in countries like Germany or Japan. If a resolution can bring compensation more in line with the company's international competitors, it can save shareholders hundreds of millions of dollars a year in excessive payments.

The other issue is whether these resolutions might result in changes in corporate behavior even if they are not passed. The study from the Manhattan Institute which provided the basis for the column did not consider this issue. If a resolution causes companies to change their behavior by calling attention to improper practices then it can have large benefits for shareholders even if it is not approved. 

William Cohan had a column in the NYT noting that the Justice Department's settlements with the major banks over their securitization of fraudulent mortgages largely let the banks off the hook. His alternative route would have been criminal (as opposed to civil) prosecutions of the banks. While this may have led to more severe consequences for the banks and their current shareholders, it still would have allowed most of the people responsible off the hook.

In most cases, the top executives who set the course for the banks during the housing bubble years have moved on. They are either retired or employed elsewhere. Therefore they would not be affected by harsh punishments directed at their former employers. If the point is to have a sanction that will provide a serious disincentive to illegal actions then the Justice Department should have been trying to criminally prosecute the bankers themselves.

Knowingly packaging and selling fraudulent mortgages is fraud. It is a serious crime that could be punished by years in jail. The risk of jail time is likely to discourage bankers from engaging in this sort of behavior. The risk that their former employer may face serious sanctions years after they have left will not.

That's what can be inferred from his column calling for an end to tenure for public school teachers. Job security is part of the pay package for public school teachers. If they can expect less job security, it effectively amounts to a cut in pay. This would be expected to make teaching a less attractive career path compared with the alternative choices.

As a practical matter, there are few (if any) school districts that do not have provisions that allow even tenured teachers to be fired if they are not competent. This may not happen in many cases because their principals are too lazy to document the incompetence, or the higher ups in the school district don't provide them the resources they would need to ensure that classes are being well-taught. These latter problems will not be addressed by the ending of tenure.

This is the issue that Andrew Biggs implicitly raises in his Wall Street Journal column highlighting the jump in the size of the projections of the Social Security shortfall since 2008. Biggs complains that progressives have responded to the economic collapse by proposing an increase in benefits that would make the shortfall even larger rather than supporting plans for eliminating the projected shortfall. While Biggs' focus is explicitly the solvency of the program, the actions of progressives can only be understood against the larger economic context.

The calls for expansion of benefits are at least in part a response to the economic collapse.It's worth noting that this collapse was 100 percent preventable and that it was one of the worst blunders in the history of economic policy-making in the history of the world. Unfortunately the top economic advisers in both political parties whose errors were responsible did not have their standing affected by this mistake.

As a result of the collapse, many people nearing retirement saw much of their savings disappear as the stock market collapsed, house prices plummeted and they lost their jobs during their peak savings years. This meant that millions of workers had to draw down their savings to support their families at a point where they had planned to be accumulating wealth for retirement. In addition, due to the weakness of the labor market created by high unemployment, tens of millions of workers have seen stagnant wages over the last six years when they could have expected to see real wage growth in the neighborhood of 1.0 percent annually had the economy continued on the path projected in 2008.

In short, the collapse hugely increased the need for Social Security, which is the basis for the response of progressives. Biggs is correct that the cost of additional benefits will have to be covered at some point, but there is no obvious reason that it is necessary to come up with the full plan today. Part of the cost can be recovered by increasing the payroll cap as has been proposed by people across the political spectrum.

It is likely that we will need some increase in the payroll tax at some point, but there is little reason that the exact timing needs to be pinned down today. In the decade from 1980 to 1990 the payroll tax increased by over 2.0 percentage points. In spite of this hike, many conservatives tout the eighties as an economic golden age. It is difficult to see why it would be such a disaster if there were a comparable increase somewhere over the next three decades.

Workers care about their after-tax wages which are primarily determined by what they earn before taxes. Due to economic mismanagement and trade and regulatory policies that were designed to redistribute income upward, most workers have seen very little growth in before-tax wages over the last three decades. If they get an even share of the projected growth in compensation over the next three decades, then before tax compensation will be almost 60 percent higher in 2044 than it is today. It is understandable that progressives would be more focused on ensuring that workers get their fair share of economic growth than the risk 3-4 percent of these gains might be taken back in tax increases to support their retirement.

Robert Shiller had a piece in the Sunday NYT noting that the S&P 500 was unusually high relative to his measure of trailing earnings. He calculated a ratio above 25, far above the historic average of 15. Shiller said that in the past, each time this ratio crossed 25 the market took a plunge shortly thereafter. He concludes his piece by seeing it as a mystery that the market remains as high as it does.

Brad DeLong picks up on Shiller's analysis and points out that in most cases in the past where Shiller's ratio had exceeded 25, people who held onto their stock over the next decade would still have seen a positive real return. He notes the examples in the 1960s when investors would have seen a negative ten-year return, even though Shiller's ratio was below the critical 25 level. He therefore concludes there is no issue.

I would argue there is an issue, although not quite as much as Shiller suggests. To get at the problem, we have to recognize that stock returns, at least over a long period, are not just random numbers. Both Shiller and DeLong treat this as a question of guessing whether an egg will turn into a lizard or chicken based on the distribution of past hatchings that we have witnessed.

That would be a reasonable strategy if that is the only information we have. But if we saw that one of the eggs was laid by a hen, then we may want to up our probability estimate that it will hatch into a chicken.

In the case of stock returns we can generate projections based on projections of GDP growth, profit growth, and future price to earnings ratios. For example, we may note that the ratio of stock prices to after-tax corporate profits for the economy as a whole was 22.3 at the end of 2013. (This takes the value of stock from the Financial Accounts of the United States, Table L.213, lines 2 plus 4 for market valuation. After-tax corporate profits are from the National Income and Product Accounts, Table 1.10, Line 17).

This means that earnings are roughly 4.5 percent of the share price. If companies pay out 70 percent of their earnings as dividends or share buybacks (roughly the average), this translates into a 3.1 percent real return in the current year.

The Washington Post had an article reporting on the more rapid job growth in higher paying sectors of the economy in the last six years. At one point the piece tells readers:

"Even before the recession began, the economy was experiencing what academics call job polarization: growth at the high and low ends of the pay scale, but not much movement in the middle. Two major factors drove this shift: new technologies that replaced some skilled workers and increased competition from the international labor market."

Actually this is not true. Since 2000 both high and middle wage occupations were declining as a share of total employment. Only low-paying occupations saw an increase in their share of total employment.

The Washington Post had a major front page story reporting on scammers pushing unneeded motorized wheelchairs to seniors. Medicare pays roughly $5,000 for each chair, which allows for a large profit to suppliers as well as payments to intermediaries who would push the chairs to people who did not need or want a motorized wheelchair.

The piece is a useful exposure of a major scam operation, however it never puts the cost of the scam in a perspective that would be meaningful to most readers. At one point it tells readers that Medicare spent a Really Big Number ($8.2 billion) on these motorized wheelchairs since 1999. It would have been helpful to inform readers that this amounted to 0.14 percent of the $5.8 trillion that Medicare paid out over this period. 

Of course not all of the payments were made for unnecessary wheel chairs. If 60-70 percent of the wheel chairs were not needed, then fraudulent sales would come to roughly 0.1 percent of Medicare spending over this period.

This is hardly a trivial sum, but by failing put the numbers in context readers may wrongly be lead to believe that the Medicare program is grossly inefficient because of such scams. In fact, because the program has much lower administrative costs than the private sector (@ 2 percent for Medicare compared to 15-20 percent for private insurers), the country is still saving an enormous amount of money because the government is providing Medicare rather than private insurers.

If administrative costs were at the level of the insurance industry, Medicare would have cost between $600 billion and $900 billion more since 1999. It is also worth noting that private insurers are also often victims of scams.

 

Note: The figure for administrative costs for Medicare refers to the traditional fee for service Medicare program. Parts C and D, which are administered by private insurers, have considerably higher costs.

Floyd Norris has an interesting column comparing the numbers of job openings, hirings, and quits from 2007 with the most recent three months in 2014. The most striking part of the story is that reported openings are up by 2.1 percent from 2007, while hirings are still down by 7.5 percent. 

While Norris doesn't make this point, some readers may see this disparity as evidence of a skills gap, where workers simply don't have the skills for the jobs that are available. If this is really a skills gap story then it seems that it is showing up most sharply in the retail and restaurant sectors. (Data are available here.) Job openings in the retail sector are up by 14.6 percent from their 2007 level, but hires are down by 0.7 percent. Job opening in the leisure and hospitality sector are up by 17.0 percent, while hiring is down by 7.4 percent.

If the disparity between patterns in job openings and hires is really evidence that workers lack the skills for available jobs then perhaps we need to train more people to be clerks at convenience stores and to wait tables. 

In one of the more remarkable shows of chutzpah in modern economic policy, Martin Feldstein and Robert Rubin penned a joint oped in the Wall Street Journal warning that the Fed needs to take seriously the risk of asset bubbles. The basis for the chutzpah is that this column is appearing in the summer of 2014 instead of the summer of 2004, when it could have saved the United States and the world from an enormous amount of suffering.

Had these men written a similar column in 2004 warning about the housing bubble (as some of us were desperately trying to do at the time) it undoubtedly would have received enormous attention in both the policy and financial community. Both men were considered the pillars of economic wisdom for their respective parties. Feldstein served as head of the Council of Economic Advisers under President Reagan and had trained most of the other leading lights of conservative economics. Rubin has served as Treasury Secretary under President Clinton and had advanced the careers of figures like Larry Summers and Timothy Geithner.

Unfortunately, instead of warning of the bubble, they were profiting from it. Rubin was a top executive at Citigroup, which was one of the biggest actors in the securitization of subprime mortgages. Feldstein was on the board of AIG, which was issuing credit default swaps on mortgage backed securities with a nominal value well into the hundreds of billions. 

For what its worth, their current warnings are misplaced. The Fed has to concentrate on trying to promote growth and getting people back to work. The risk from inflated asset prices that they identify are primarily a risk that some hedge funds and other investors may take a bath when asset prices (like junk bonds) move to levels that are more consistent with the fundamentals.

Unlike the housing bubble, these inflated asset prices are not driving the economy. This means that the economic repercussions of a decline in the price of assets like junk bonds will be largely limited to the losses of the people who invested in them. That is the way a market economy works. People make bets and some lose, so what?

It is also worth noting that Federal Reserve Chair Janet Yellen is far ahead of Feldstein and Rubin on the problem of bubbles. Last month she warned of the over-valuation of some assets in her congressional testimony. Since then the price of these assets, notably junk bonds, has fallen, reducing the potential risk they pose to the financial sector. It makes far more sense to deal with out of line asset  prices by trying to use targeted actions to bring them back into line than to throw millions of people out of work, and reduce the bargaining power of tens of millions more, by raising interest rates.

Matt O'Brien had a good piece in Wonkblog pointing out that the current downturn in the euro zone has been worse for these countries than the Great Depression. However it does get part of the story wrong.

At one point it outlines the troubles of the region:

"The combination of zombie banks, a rapidly aging population and, most importantly, too-tight money have pushed it into a "lowflationary" trap that makes it hard to grow, and is even harder to escape from. That's what happened to Japan in the 1990s, and now, 20 years later, its nominal GDP is actually smaller than it was then."

The aging of the population, and therefore a slow-growing or declining labor force, does not belong on the list of problems here. What matters for well-being is per capita growth. (That is not the only thing that matters, but insofar as GDP matters it is GDP per capita.) If the population is growing very slowly or even shrinking slowly, it will likely be associated with lower overall growth, but not necessarily with lower per capita GDP growth.

Germany has managed to get its unemployment rate down to 5.1 percent, compared to 7.8 percent before the downturn, in spite of having considerably lower growth than the United States over this period. Its employment rate for prime age workers (ages 25-54) has risen by 3.0 percentage points, compared to a drop of 3.5 percentage points in the United States. 

As a result of its slow population growth, few in Germany would see its slow economic growth as being a problem. In fact, most view the economy as being relatively prosperous right now. This is one of the reasons that the country is reluctant to support measures that would help its neighbors, since Germany is not really sharing in their pain at the moment. Similiarly, Japan's slow population growth meant that most people in the country were not suffering in the way that its weak GDP growth may have suggested.

In its report on retail sales in July, the Washington Post told readers that consumers are being "cautious," since there was little increase from June's levels. Actually, with the saving rate hovering between 4-5 percent of disposable income, consumers are spending about as much as we can reasonably expect them to spend.

The current saving rate is well below the level of the pre-bubble years, which averaged close to 8.0 percent. The ephemeral wealth of the stock and housing bubbles drove the saving rate to lower levels. But if we pull out these unusual periods, the current saving rate is unusually low, not high as the Post article would imply.

Matt O'Brien had an interesting post in Wonkblog on the market reactions to Abenomics. O'Brien points out that the rise in Japan's stock market and the fall in the value of the yen since Abe took office are the result of market movements when Japan's markets were closed. This means that the movements in the stock market were driven by traders in Europe, the United States and elsewhere. O'Brien shows that Japan's stock market has actually declined slightly in the period when the Japanese market was open and the yen has risen in value, implying that Japanese investors don't share the views of foreign investors.

This takeaway is not quite right. It is important to remember that the outstanding amount of equity or currency vastly exceeds the amount that is bought and sold in a day or month. Japanese investors obviously noticed the dramatic rise in the stock market and the fall in the yen over the last year and a half. If they did not believe that these movements were based on solid economic foundations, presumably they would have sold their stock and bought yen in a way that offset these movements.

To see this point, imagine you had shares of stock in a company that were trading at $100 per share. Imagine you went away on vacation for two weeks, out of reach of the Internet. When you came back you discovered that the shares were selling at $150 each. If you did not believe that the higher price accurately reflected the outlook for the company's future profit potential, then presumably you would dump your shares and pocket the profit. 

This is clearly not going on in Japan. While the actions of Japanese traders may very slightly be offsetting the enthusiasm of foreign investors, for the most part they obviously share this enthusiasm or they would not be willing to hold the stock of Japanese companies at current prices.

Harold Meyerson had an interesting column about how the problem of inequality is not just about low wages at the bottom, but also about people at the top ripping us off. However part of his story is not exactly right.   

At one point the column tells readers:

"As a recent study in the Harvard Business Review concluded, a 'survey of chief financial officers showed that 78% would "give up economic value" and 55% would cancel a project with a positive net present value — that is, willingly harm their companies — to meet Wall Street’s targets and fulfill its desire for "smooth" earnings.'"

While Meyerson portrays this smoothing as benefiting shareholders, as he describes the process, it is actually coming at the expense of shareholders. If the company is sacrificing long-term profitability to meet earnings targets then most shareholders are likely losing in this deal. The most likely winners would be top managers whose bonuses are tied to meeting earnings targets or who have options coming due at specified times.

This distinction is important since it describes alternative political paths. The situation as Meyerson describes it clearly indicates the potential of an alliance with shareholders against top management. Since CEOs and other top management are an important part of the 0.1 percent, reducing their pay could have a substantial impact on income distribution, especially when the spillover effects are taken into account.

In this case, the nature of the problem is a corporate governance structure in which the directors, who are the immediate governing body of the corporation, act in the interest of top management instead of shareholders. Empowering shareholders would then be an effective way to rein in CEO pay.


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