The following newsletter highlights CEPR's latest research, publications, events and much more.
CEPR on No-Vacation Nation, Redux… CEPR’s latest paper, “No-Vacation Nation Revisited” by former CEPR Research Associate Rebecca Ray, Program Assistant Milla Sanes, and Senior Economist John Schmitt, finds that the United States is the only advanced economy that does not guarantee its workers any paid vacation time. As a result, almost 1-in-4 Americans do not receive any paid vacation or paid holidays, trailing far behind most of the rest of the world's rich nations.
The new report revisits an analysis originally performed by CEPR researchers six years ago. Since the 2007 CEPR study, the U.S. has made up none of the gap with the rest of the major economies that are members of the Organization for Economic Cooperation and Development (OECD). “It is striking that six years after we first looked at this topic absolutely nothing has changed. U.S. law and U.S. employer behavior still lags far behind the rest of the rich countries in the world,” said John. He elaborated on these themes in a discussion on HuffPost Live with Joe Robinson, founder of the Work To Live Campaign and Ellen Bravo, Executive Director of Family Values @ Work. John was also interviewed by WWL Radio’s The Tommy Tucker show.
And on Workplace “Flexibility” CEPR also weighed in on the"Working Families Flexibility Act of 2013." As CEPR Senior Economist Eileein Appelbaum wrote in this April op-ed for The Hill: “Touted by House Republicans as a new comp time initiative that will give hourly-paid workers the flexibility to meet family responsibilities, it is neither new nor about giving these workers much needed time off to care for their families… Its major effect would be to hamstring workers – likely increasing overtime hours for those who don't want them and cutting pay for those who do.”
Eileen reiterated these points in this interview that aired on NPR’s Morning Edition, Eileen was also quoted in this Time magazine article as well as this piece that appeared on NBCNews.com’s First Read. Eileen addressed these and similar issues in several op-eds timed to coincide with Mother’s Day. Here she is in the Huffington Post, and she penned this piece for US News and World Report.
The 2013 Social Security and Medicare Trustees reports will be released tomorrow. There is much discussion in policy circles of how the cost of these programs is projected to rise over the next three decades due to both the retirement of the baby boom cohorts and the increased cost of health care, which is the main factor behind the projected increase in Medicare costs. These projected cost increases have frequently been presented as implying a disastrous scenario for today’s young. In today’s edition, economist Dean Baker of the Center for Economic and Policy Research examines how the cost of these programs is likely to affect the financial well-being of our children and grandchildren:
Disaster stories about rising Social Security and Medicare costs ignore the fact that the tax increases projected over the next three decades are not very different than the tax increases that we have actually seen since 1980. Furthermore, the far more important factor in determining the well-being of our children and grandchildren is the extent to which their before tax wages increase in the decades ahead.
Starting with the issue of tax increases, if we assume that the projected shortfall in Social Security is met entirely by increasing the size of the payroll tax, according to the 2012 Trustees Reports it would be necessary to have an increase in the tax of 3.91 percentage points by 2045.
This assumes that there are no cuts in scheduled benefits, no other taxes are used to finance Social Security and the cap on wage income subject to the Social Security tax (currently around $113,000) is not raised.
In the 2012 Medicare Trustees report, the projected increase in the tax needed to keep the program fully solvent in 2045 was 1.91 percentage points.
It is worth noting that the size of the projected shortfall in Medicare has fallen by more than 60 percent since 2008, from 3.54 percent of payroll to 1.35 percent of payroll in 2012.
This is in spite of the fact that the change in the 75-year projection period would have increased the projected shortfall by close to 0.20 percentage points.
The combined tax increase needed to keep both programs fully funded in 2045 under the 2012 projections was 5.81 percentage points.
By comparison, since 1980, the Social Security tax rate has increased by 2.24 percentage points.
In addition, the self-employed were required to pay for the employer’s side of the payroll tax as well. This was an additional increase of 5 percentage points on the roughly 9 percent of the workforce who is self-employed, which is equivalent to a 0.45 percentage point increase.
That makes the total increase in the Social Security tax to 2.69 percentage points over this period.
The Medicare tax rate increased by 1.9 percentage points from 1980 to the present.
That brings the total increase in the payroll tax since 1980 to 4.59 percentage points.
While this increase is less than the 5.81 percentage point increase that would be implied by the projections in the 2012 reports for 2045, assuming no other changes to the programs, it is not hugely different.
The more important part of the equation for living standards is the wage growth that workers will see over the next three decades.
The wage growth assumptions in the 2012 report implied that the average annual wage would be $68,300 in 2045 (in 2012 dollars).
This implies an increase of more than 55 percent over the average wage of $43,800 in 2012.
Even if we assume that the Social Security and Medicare taxes are together raised by 5.81 percentage points by 2045, the average wage in 2045 after deducting payroll taxes would still be more than 46.0 percent higher than it is for workers today.
It is difficult to see this as a story in which our children and grandchildren are being impoverished by these programs.
Most workers have actually seen little real wage growth over the last three decades in spite of a substantial increase in average wages over this period.
This is due to the fact that top end earners -- doctors, lawyers, CEOs and those in the financial industry – have captured the bulk of the gains from economic growth over this period.
If this pattern continues, then the before tax wages of most workers will not be much higher in 2045 than they are today.
However, that would clearly be an issue of the distribution of income within a generation, not a question of distribution across generations.
This should illustrate the importance of wage inequality in determining the well-being of our children and grandchildren.
The amount of money at stake in terms of the distribution of future wage gains is an order of magnitude greater than the potential tax increases needed to maintain full funding of Social Security and Medicare. For this reason, it is ironic that discussions of future the well-being of our children and grandchildren tend to focus on these programs and the budget more generally. The distribution of income in three decades will be of far greater importance.
Yesterday, Carmen Reinhart—she of the infamous Excel error—wrote an open letter to Paul Krugman taking issue with his “spectacularly uncivil behavior.” That his “characterization of our work is selective and shallow.” In particular, Reinhart citesKrugman’s views on Italy. She writes:
However, [falling interest rates in “high-debt Italy”] is meant to re-enforce your strongly held view that high debt is not a problem (even for Italy) and that causality runs exclusively from slow growth to debt. You do not mention that in this miracle economy, GDP fell by more than 2 percent in 2012 and is expected to fall by a similar amount this year. Elsewhere you have stated that you are sure that Italy's long-term secular growth/debt problems, which date back to the 1990s, are purely a case of slow growth causing high debt. This claim is highly debatable.
In fact, Reinhart recently cited Italy as an example of a “more recent public debt overhang episode”. She cites another paper to back up her claim that the evidence shows the direction of causality runs from high debt to slow growth. But even a cursory examination of the data undermines that case.
Figure 1 takes data from Reinhart’s paper in the Journal of Economic Perspectives and shows very clearly that Italy built up its debt after growth slowed significantly—not the other way around. In fact, when growth slowed back in 1974, Italy’s debt-to-GDP was only 41.3 percent. Italy did not reach 90 percent debt-to-GDP until 1988—some 14 years later.
Figure 1: Real GDP Index (Italy Since 1947) (log)
Source: Reinhart, Reinhart, and Rogoff and author’s calculations.
Note: Specified years indicate first year of high-debt episode (see Reinhart, Reinhart, andRogoff)
Indeed, there is a clear association in Italy’s post-war data between high debt and slow growth, but it clearly tells a story very different than what Reinhart would have us believe.
From 1947-74, real economic growth in Italy averaged 5.8 percent per year. Over the period 1975-88 (when Italy’s debt grew from 41.3 to 90.9 percent of GDP) economic growth averaged only 2.7 percent per year—a fall of 3.2 percentage points. It is clear, based on Reinhart’s data, that high debt could not have caused this slowdown in Italy’s economic growth, even if Italy’s period of low debt is associated with much faster growth.
Nor is Italy the sole example. In all four such recent examples of advanced countries with episodes of high debt, the slowdown precedes the increase in debt.
Figure 2: Real GDP Indices Since 1947 (log)
Source: Reinhart, Reinhart, and Rogoff and author’s calculations.
Note: Specified years indicate first year of high-debt episode (see Reinhart, Reinhart, andRogoff)
Though less obvious for Belgium, most of the jump in debt-to-GDP came in 1980 and was largely the result of a series break in the data. According to the data on Reinhart andRogoff’s website, Belgium’s gross general government debt-to-GDP was 62.5 percent in 1970 and falling (debt-to-GDP stood at 57.8 percent in 1974—the year real GDP peaked). Nevertheless, from the peak in real GDP in 1948 to peak in 1974, economic growth in Belgium averaged 4.2 percent per year. When the economy bottomed out in 1975, debt was only 54.4 percent of GDP, and did not reach 90 percent until 1983. Yetfrom 1975-83, growth averaged only 2.2 percent per year.
For the other countries, it is even more obvious that the economies slowed well before reaching high levels of debt. Clearly, Reinhart should look carefully to her own data before lashing out at Krugman.
In addition to the legal and ethical concerns with unpaid internships, which I raised in a recent post, unpaid internships also pose a number of economic issues. First and foremost, unpaid internships require a substantial financial commitment from interns. Young adults participating in unpaid internships typically sacrifice time they could spend earning money at paying jobs. Even so, many interns work second jobs at night shifts to make ends meet. As many of the most desirable internships are located in cities, interns often have to endure long, costly commutes or somehow afford housing closer to the city. Some interns even paymore than $12,000 for a semester-long internship placement (includes housing costs) in cities like Washington, D.C.
Some students and recent graduates are fortunate enough to have families that can afford to subsidize these costs. For many students from modest backgrounds, however, their families cannot bankroll their living expenses as they perform unpaid work. It is not possible for these students to work unpaid internships when they need to take paying jobs in order to put themselves through school or cover their living expenses. Without internship experiences, lower-income students will be at a competitive disadvantage when applying for future jobs. In this regard, unpaid internships can reinforce socioeconomic inequalities.
Unpaid internships don't always provide the returns many interns expect. The 2011 National Association of Colleges and Employers (NACE) graduate survey (includes every organization type: for-profit, non-profit, government) found that graduates who had unpaid internships not only performed worse in job offers and starting salaries compared with those with paid internships but they also had worse prospects than those who had no internship experience at all (Eisenbrey, 2012).
Jeremy, a member of the Writers Guild, is a cancer survivor, and he gives credit to his union for negotiating his health care plan in a new video by the American Worker Project at the Center for American Progress Action Fund.
His is just one of the moving stories told in three short videos released today. These profiles show how unions have helped workers in very different occupations — child care, freelance writing and taxi driving — gain and maintain wages and benefits that are key to a middle-class standard of living.
On the flip side, La Tonya describes the hardship she's faced since public sector workers lost their right to collectively bargain in Wisconsin.
These videos bring to life a huge body of research that finds that unions provide invaluable benefits for workers. CEPR regularly focuses on this topic and has many reports about how union membership increases workers' chances of having health insurance and a retirement plan. Some reports focus on specific groups of workers — African American, Latino, women, young, low Wage, service sector, and immigrant — and find the same positive effects across the board.
Internships can be great opportunities for undergraduates or recent college graduates to gain career-related experiences or skills. Additionally, these learning experiences can improve trainees’ chances of future employment as they develop networks and connections. But, the widespread use of unpaid internships also raises legal and ethical questions, especially in the for-profit sector. Unpaid internships at non-profit organizations and government bodies also deserve attention, but these programs are not subject to the same rules as at for-profit, private businesses because interns can be considered “volunteering” their time.
The Obama administration had considered cracking down on illegal unpaid internships, which perhaps prompted the Department of Labor’s Wage and Hour Division (WHD) to release a memo that clarifies what constitutes a legal unpaid internship with a six-part test.
The internship, even though it includes actual operation of the facilities of the employer, is similar to training, which would be given in an educational environment;
The internship experience is for the benefit of the intern;
The intern does not displace regular employees, but works under close supervision of existing staff;
The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
The intern is not necessarily entitled to a job at the conclusion of the internship; and
The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
Recently, over 3,000 former unpaid interns of the Hearst Corporation filed a class action lawsuit against the magazine business. The former interns argued they had been doing the work of paid employees and the “unpaid” classification was misused and illegal. The lines between a mutually beneficial learning experience and free labor have thus become increasingly blurred as more businesses have adopted unpaid internships in recent years. It appears likely that many other for-profit organizations either openly ignore the six-part test or bend the rules in order to avoid paying for work or any other benefits.
McKinsey and Company released a report this week that found 42 percent of recent college graduates are currently in jobs that do not require four-year degrees. This finding was comparable to those estimates of previous studies that I mentioned in this blog post. McKinsey surveyed more than 4,900 recent graduates (2009-2012) using the learning platform, Chegg. Almost 45 percent of graduates of public universities reported that their current job requires less than a four-year degree compared with only 34 percent of those from private universities.
Almost half of recent college graduates did not get jobs in their field of choice. The majority of these underemployed appear to work in the retail or restaurant industries. Among those working in the retail industry, 78 percent had desired to enter a different industry prior to graduating. Similarly, 81 percent of those graduates working in the restaurant industry had wanted to enter a different industry. This study once again showed that many of our recent graduates are currently underutilized.
It's always nice when other scholars reach conclusions similar to those in CEPR's work. For this reason it was good to see Brookings publish a paper by Stephanie Owen and Isabelle Sawhill questioning whether everyone benefits from going to college. The paper noted that there was a substantial overlap between the earnings distribution for people with just a high school degree and those with college degrees. Specifically, they pointed out that 14 percent of workers with just a high school degree earned more the median college graduate.
This is similar to the findings in a paper that CEPR published with the Center for American Progress two and a half years ago. That paper, by John Schmitt and Heather Boushey, called attention to the large dispersion in earnings among men at all education levels. As a result of this dispersion, almost 20 percent of male college graduates between the ages of 25-34 earned less that the average male with just a high school degree in 2009.
This could help to explain why there has been little increase in college enrollment rates among men over the last three decades in spite of a sharp increase in the college premium. The marginal college student (a person debating whether or not it makes sense for him to go to college) may think it is likely that he could end up in this 20 percent who earn less than the average high school grad. This means that he will have foregone the opportunity to work full-time for four years, and incurred considerable expenses associated with college, yet have little to show for it in terms of a higher paycheck. Given these facts, it is not surprising that many men who graduate high school opt not to go to college.
It's good to see that Brookings' researchers are finding a similar story. If we want to get more people to attend college it will be necessary to have either a surer payoff for those who complete their degree and/or lower costs for attending college. Given the current situation, for many men it probably does not pay to attend college.
New research from the Bureau of Labor Statistics highlights the increased access to employer-sponsored benefits for union workers. Across every type of benefits examined, union workers had more access to those benefits. For example, in 2011, 92 percent of union workers in the private sector received medical benefits compared to just 67 percent of those that were nonunion. The only exception was defined contribution retirement plans, but more union workers had access to retirement plans overall.
Much analysis of the economy is excessively swayed by one or two economic reports or short-term fluctuations that may be driven by random factors like the weather. This appears to be the case following the Labor Department’s release of the April jobs report last week. In a post for the Roosevelt Institute's Econobytes, economist Dean Baker, co-director of the Center for Economic and Policy Research, on why the April jobs report does not presage an economic boom:
The April jobs report showed somewhat faster than expected job growth for the month, along with upward revisions to the prior two months’ numbers, and a drop in the unemployment rate to 7.5 percent. This led many commentators to speculate that the recovery was accelerating and that perhaps the Federal Reserve Board should be pulling back from its quantitative easing program. A more careful assessment of the data does not support this view.
The Commerce Department released a report showing that durable goods orders had declined 4.0 percent in March from their February level.
Even pulling out the volatile transportation component, the drop was still 2.0 percent.
More narrowly, new orders for non-defense capital goods (excluding aircraft) rose 0.9 percent in March, but were still almost 4.0 percent below their January level. The March number is less than 0.2 percent above the year ago level suggesting that the equipment investment component of GDP is barely growing.
The data that the Commerce Department released on construction last week was not any better.
In spite of strong growth in residential construction, total construction spending fell 1.7 percent in March driven by a 4.1 percent falloff in spending by the public sector.
This sector will likely continue to show weakness as cutbacks at all levels of government, coupled with weakness in non-residential private construction, offset growth in the residential sector.
For young college graduates, high unemployment is certainly a primary concern, but beneath this is the issue of whether those who are employed are being used to their fullest capabilities. Many young graduates who cannot find suitable college-level jobs may opt to accept jobs that do not require college degrees. Two studies examining recent data found that the incidence of this “over-qualification” has risen for graduates of four-year programs in recent years, particularly since the end of the Great Recession. They find that approximately four-in- ten recent college graduates are working at jobs that don’t require a degree, a number similar to the findings of a recent Accenture survey.
Neeta Fogg and Paul Harrington of Drexel University studied the growing disconnect between college graduates and the labor market (2011). Without any standard measurement of defining workers as being “overqualified” for a particular job, Fogg and Harrington utilized the Department of Labor’s O*NET occupational-analysis information system in order to determine which jobs required four-year college degrees (college labor market or CLM). Concentrating on those between the ages of 20 and 24, Fogg and Harrington defined college graduates (Bachelor’s degree) as being “mal-employed”, or overqualified, if they were not in a CLM occupation. Analyzing cross-sections of three separate years (2000, 2007, 2011) of Current Population Survey data, Fogg and Harrington found that a greater share of young employed graduates turned to jobs for which they were overqualified (see table below for results). Note that these numbers represent the share of those employed, and therefore leave out all of those who are unemployed. As of 2011, over 39 percent of those sampled are employed in jobs that do not use their acquired skills and likely pay less than the average college-level job. We know that long unemployment stints can hurt job prospects and future earnings for workers. It appears that persistent over-qualification can have similar detrimental effects for one’s medium-term earnings (Kahn, 2010; Oreopoulos et al., 2012).
Similar to Fogg and Harrington, Grusky et al (2013) employed O*NET’s classifications to distinguish those occupations that typically require college degrees. Concentrating on 21-24 year olds, Grusky et al estimated job placements across three two-year periods (before recession, 2005-2007; during recession, 2007-2009; and after recession 2009-2011). Despite these subtle differences in sampling, the report’s numbers were very similar to those of Fogg and Harrington. Grusky et al also estimated the numbers for those with high school degrees and Associate’s degrees. Compared with either of these groups, college graduate lost more college-level jobs but the percentage losses were greater for high school and Associate’s graduates. In light of this comparison, Grusky et al suggested that college education had protected many graduates from the worst of the recession. However, having four-in-ten young college graduates overqualified for their jobs is a substantial waste of skill (not to mention the investments made by individuals and their families to acquiring said education).
Job prospects have deteriorated for recent college graduates. Besides facing high unemployment rates, young college graduates are now accepting more jobs that do not require college degrees. Not only do these stints of over-qualification affect the future earnings of these college graduates, they also make it more difficult for high school graduates to find employment as they face competition from higher-educated workers. Young workers certainly face an uphill battle as the economy continues to struggle.
 It is important to note that this definition overlooks those who are in a CLM occupation, but the position does not relate to their field of study, typically indicating some mismatch of skills.
Last month, Moody’s, one of the big three bond-rating agencies announced that it was changing the way that it will treat public pension liabilities. While there are several notable features to announced changes, two are especially important.
First, instead of accepting projections of pension fund returns based on the assets they hold, Moody’s will evaluate their liabilities using a risk-free discount rate.
The second major change is that it will evaluate pension assets at their current market value rather than using a formula to smooth volatile asset prices over a period of 3-5 years as is the current practice.
Together Moody’s changes in accounting will have the effect of making pension funds seem in considerably worse financial condition.
They could also lead pension fund managers to follow investment strategies that will provide far lower rates of return on assets. This would mean higher costs for taxpayers with little obvious benefit in reduced risk.
The practice of using a risk-free discount rate to assess liabilities is a departure from the current practice of effectively discounting liabilities using projected rates of returns on assets.
Most pension funds project rates of return on assets of between 7.0-8.0 percent. By contrast, the rate that Moody’s would apply at present would be around 4.5 percent.
This makes a huge difference in assessing liabilities. If a pension fund was obligated to make $1 billion in payments each year for the next thirty years its liabilities would be calculated at $16.5 billion using a 4.5 percent discount rate.
By comparison, they would be just $11.9 billion using a 7.5 percent discount rate. This is a difference of almost 40 percent.
Put another way, a pension that is fully funded using the 7.5 percent return assumption would be almost 30 percent underfunded using Moody’s new approach.
While the implication for an assessment of funding levels is clear, there are grounds for debating which method is appropriate.
Supporters of the Moody’s approach argue that it is appropriate to discount for the risk associated with pension returns, and especially stock returns.
However this argument is problematic since it is not clear that there is much risk for pension funds on projected returns when they are properly calculated.
The reason is that a pension fund, unlike individuals, does not need to be concerned about the stock market’s short-term fluctuations.
State and local governments do not have retirement dates where they have to start drawing on stock holdings. They need only concern themselves with long period averages, without worrying about short-term fluctuations.
This post originally appeared in Dissent Magazine. Colin Gordon is a professor and director of Undergraduate Studies, 20th Century U.S. History, at the University of Iowa.
What happened to the good jobs? This is the question posed by the walkouts of fast food workers in New York and Chicago in recent weeks. It is the question posed by activists in those corners of the economy—including restaurants and domestic work and guestwork—where the light of state and federal labor standards barely penetrates. And it is the question posed (albeit from a different set of expectations), by recent college graduates for whom low wages and dim prospects are the dreary norm.
There are no shortage of suspects for this sorry state of affairs. The stark decline of labor, now reaching less than 7 percent of the private sector, has dramatically undermined the bargaining power and real wages of workers. The erosion of the minimum wage, for which meager increases have been overmatched by inflationary losses, has left the labor market without a stable floor. And an increasingly expansive financial sector has displaced real wages and salaries with speculatory rent-seeking.
New work by John Schmitt and Janelle Jones at the Center for Economic and Policy Research recasts this question, posing it not as a causal riddle but as a political challenge: What would it take to get good jobs back?
Schmitt and Jones start with a basic distinction between good jobs (those that pay $19.00/hr or better and offer both job-based health coverage and some retirement coverage) and bad jobs (those that meet none of these criteria). Each of these categories accounts for about a quarter of the workforce (the rest fall somewhere in between), with the share of good jobs slipping since 1979 and the share of bad jobs creeping up. The goal, by simulating the impact of different policy interventions, is to increase the share of good jobs and to eliminate—as much as possible—the bad jobs entirely.
CEPR’s Director Watch fundraising campaign on Indiegogo ends on Friday, May 3 at noon. Thanks to everyone who has donated so far! We’re close to raising our goal…we need only $4,586 to make our initial $17,000 goal.
For those of you who haven’t heard, The Huffington Post has agreed to partner with CEPR to host a new website called Director Watch. Director Watch will bring to light the names of people serving on corporate boards who get large paychecks even as the companies they oversee are going down the tubes.
Here’s a graph showing just why we need Director Watch:
We’re so close! Please click here and help us to get Director Watch up and running.
The following highlights CEPR's latest research, publications, events and much more.
CEPR on Venezuela CEPR closely followed the April 14, 2013, elections in Venezuela, live-blogging the election and the follow-up, as well as providing research and analysis both before and after election day.
CEPR Co-director Mark Weisbrot released this press release on the narrow victory of Nicolás Maduro over Henrique Capriles, and he wrote several op-eds calling on the U.S. to recognize the election results. As Mark pointed out, former U.S. president Jimmy Carter last year called Venezuela’s electoral system “the best in the world”. “President Obama should not play politics with this one” he wrote, noting that Venezuela’s voting system is very secure, with 54.3 percent of the machines subject to a random paper ballot audit by the National Electoral Council (on which the opposition is represented)”.
Mark offered further post-election analysis of the U.S.’s refusal to recognize the results of election, here in The Guardian and here in Folha de São Paulo (Brazil). “Recent events indicate that the Obama administration has stepped up its strategy of ‘regime change’ against the left-of-center governments in Latin America, promoting conflict in ways not seen since the military coup that Washington supported in Venezuela in 2002” wrote Mark.
In addition to offering pre- and post-election live blogging – which brought a record number of visitors to CEPR’s website, and was widely discussed on Twitter – CEPR’s Americas Blog provided additional analyses and reactions to the election. Guest blogger George Ciccariello-Maher wrote this post debunking myths circulating about so-called ‘civil society’ in Venezuela. CEPR research Assistant Stephan Lefebre wrote this post on former president of Brazil Lula da Silva’s warm and unequivocal endorsement of Nicolás Maduro prior to the election. Mark and International Communications Director Dan Beeton each weighed in with analysis of the opposition’s refusal to recognize the results – supported by Washington – and related post-election violence.
The Americas Blog’s most recent entry offers astatistical analysis that shows that if Venezuelan opposition claims that Nicolás Maduro's victory was obtained by fraud were true, it is practically impossible to have obtained the result that was found in an audit of 53% of electronic voting machines that took place on the evening of Venezuela’s April 14 elections. The post is a preview of a forthcoming paper and was also the subject of a press release last week that received notice in Latin America and was picked up by numerous outlets including Telesur, as well as the Dow Jones Newswire.
The worldwide debate over fiscal policy and austerity was turned upside down last week by a paper co-authored by a University of Massachusetts grad student Thomas Herndon and two professors, Michael Ash and Robert Pollin (HAP). The paper uncovered serious calculation in errors in an important paper by Harvard professors Carmen Reinhart and Ken Rogoff (R&R).
The Reinhart and Rogoff paper, “Growth in a Time of Debt,” has been widely cited in policy debates in the United States and around the world as providing the basis for cutting deficits even at a time when the economy is suffering from large amounts of unemployment and interest rates are extraordinarily low. Ordinarily economists would argue that these are exactly the circumstances in which governments should undertake aggressive stimulus measures. Government spending can both boost growth and increase employment in the short-run, and also lead to long-run benefits insofar as the stimulus takes the form of investment in infrastructure, research and development, and education.
The Reinhart and Rogoff paper was used to argue against increased spending because it purports to show that high ratios of debt-to-GDP lead to large falloffs in growth. The implication of the paper is that the United States and other wealthy countries are at debt levels near a tipping point where further increments of debt can lead to decades of slow growth.
The moral of the Reinhart and Rogoff analysis is that we have no choice but to live with the pain of high unemployment and slow growth now, since the eventual cost in terms of a prolonged period of slow growth and high unemployment would be so awful. This is the sort of reasoning behind the austerity plans that are leading to double-digit unemployment across Europe and slow growth and high unemployment in the United States.
The paper by HAP was a body blow to the intellectual foundations for these policies. When corrected, the R&R analysis provides no basis for the concerns about a high debt cliff that they had been pushing for the last three and half years.
The renewed interest in breaking up too-big-to-fail (TBTF) banks may remind people about the extraordinary influence that banks and financial institutions hold over our economy. The financial industry has experienced substantial growth over the last few decades. The financial sector’s share of corporate output (gross value added less Fed profits) has grown rather steadily from 5.7 percent in 1960 to 14.1 percent in 2006 (see Graph 1). Yet, the financial sector’s share of total corporate profits (net operating surplus less Fed profits) soared from slight losses to 22 percent (corresponds to an increase of $142 billion in 2006) in the same timeframe. This increase in finance’s share of profits far exceeded its gain in the share of corporate production. In the years leading up to the financial collapse (2001-2006), the financial industry enjoyed profits that were hugely disproportionate to their share of output. The disparity between the share of profits and production peaked in 2003 at a difference of 8.3 percentage points. The financial sector’s share of total corporate business profits has been very erratic over the last few decades with a general upward trend, contrasting to a more gradual increase for its share of output. It is important to remember that the high pay and bonuses of top executives and traders, which can run into the millions or tens of millions a year, do not count as profits.
Graph 1 (Click for a larger version)
The growth in the size of the financial industry provides an interesting juxtaposition to the growing inequality over the last few decades. Between 1970 and 2006, the bottom 40 percent of households’ share of aggregate income fell by almost 3 percentage points while the shares of the top 20 percent and 5 percent rose 7 and 6 percentage points, respectively. Many of the highest incomes were earned in the financial sector. (The pay of top executives and traders are counted as wages rather than profits in the National Income Accounts.)
When toxic assets threatened the operations of those prominent banks and financial institutions, bailout funds provided them liquidity. The total amount lent at below market interest rates was well over $10 trillion; although most of the loans were relatively short-term. These subsidized loans enabled the financial sector to return to its pre-recession profit levels by 2009. In contrast, American households are still recovering from income shocks, unemployment stints and wealth shocks.