The New York Times DealBook ran a piece by Richard Farley, who advises banks on leveraged buyout financing, that claims workers are better off in difficult economic times working for private equity-owned firms. Private equity, he argues, saves jobs. Farley makes two points to support his claim.
First, he notes that PE-owned firms are no more likely than other companies with similar credit ratings to experience financial distress. Fair enough. It’s the high debt load, not PE-ownership, that increases the risk of default. Indeed, a study of 2,156 highly leveraged companies, half owned by private equity and half not, found high rates of default in both during the last three economic contractions. A quarter of these firms defaulted between 2007 and the first quarter of 2010. The important point, however, is that high debt is typical of private equity buyouts of operating companies. It’s the companies that private equity acquires in a leveraged buyout – and not the private equity firms- that are saddled with these high debt loads, making them vulnerable to failure in tough times. Management fees and dividend recapitalizations that transfer money from the operating companies to their PE owners assures that PE will profit regardless of the company’s success.
Second, Farley points to a study by Moody’s that shows that PE-owned companies that default on their debt are less likely to declare bankruptcy. Though Farley doesn’t mention it, the Moody’s study attributes this to private equity’s greater ability to get lenders to exchange distressed debt for new debt due a few years in the future. These ‘amend and extend’ deals – less flatteringly referred to as ‘amend and pretend’ – allow equity sponsors to restructure the balance sheets of distressed companies they own to protect their equity stake. Distressed debt exchanges from 2008-2010 are coming due now and, according to a separate Moody’s study, a large percentage of these have failed. This is fueling an otherwise puzzling uptick in corporate bankruptcies since the fall of 2011.
Delaying bankruptcy is not the same as saving jobs.
That's the implication of a new study by two economists, Stephan Cecchetti and Enisse Kharroubi, at the Bank of International Settlements. This study analyzed the link between growth and the size of the financial sector across 50 wealthy and developing countries. It found that a larger financial sector seems to foster growth up to a certain point. After achieving an optimal size relative to the size of the economy, the financial sector acted as drag on growth when it grew larger.
The study looked at industry level data from a smaller sample of wealthy countries. It found that industries that were the most dependent on external financing and that were heaviest in R&D spending were the ones that were most likely to experience slower productivity growth in countries with rapidly growing financial sectors.
There is a plausible explanation for this pattern. In the first case, if a bloated financial sector is pulling away capital that could otherwise have gone to productive investment, then it makes sense that the most affected sectors would be the ones that need external financing. The companies that can generate all the money they need for investment from their own profits may not be hurt much by an over-sized financial sector.
In the case of R&D intensive industries, the financial sector should be viewed as a competitor for talent. If there are lots of high paying jobs for people with good math and technical skills in finance, then they are less likely to be working in designing software.
The Wall Street crowd will no doubt raise some issues with this study. For example, in looking at the effect of the size of financial sector on growth, it might be appropriate to have a non-linear control for starting income levels, meaning that we may expect that very wealthy countries have slower growth than other countries, but middle income countries may not. (This could distort the findings if very wealthy countries also have relatively larger financial sectors.) Also, it might useful to use 2007 as an end point in the industry regressions rather than 2008. Productivity growth in 2008 largely reflects how quickly firms could dump workers in response to the downturn.
But on the whole the basic analysis looks pretty solid. The moral of the story would seem to be that if we want more people to work developing new computer technology that people value or making advances in medicine that will extend and improve people's lives, then we want fewer people working on Wall Street.
Latest indicators and developments in the housing sector show more evidence that the housing market is on the mend. Prior to May, the market had seen unusually high levels of sales due to unusually good winter weather across much of the country. For this reason we should have expected a sharp falloff in sales in May. Instead, May sales were down by only 1.5 percent from their April level. They were 9.6 percent above the May 2011 level.
The data also show permits for single family homes were up 4.0 percent in May from their April level and were 19.9 percent above their year-ago level. This is the highest rate of construction since early 2010 when the first-time buyers’ credit was temporarily boosting the market. Also, new home sales in May were at their highest level since the end of the first-time buyers’ tax credit caused a surge in April of 2010.
On the other side of the spectrum, 52 financial professionals have broken rank with their industry peers to support small taxes on financial transactions. There will be a briefing call on Thursday, June 21, at 10 am EDT featuring some of them to discuss why they believe the tax will help improve the functioning of markets.
Speakers (see below) will also provide an update on the growing international momentum behind this tax at a critical moment, including an expected June 22nd EU finance ministers vote on the tax.
• Wallace Turbeville, Fellow, Demos, and former Vice President, Goldman Sachs
• Leo Hindery, Jr., Managing Partner, InterMedia Partners, LP, a media industry private equity fund
• Professor Lynn A. Stout, Distinguished Professor of Corporate and Business Law, Clarke Business Law Institute, Cornell Law School
• Sarah Anderson, Global Economy Project Director, Institute for Policy Studies
• U.S. Representative Peter DeFazio (invited)
to RSVP for the call.
The call is being organized and will be moderated by Americans for Financial Reform. Co-hosts are: AFL-CIO, Center for Economic and Policy Research, Institute for Policy Studies, and Public Citizen.
Last Friday, the IMF released a Public Information Notice on the Executive Board’s discussion of Jamaica’s Article IV consultation, an annual report in which the IMF assesses member countries’ economic programs. Of course, the timing was perfect, released just one day after the conclusion of the Jamaican parliamentary debate on its 2012/13 budget. The Article IV discussion clearly shows which way the IMF’s Executive Board—or at least 62.5 percent of it— wants Jamaica to go: further fiscal austerity.
The Jamaican Finance Minister had told Parliament that there were no pre-conditions that had to be met before securing a new IMF loan. Nonetheless, Jamaica’s new “creditor’s budget” is explicitly designed to placate the IMF after the previous loan agreement veered off track over a year ago, when the Jamaican government defied the IMF by paying out back wages and giving already agreed-upon raises to public sector workers. The new budget for 2012/13 cuts non-interest expenditure by two percentage points of GDP—this despite the fact that GDP remains below its 2007 level and per capita GDP is not projected to reach its 2007 level until after 2017.
The IMF praised the cuts, as the Executive Directors “welcomed the authorities’ efforts to increase the primary surplus in this fiscal year.” In addition, “[t]hey were generally of the view that a strong upfront fiscal adjustment would provide credibility to the program.” But not all of the 24 Executive Directors agreed. In a rarely seen move, the IMF press release notes that a “number of Directors, however, supported a balanced pace of adjustment to safeguard the fragile recovery and social cohesion.” Flipping to the convenient “Qualifiers Used in Summings Up of Executive Board Meetings,” one finds that a “number” of Directors means from six to nine. In other words, over a quarter of the Executive Board cautioned against such front-loaded fiscal austerity.
The Consumer Price Index fell 0.3 percent in May, representing the fourth consecutive month of slowing in headline inflation as energy prices plunged, according to the Bureau of Labor Statistics' latest reports on the consumer price, U.S. import/export price and producer price indexes. Energy prices, which showed a 1.7 percent decline in April, dropped 4.3 percent. Core inflation remained steady at 0.2 percent for the third consecutive month, and prices have risen at a 2.7 percent annualized rate over the last three months.
The consumer price of health insurance has rebounded over the past 12 months after falling for three consecutive years. The price of medical care services rose 0.5 percent in May, including a 0.6 percent increase in hospital services. By contrast, the price of medical care commodities—largely drug prices—was unchanged. A 0.8 percent increase in health insurance prices brought the 12-month change to 13 percent. The increase over the past year follows a multi-year slide, and over the past five years, insurance prices are up only 2.3 percent. Health insurance prices have grown at a 2.3 percent annualized rate since December 2005.
For a more in-depth analysis, read our latest Prices Byte.
The Center for Economic and Policy Research once again ranked first in media hits per budget dollar of all major think tanks, based on an analysis of Fairness and Accuracy in Reporting’s 2011 think tank media citation rankings and organizational budgets. CEPR outpaced all other think tanks with 1.3 media citations per ten thousand budget dollars. CEPR had also been first in hits per dollar in the five years from 2004-2008.*
CEPR was also number one in web traffic per budget dollar in 2011, getting more than twice the number of hits as its closest competitor. CEPR had ranked first in three of the five years from 2004-2008 and placed second in the other two years.
* CEPR did not do this analysis for the years 2009 and 2010 because Fairness and Accuracy in Reporting (FAIR), which produces the measure of think tank media citations that is the basis of this analysis, did not compile its list in those years.
Many of the leading voices in economic policy debates are telling us that excess government spending, like that characteristic of Western European welfare states over the past sixty years, leads ultimately to rising interest rates. This happens, it is argued, because excessive government spending is likely to crowd out private investment and consumption. This will slow growth and lead to higher inflation.
However, a cursory glance at recent data on government spending and the interest rates of government bonds reveals a different story. For 2011, we plotted government expenditure as a percentage of GDP versus the yields on ten-year government bonds for the OECD countries, and found a slight positive relationship between spending and interest rates, as is shown in the following figure.
While a small positive relationship appears to exist, as can be seen by the upward slope of the line of best fit in the chart above, regression analysis of bond yields and government expenditure showed that this relationship was not statistically significant. Any miniscule positive relationship can be attributed to a few countries with high government expenditure as share of GDP and high bond yields. These are the European economies of Greece, Portugal, and Ireland. While it is possible that government spending played a role in precipitating the current crisis in Greece, this is not the case for the other distressed economies. For instance, Ireland and Spain both ran budget surpluses in the years just before the recession. Noteworthy, also, are the many countries, such as France, Denmark, Finland, and Belgium, with high government expenditure and very low bond yields.
We already knew that unions increase wages, especially for less-educated workers. They also strongly increase the probability that a worker will have benefits like health care insurance, a pension, or paid sick days and family leave. It turns out that unions are also good for your health.
A new study by Megan Reynolds and David Brady at Duke University finds that being a union member has a large positive effect on self-rated health status. This effect is largest for less-educated workers.
Given that unions provide a much greater degree of security on the job and protection against arbitrary actions by capricious bosses, it perhaps is not surprising to see that unions are associated with better health. After all stress can be a major factor leading to bad health. Still it is nice to see that Reynolds and Brady have produced the evidence showing that this is the case.
In a recent post at The Atlantic Cities blog, sociologist Richard Florida provides an interesting analysis of some of the findings of a new study by the Pew Center on the States on economic mobility in the United States. Florida shows that, across the 50 states, there is a positive correlation between the degree of residents' upward mobility and state: median household income; high school graduation rates; public education spending per pupil; and openness to immigrant and LGBTQ communities. His results help to expand the view of the sort of institutional and cultural contexts that support --or are at least associated with-- high economic mobility.
On the other hand, Florida also demonstrates that states with a higher share of their labor force in what he defines as “working class professions” have lower rates of upward mobility. But, his analysis overlooks the role of the most important working class institution: labor unions. The figure below uses the same Pew data analyzed by Florida to compare upward mobility across states with different levels of unionization. The graph shows a strong, positive relationship between the share of a state's workforce that is unionized and the Pew measure of upward mobility. The union data in the graph refer to 2011, but this is a long-standing relationship and a similar pattern holds for 1983, too (the earliest year for which comparable data are available).
The following newsletter highlights CEPR's latest research, publications, events and much more.
CEPR on Work Sharing CEPR Co-director Dean Baker teamed up with the American Enterprise Institute's Kevin Hassett to pen this Sunday op-ed on the benefits of work sharing for the New York Times. Dean appeared with Hassett on PBS' NewsHour with Jim Lehrer to discuss the issue. Dean has written extensively on work sharing as a means to address continuing long-term unemployment, most recently in this issue brief co-written with CEPR’s Director of Domestic Policy Nicole Woo that looks at how work-sharing provisions signed into law by President Obama in February 2012 as part of the Middle Class Relief and Job Creation Act could help states reduce their unemployment rates and also save $1.7billion per year.
Senator Herb Kohl referred to the op-ed in his opening statement at a May 15th Aging Committee hearing titled "Missed by the Recovery: Solving the Long-Term Unemployment Crisis for Older Workers": “And as a bipartisan opinion piece in the New York Times over the weekend stated, this problem “nothing short of a national emergency.” Work sharing was also featured in this article in the Cleveland Plain Dealer and this one in the West Virginia Gazette.
CEPR on Jamaica CEPR’s recent release, “Update on the Jamaican Economy,” by CEPR Research Assistants Jake Johnston and Juan Antonio Montecino, looks at Jamaica’s stalled agreement with the IMF, its economic performance over the past year and examines its persistently high debt burden. The paper argues that Jamaica’s economic performance and development prospects have been seriously damaged by an unsustainable debt burden, with the economy stagnating for decades. The paper updates a similar report released in May 2011.
Yesterday there was quite a bit of media coverage -- in outlets such as Marketplace and the Guardian -- about the launch of a new "national movement of underwater homeowners and their allies," the Home Defenders League (HDL).
With numbers last week showing that there are more than 15 million underwater households in the U.S., this movement seems long overdue. The HDL is pushing for a well-reasoned slate of ideas to to help those who are stuggling with foreclosures and underwater mortgages, including Right to Rent, allowing homeowners to stay in their homes, after foreclosure, paying the market rent (emphasis added below):
It's good for us, it's good for the borrower and ultimately good for the community.
The news is that this pilot has started to roll out in California, and will tested in Arizona, Nevada and New York soon. A BofA spokesman says that their program will be expanded if their pilot "works out for enough borrowers" and that they expect to get some test results in 60 days. Rest assured that CEPR will be on the lookout for that!
Dean has been advocating for his Right to Rent plan for years. It's rewarding to see entities from across the spectrum -- mega-corporate Bank of America to a league of underwater homeowners -- endorse, and indeed, start to implement his idea. We can only hope it'll continue to get picked up by more mortgage-holders, advocates, and policy makers!
Though the economy only saw a slight rise in the unemployment rate to 8.2 percent, revisions of the march and April jobs numbers showed much slower job creation than previous reported. The public sector continues to shed jobs – 657,000 have been lost over the last four years.The current pace of recovery lags behind that of any of the previous four recoveries. More in this month’s Jobs Byte.
Two CEPR papers by John Schmitt and Janelle Jones released earlier this year on long-term unemployed were published in the spring issues of Challenge and New Labor Forum. In the newest issue of Challenge, “Down and Out: Measuring Long-Term Hardship in the Labor Market” (behind a paywall here) proposes several ways to rethink our understanding of long-term unemployment. In New Labor Forum, “America’s “New Class”: A Profile of the Long-Term Unemployed” (behind a paywall here) uses the framework from the Challenge piece to paint a demographic portrait of those still suffering from long-term unemployment in the labor market.
The Challenge article is based on this January 2012 CEPR briefing paper. The New Labor Forum piece is based on this March 2012 CEPR briefing paper.
Unionization rates — and the gender and racial composition of unionized workers — vary widely across the 50 states and the District of Columbia. In a newly released issue brief, based on an analysis of the Current Populations Survey, we give an overview of the size and basic demographics of the unionized workforce in each state. The brief is a partial update of some of the numbers that appeared in a 2010 release CEPR report called “Unions of the States.”
Size of the States' Union Workforces
The figure below (Figure 2 in the new brief) shows the average unionization rate in each state over the years 2007-2011. We define a unionized worker as anyone who is a member of a union or represented by a collective bargaining agreement.
In 2007-2011, the 13.3 percent of the U.S. workforce was unionized. New York state had the highest unionization rate, at 26.4 percent. Alaska (24.3 percent) and Hawaii (24.0 percent) followed closely. Only one other state had a unionization rate above 20 percent and that was Washington (21.2 percent). The rest of the top ten most unionized states were Michigan (19.2 percent), New Jersey (18.8 percent), California (18.5 percent), Connecticut (17.6 percent), Oregon and Rhode Island (17.4 percent each), and Nevada (17.3 percent). Eight states had a unionization rate that was less than half of the national average: Tennessee (6.2 percent), Texas (6.1 percent), Arkansas and Louisiana (5.9 percent each), South Carolina (5.7 percent), Virginia (5.3 percent), Georgia (5.1 percent) and North Carolina (4.4 percent).
See the full brief for data on the number of union workers and their racial and ethnic background, by state.