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College Aid Not Keeping Pace with College Costs Print
Written by Marie-Eve Augier   
Thursday, 12 April 2012 15:30

People who haven’t gone through the financial aid process (recently or at all) might think of financial aid as mostly about grants or scholarships. Financial aid, however, comes largely in the form of federal loans, which a student must pay regardless of whether they complete their degree or not. Grants and scholarships are awarded, but they have not kept pace with the rising costs of education. The average Pell Grant, for example, has increased from $929 in 1979 to $3,706 in 2009 -- a near 300% increase. This may sound like a lot but not when compared to the 548%, 807% and 620% increases in average annual tuition for (respectively) a 2-year, 4-year public and 4-year private college.

There is evidence to suggest that there has been a significant shift away from the ‘need-based’ philosophy of Pell Grants: the much more rapid growth of non-need-based aid like student loans, as shown in the graph, or the expansion of tax credits, which tend to disproportionately benefit middle- and upper-income families. As a result, according to the Federal Reserve Bank of New York, the average outstanding student loan balance per borrower is $23,300.


Source: Avery, C. and Turner, S. Student Loans: Do College Students Borrow Too Much - Or Not Enough?; Journal of Economic Perspectives, Volume 26, No. 1, Winter 2012, Pg. 165- 192

This means students from low-income families are not getting the help they need with funding their educations. (CEPR recently looked at the increase in the financial burden facing minimum-wage workers paying for college.) In fact, unmet need (i.e. expenses after expected family contribution and grant aid) of enrolled students averages 72% of family income (2007 dollars) for families in the lowest income quintile, versus 14% for those in the top quintile. In a recent report by the Education Trust of 1,186 four year colleges and universities, some 275 institutions required low-income students to pay more than 100% of family income.



Shoring Up Medicare and Reducing the Budget Deficit Is Not Double-Counting Print
Written by CEPR   
Thursday, 12 April 2012 14:15

A recent study by Charles Blahous, a public trustee for Medicare and Social Security, concluded the Affordable Care Act would contribute $340 billion to the deficit from 2012-2021, contrary to CBO's estimate it will reduce the deficit by $132 billion from 2012-2019. One of Blahous' main arguments in the study is the potential double-counting of increased Medicare payroll taxes toward making the Medicare Hospital Insurance (HI) program more solvent and reducing the deficit in the general fund. But as Dean Baker pointed out in a 2009 post from the Beat the Press archives, there is no double-counting.

The NYT had a thoroughly confusing article that seemed to imply that proponents of the health care bill were double-counting when they claimed that targeted savings in the Medicare program could both shore up the program and also be used to finance extending care to more people. In fact, as the article at one point correctly notes, there is no double counting.

The reality is that the government faces multiple budget constraints. Savings in the Medicare program allow it to meet two of them.

The law requires that spending in the Medicare Hospital Insurance (HI) program is financed exclusively raised through the HI tax (or interest on the bonds purchased with this money). If the HI tax produces insufficient revenue, then under current law, the program would cease to operate. In other words, Congress would either have to appropriate new money or change the structure of the program.

The targeted savings would reduce spending in the program. According to Medicare's chief actuary, these savings would give HI enough money to pay its bills through 2026 rather than the 2016 date when the program is now scheduled to face a shortfall.

Since Medicare is included in the overall budget, savings in the Medicare program also reduce the budget deficit. If there is a concern that we can only finance health care insofar as we are able to keep the budget deficit within certain limits, then the savings in Medicare will relax this constraint also.

There is no double-counting in this story. The government's budget is structured so this multiple constraints must be met. Savings in the Medicare program will allow for this.

More Musings on Modern Monetary Theory Print
Written by Dean Baker   
Monday, 09 April 2012 16:15

I had several people ask me in comments or e-mails whether I agreed with Modern Monetary Theory (MMT) that the government doesn't need to raise taxes to pay for spending or whether I agreed with Paul Krugman that it does. I won’t claim to know exactly Paul Krugman’s view on the topic, but let me reframe the issue somewhat in a way that may cause people to see differently what is in dispute.

I think that all MMTers believe that the government cannot literally spend without limits. In other words, we can push the economy to the point where inflation is a real problem. The MMT answer is to raise taxes to prevent inflation from getting out of control.

Now suppose we are in the world where we have pushed the economy to the point where inflation is a problem and we decide we want the government to spend more money on some great project. At that point, it would seem that MMTers would have to agree that we need tax increases to offset the impact of government spending in boosting the economy.

We don’t literally need the tax increases to pay for the spending. The Fed could simply create more money to finance the spending. However if we don’t want the spending to be inflationary, then it must be offset by a tax increase.

I think the difference between the MMTers and Krugman is largely on the frequency with which they believe that the economy is up against its capacity constraints so that inflation is a real issue. I don’t want to put words in Krugman’s blog, but my guess is that he believes that the U.S. economy is typically operating near its capacity, so that the story of needing tax increases to offset spending would in general apply.



Labor Market Policy Research Reports, April 2 – 6, 2012 Print
Written by Marie-Eve Augier   
Friday, 06 April 2012 14:30

The following papers are highlights this week in labor market policy research:

Center for American Progress

Taking Action on Clean Energy and Climate Protection in 2012: A Menu of Effective and Feasible Solutions
Jason Walsh and Kate Gordon

Center for Economic and Policy Research

Low-wage Workers Are Older and Better Educated than Ever
John Schmitt and Janelle Jones

Center on Budget and Policy Priorities

The Impact of State Income Taxes on Low-Income Families In 2011
Phil Oliff, Chris Mai, and Nicholas Johnson

Tax Foundation Figures Do Not Represent Typical Households’ Tax Burdens: Figures May Mislead Policymakers, Journalists, and the Public
Chuck Marr and Chye-Ching Huang

The Texas Economic Model: Hard For Other States to Follow and Not All It Seems
Elizabeth McNichol and Nicholas Johnson



Sharp Slowdown in March Jobs Numbers, Wages Remain Stagnant Print
Written by Dean Baker   
Friday, 06 April 2012 10:00

The economy added just 120,000 jobs in March, a sharp slowdown from the pace of the prior three months where growth averaged 246,000, according to the Bureau of Labor Statistics' latest employment report. The slowdown was pretty much across all sectors, with manufacturing, which added 37,000 jobs in March, being the major exception. In spite of the weak job growth, however, the unemployment rate edged down from 8.3 percent to 8.2 percent.

One very discouraging item in the report was a 0.1 hour drop in the length of the average workweek. The drop was driven largely by a decline of 0.3 hours in nondurable manufacturing, a sector where hours tend to be better measured. Wages continue to go nowhere. The average hourly wage has increased at just a 1.85 percent annual rate over the last quarter, which likely puts it behind inflation. The wage for production, non-supervisory workers, which better tracks the median wage, increased at just a 1.37 percent annual rate over this period.

For a more in-depth analysis, check out the latest Jobs Byte.

Three New Briefs Confirm It: The Minimum Wage is Way Too Low Print
Written by CEPR   
Thursday, 05 April 2012 13:45

Click here for a list of all of our most recent research, including these three issue briefs on the minimum wage.

Low-Wage Latino Workers Print
Written by Janelle Jones and John Schmitt   
Wednesday, 04 April 2012 11:15

For the past few weeks, CEPR has been beating the federal minimum wage drum with a series of issue briefs. In the latest brief, we describe how the increases in age and education of the low-wage workforce have not been recognized by the minimum wage. Several people have emailed us to ask how it is that the influx of primarily Latino immigrants since the 1980s has not pulled down the educational attainment of low-wage workers.

There are two important points here: First, Latinos are indeed over-represented among low-wage workers, but they are still only about one-fourth of the total in that wage range; and second, Latinos, even after the increase in immigrants over the last three decades, are still much better educated today than they were in 1979.

On the first point, here is the racial breakdown of low-wage workers (defined as earning $10 an hour or less in inflation-adjusted 2011 dollars):

Low-wage Workers, By Race, 1979 and 2011
















Source: Authors' analysis of CPS ORG.

Latinos were a much smaller share of the workforce in 1979 and made up only about 7 percent of low-wage workers in that year. The Latino population grew substantially in the intervening decades and Latinos are over-represented in low-wage jobs, but they were still only about one-fourth (23 percent) of low-wage workers in 2011.



Playing Inflation Games with Grandma: The Washington Consensus and the Chained CPI Print
Written by Dean Baker   
Wednesday, 04 April 2012 07:38

All the inside Washington types seem to agree, we should change the indexation of Social Security benefits to the chained consumer price index (CPI). This would supposedly make the annual cost-of-living adjustment (COLA) more accurate and save the government big bucks. Sounds great, right?

First of all, when all the inside Washington types agree on something, it is a good idea to hang on to your pocket books. Remember, these are the folks who thought it was great that everyone was becoming a homeowner in the middle of a housing bubble and that Alan Greenspan was the greatest central banker of all-time. In other words, inside Washington types are a group of people that mindlessly repeat the conventional wisdom and are largely incapable of original thought.

At the most simple level, the switch to a chained CPI is a way to reduce the annual COLA in Social Security by roughly 0.3 percentage points. That may sound trivial, but it is important to remember that this sum adds up over time. After ten years, this lower annual cost-of-living adjustment would imply a reduction in benefits of roughly 3 percent, after 20 years the reduction would be 6 percent, and after 30 years close to 9 percent. So this is real money.

This plan to lower the COLA raises two obvious questions. First would the new measure actually be more accurate, and second is a cut in Social Security benefits good policy?



Issue Brief Finds Low-wage Workers Are Older and Better Educated than Ever Print
Written by John Schmitt and Janelle Jones   
Monday, 02 April 2012 08:00

Relative to any of the most common benchmarks – the cost of living, the wages of the average worker, or average productivity levels – the current federal minimum wage of $7.25 per hour is well below its historical value. These usual reference points, however, understate the true erosion in the minimum wage in recent decades because the average low-wage worker today is both older and much better educated than the average low-wage worker was in the past.

All else equal, older and better-educated workers earn more than younger and less-educated workers. More education – a completed high school degree, an associate’s degree from a two-year college, a bachelor’s degree from a four-year college, or an advanced degree – all add to a worker’s skills. An extra year of work also increases skills through a combination of on-the-job training and accumulated work experience. The labor market consistently rewards these education- and experience-related skills with higher pay, but the federal minimum wage has not recognized these improvements in the skill level of low-wage workers.

Even if there had been no change in the cost of living over the last 30 years, we would have expected the earnings of low-wage workers to rise simply because low-wage workers today are, on average, older and much better educated than they were in 1979, when wage inequality began to rise sharply in the United States.



College Comparisons Print
Written by John Schmitt   
Sunday, 01 April 2012 10:25
Paul Krugman has reproduced an OECD chart that was featured in  a recent post by Jared Bernstein. The graph of interest (below) contrasts the share of older and younger people in OECD countries that have the equivalent of a four-year college degree or more.


Source: OECD via Jared Bernstein.

The dark blue squares show the share of the population age 55-64 with a college education; the light blue triangles show the share of much younger 25-34 year olds that have college degree. The arrows connecting the two observations for each country give an idea of the degree of national progress between generations. So, the long lines for Korea or Ireland, for example, suggest enormous progress in the thirty years or so between the time when the two age groups hit college age.

Jared’s main concern is that the United States “has essentially ceased making progress in terms of college attainment.” There is no arrow between the older and the younger generations’ college attainment rates because they are basically identical. Jared also notes that our younger generations are “now behind those of 12 other countries.” Krugman highlights the same points: “what we see is that almost every other nation is becoming more educated, but we’re not — and, of course, [the United States is] slipping rapidly down the rankings.”



CEPR News March 2012 Print
Written by Dawn Lobell   
Friday, 30 March 2012 14:30

The following highlights CEPR's latest research, publications, events and much more.

CEPR Successfully Pushes for World Bank Reform
At the beginning of the month, CEPR Co-director Mark Weisbrot was among the first to applaud the reform candidacy of economist Jeffrey Sachs for World Bank president. Sachs' run was unprecedented in its openness, in that Sachs sought to be the “world’s candidate” and ended up being nominated by several developing countries, and for drawing attention to the fact that all previous World Bank presidents have had Wall Street, military, or political backgrounds, rather than economic development backgrounds such as Sachs. It also put the undemocratic nature of the selection process (the U.S. has traditionally hand-picked the World Bank president) under a microscope.

CEPR’s support for Sachs' challenge to the World Bank, through a press release, op-eds in The Guardian, Folha de São Paulo (Brazil), and radio interviews helped to bring it to the attention of U.S. and international media. CEPR likewise applauded the historic developing-country nominations of Nigerian Finance Minister Ngozi Okonjo-Iweala and former Colombian finance minister and former high-level UN official Jose Antonio Ocampo.

Because of these challenges – as well as an international grassroots campaign opposing likely U.S. nominee Larry Summers – the Obama administration was forced to nominate someone who would also gather international support. CEPR joined others in the development community in applauding the U.S. nomination of Dartmouth College president and Partners in Health co-founder Jim Yong Kim. In comments widely-cited in press coverage, Mark Weisbrot said of Kim’s nomination “This is a huge step forward. If Kim becomes World Bank President, he’ll be the first qualified president in 68 years,” “Kim’s nomination is a victory for all the people, organizations, and governments that stood up to the Obama administration and demanded an open, merit-based process.” Mark wrote about the victory that Kim’s nomination represents in this op-ed for Folha de São Paulo and CEPR’s Director of International Programs Deborah James provided her analysis as well, with this op-ed published on Common Dreams, as well as this interview with WBAI 99.5FM’s Wake Up Call. Deborah also discussed Kim’s nomination with Thom Hartmann on The Big Picture (RT).

CEPR on Right to Rent and B of A
Bank of America is the latest entity to get behind CEPR’s Right to Rent concept. B of A recently announced the "Mortgage to Lease" program, which will be available to 1,000 B of A customers selected by the bank in test markets in Arizona, Nevada and New York. Participants will transfer their home's title to the bank, which will then forgive the outstanding mortgage debt. In exchange, they will be able to lease their home for up to three years at or below the rental market rate.

CEPR Co-director Dean Baker issued a press release in support of the program, saying: “It is encouraging that Bank of America has decided to pursue this rental option on its own. It would have been desirable if Congress had taken steps to require lenders to offer a rental option to foreclosed homeowners. This is a simple form of relief that would have been costless to taxpayers. It would also be desirable for Fannie Mae and Freddie Mac follow the lead of Bank of America and ease and extend the terms of their foreclosed homeowner rental option programs for the homes under their control.”

CEPR Senior Economist Eileen Appelbaum wrote an op-ed for the U.S. News and World Report. Dean Baker was quoted in this Wall Street Journal article and he was interviewed by MarketWatch. Dean also discussed the B of A plan with Jared Bernstein, video here.



Labor Market Policy Research Reports, March 26 – 30, 2012 Print
Written by Marie-Eve G. Augier   
Friday, 30 March 2012 13:00

Here’s a roundup of the labor market research reports released this past week:

Center for American Progress

Insourcing: How Bringing Back Essential Federal Jobs Can Save Taxpayer Dollars and Improve Services
Pratap Chatterjee

Sharing the Pain and Gain in the Housing Market: How Fannie Mae and Freddie Mac Can Prevent Foreclosures and Protect Taxpayers by Combining Principal Reductions with “Shared Appreciation”
John Griffith and Jordan Eizenga

Center For Economic and Policy Research

Affording Health Care and Education on the Minimum Wage
John Schmitt and Marie-Eve Augier

Center on Budget and Policy Priorities

Draconian Republican Study Committee Budget Would Cut Federal Medicaid Funding Nearly in Half by 2022 Even More Extreme than the Ryan Block Grant
Edwin Park and Matt Broaddus

Cantor Proposal for 20 Percent Business Tax Deduction Would Provide Windfall for Wealthy, Not Create Jobs CBO Rated Similar Approach One of Least Effective Ways to Create Jobs
Chuck Marr

Cooper-LaTourette Budget Significantly to the Right of Simpson-Bowles Plan: Proposes Much Smaller Tax Increases, Smaller Defense Cuts, and Deeper Domestic Cuts than Original Simpson-Bowles
Robert Greenstein

Medicare in the Ryan Budget
Paul N. Van de Water

New Tax Cuts in Ryan Budget Would Give Millionaires $265,000 on Top of Bush Tax Cuts
Chuck Marr

Ryan Medicaid Block Grant Would Cut Medicaid by One-Third by 2022 and More after That
Edwin Park and Matt Broaddus



Can Ireland Outsmart the European Central Bank? Print
Written by Dean Baker   
Friday, 30 March 2012 11:50

Okay, that may not be a very high bar, but the real issue is whether Ireland and other debt-troubled countries get around the straight-jacket being imposed by the ECB. Philip Pilkington and Warren Mosler have a plan that might do the trick: tax-backed bonds.

The idea is that a country like Ireland or Greece could issue bonds which, in the event of default, could be used to pay taxes in the issuing country. This means that if Greece issued a 10,000 euro bond, and suddenly found itself unable to meet an interest payment, the holder of the bond could then sell it to a person or corporation who owed Greece taxes. It would be worth 10,000 euros as a tax payment, so the holder of the bond would then presumably be able to sell it for pretty close to 10,000 euros.

This should ensure that Greece has a ready market for its bonds at a fairly low interest rate. As long as the Greek government is able to collect taxes, there will be demand for these bonds.

Of course what this implies is that the bonds are being used effectively as currency. Given the concerns of the people putting together the euro, they certainly should have outlawed this sort of move. After all, if larger euro zone countries went this route, they could issue huge amounts of tax-backed bonds. This could lead to much stronger growth but, horrors of horrors, it could make it difficult to keep inflation down to the sacred 2.0 percent target (moment of silence, please).

It would be remarkable if the euro designers did not write rules that prohibited member states from going this route. But hey, these folks missed the huge asset bubbles in the housing market that collapsed and sank the world economy, so clearly they are not the sharpest tools in the shed.

It would be great if the debt-troubled eurozone countries explored this tax-backed bond option. If it can be done, it should be.

Case-Shiller Index Virtually Flat in January Print
Written by Dean Baker   
Tuesday, 27 March 2012 11:45

After six consecutive months of falling, the Case-Shiller 20-City Index showed signs of stabilizing in January with the index remaining virtually flat. However, there were sharp divergences in price paths across cities, with four (Phoenix, Washington, D.C., Miami and Minneapolis) showing gains of more than 1.0 percent in January. San Francisco and Portland each had price declines of 0.6 percent. Prices in Cleveland fell by 0.7 percent, and prices in Atlanta fell by 1.1 percent.

There have been some reports of rising rents in many areas, ostensibly due to the fact that people who have lost their homes are now being forced to find rental housing that is in short supply. This really does not make sense as a national phenomenon. Rental vacancy rates continue to be at near-record levels, exceeded only by the peaks reached in 2009 and 2010 near the trough of the recession.

There also is zero evidence of upward pressure on rents in the Consumer Price Index series. The owners' equivalent rent series, which pulls out the impact of utilities and exclusively measures rent of shelter, is below its pre-recession level after adjusting for inflation. If anything, it has trended slightly downward over the last two years.

For a more in-depth analysis, check out the latest Housing Market Monitor.

Affording Health Care and Education on the Minimum Wage Print
Written by John Schmitt and Marie-Eve Augier   
Monday, 26 March 2012 09:00

The current value of the federal minimum wage — $7.25 per hour — is often compared to the cost of living, the average wage in the economy, or the productivity of the average worker. By all of these benchmarks, the current federal minimum is well below its historical levels.

But the current minimum wage looks even worse when compared with two kinds of purchases strongly associated with a middle-class standard of living or the ability to move up to the middle class: health insurance and a college degree.

The table below shows the results of a simple exercise. We ask how many hours did a minimum-wage worker have to work to pay for a year of college education (at various kinds of institutions) or a year of health insurance (for an individual or a family). The table compares the experience facing a minimum-wage worker in 1979 — when the minimum wage was $2.90 per hour — with that of a minimum-wage worker in 2010 or 2011 — when the minimum wage was $7.25. (All wages and prices, here and below, are in current dollars — that is the actual dollar value at the time, without any adjustment for inflation. The point is to compare the minimum wage in place in each period with the actual cost of health and education services at the same point in time.)

A minimum-wage worker in 1979, making $2.90 per hour, had to work 254 hours in a year to pay the $738 annual cost of tuition at a public four-year college in that same year. By 2010, minimum-wage workers at $7.25 per hour had to spend 923 hours to cover the $6,695 annual tuition at a public four-year college. (All our calculations ignore taxes and subsidies. More on that later.)




Labor Market Policy Research Reports, March 19 – 23, 2012 Print
Written by Marie-Eve Augier   
Friday, 23 March 2012 14:00

Here’s a roundup of the labor market research reports released this week:

Center for American Progress

The Economic Consequences of Cutting the Supplemental Nutrition Assistance Program
Jeffrey Thompson and Heidi Garrett-Peltier

The Costly Business of Discrimination: The Economic Costs of Discrimination and the Financial Benefits of Gay and Transgender Equality in the Workplace
Crosby Burns

Center on Budget and Policy Priorities

Ryan Budget Would Slash Snap Funding By $134 Billion Over Ten Years: Low-Income Households in All States Would Feel Sharp Effects
Dorothy Rosenbaum

President’s Proposal to Raise Rents on Some of the Nation’s Poorest Households Would Cause Serious Hardship
Barbara Sard

CBO Shows Ryan Budget Would Set Nation on Path to End Most of Government Other Than Social Security, Health Care, and Defense By 2050
Robert Greenstein

What You Need To Know About Premium Support
Paul N. Van de Water

The Asianization of America? Print
Written by Nicole Woo   
Wednesday, 21 March 2012 16:54

Well, not quite.  While Asians were the fastest growing racial group in the U.S. between 2000 and 2010, they still make up only about 5% of the population.  This is according to the a new Census brief released today, The Asian Population: 2010.

This brief is features several colorful maps and graphs showing the U.S. Asian population in states, cities, even counties.  It also has an interesting discussion of "race alone-or-in-combination concepts" and multiple race reporting, reflecting how the Census has been evolving over the past decades along with our racially-diversifying population. 

This useful new Census brief confirms what CEPR found last year in our report, Diversity and Change: Asian American and Pacific Islander Workers.  The Census brief is based on the 2010 Census data, while most of CEPR's analyses were based on the 2009 American Community Survey.  Also, CEPR's report looks at AAPI workers, while Census looks at the overall Asian population (and does not include Pacific Islanders, unless in combination with Asian, in this brief).  Still our findings match up very well.


Some small differences occur when looking at states.  While the 9 states with the largest Asian population match perfectly (CA, NY, TX, NJ, HI, IL, WA, FL and VA), Census ranks Pennsylvania 10th, while CEPR ranks it 12th.  In 10th and 11th places in CEPR's report are Massachusetts and Maryland, respectively.

And CEPR's report looks at several aspects that the Census brief doesn't get to, such as immigration status, country of birth, educational attainment, industry, unemployment, home ownership, disabilities and unionization.  However, Census says that over the coming decade, it "will release additional information on the Asian population."  Stay tuned!


The Process is Forever Changed, for the Better Print
Written by Dan Beeton   
Wednesday, 21 March 2012 15:00

In the wake of Jeffrey Sachs’ unprecedented open candidacy for World Bank president comes important news that developing country economists may also join the race: former minister of finance for Colombia and former senior UN official José Antonio Ocampo, and Nigerian finance minister and former high level World Bank official Ngozi Okonjo-Iweala. (Okonjo-Iweala is denying she will seek the position.) If this happens, in a similarly public way, as it appears it will, this will be a huge and irreversible step forward for World Bank governance reform.

It would be a leap closer toward what the World Bank’s members have officially adopted as their preference for choosing the Bank’s leader: an open, merit-based process. A contest, of sorts, between Ocampo and Sachs (and perhaps Okonjo-Iweala) – presumably with developing country support behind them – would be a sea change from the Bank’s past practice of putting the U.S.’ (and the Global North’s) interests first in selecting presidents, with developing countries excluded. The succession this time is far different than in 2005, for example, when the Bush administration simply declared that Paul Wolfowitz would helm the Bank, to howls of protest but no-known alternative nominees.

The Obama Administration is now in a bind, facing the prospect of missing the March 23 nomination deadline as it scrambles to find a candidate who won’t be too offensive, or look especially unqualified next to two (or three) economists with experience in economic development in developing countries. That certainly leaves out Larry Summers, who reportedly is opposed even within the G7, and the administration’s other rumored options, such as UN Ambassador Susan Rice, who also may have other career goals in mind.

All this shows the importance of what Sachs has done with his campaign, unprecedented in both its openness and its calls for reform.  Sachs has said all along that he welcomes other candidates, and a merit-based process. Due in large part to his campaign, it’s something of a new ball game.

There’s a long way to go before the World Bank presidency process is truly democratic. The one-dollar/one-vote system of governance ensures that the U.S. and other rich countries have disproportionate weight in making these and other important decisions. But it is clear that Sachs – and Ocampo and Okonjo-Iweala, if he indeed is joined by them – have won considerable gains in forcing open this process.

This post originally appeared on the site World Bank President.

Congressional Budget Office Projects the Return of the Housing Bubble Print
Written by Dean Baker and David Rosnick   
Monday, 19 March 2012 13:58

The Congressional Budget Office (CBO) does not exactly have a stellar record when it comes to economic forecasting. Back in 2001 failed to see the collapse of the stock bubble that led to the recession that year even though it was already well underway. It forecast both a decade of solid economic growth and continued strong capital gains and capital gains tax revenue.

CBO also never noticed the housing bubble. In January of 2008, one month after the recession is now dated as having begun and a year and a half after the housing bubble had begun to deflate, CBO projected nothing but blue skies. The annual Budget and Economic Outlook showed nothing by continued growth, low unemployment and near balanced budgets.

This track record suggests that CBO’s economic projections warrant serious scrutiny. In carrying through such due diligence, we happened to notice an unusual aspect to the projection in the most recent Budget and Economic Outlook.

These projections show that Federal Housing Finance Administration’s House Price Index will rise by 20 percent over the course of the decade after adjusting for inflation. This projection is striking because it suggests a sharp divergence from the pre-bubble pattern to house prices.


Source: Congressional Budget Office and authors' calculations.

Robert Shiller constructed a series on house prices in the United States from 1890. This series showed that from 1890 until the beginning of the housing bubble in the late 90s, house prices essentially tracked the overall inflation rate. CBO’s projection implies that it expects house prices will regain at least part of their bubble value.

This projection has some important implications for its economic projections. Higher house prices imply greater wealth. With the value of residential housing roughly equal to GDP at present, if house prices rise by 20 percent, it implies an increase in housing wealth equal to 20 percent of GDP. Assuming a wealth effect on consumption of 6 percent (i.e. homeowners spend another 6 cents annually for every additional dollar of housing wealth), this will translate into an increase in annual consumption of 1.2 percent of GDP.

If there is a multiplier on this consumption of 1.5, then the effect of CBO’s projected return of the bubble is to raise annual GDP by roughly 1.8 percent. Presumably higher house prices also imply greater levels of construction. If this 20 percent rise in real house prices increases construction by just 5 percent above trend levels, then the impact of this projected bubble is to raise projected GDP by more than 2.0 percentage points.

Of course CBO might be proven right and we may see house prices return to levels that are well above their long-term trend. However if they are wrong then it seems likely that the recovery will be even slower than CBO is now projecting, with the economy taking even longer to get back to its potential output and for the unemployment rate to fall back to more normal levels.

New CEPR Issue Brief Shows Minimum Wage Has Room to Grow Print
Written by John Schmitt   
Monday, 19 March 2012 08:30
It is coming up on three years since the last increase in the federal minimum wage  –to $7.25 per hour– in July 2009. 
By all of the most commonly used benchmarks – inflation, average wages, and productivity – the minimum wage is now far below its historical level. By all of these reference points, the value of the minimum wage peaked in 1968. If the minimum wage in that year had been indexed to the official Consumer Price Index (CPI-U), the minimum wage in 2012 (using the Congressional Budget Office’s estimates for inflation in 2012) would be at $10.52. Even if we applied the current methodology (CPI-U-RS) for calculating inflation –which generally shows a lower rate of inflation than the older measure– to the whole period since 1968, the 2012 value of the minimum wage would be $9.22.
Using wages as a benchmark, in 1968 the federal minimum stood at 53 percent of the average production worker earnings. During much of the 1960s, the minimum wage was close to 50 percent of the same wage benchmark. If the minimum wage were at 50 percent of the production worker wage in 2012 (again, using CBO projections to produce a full-year 2012 estimate), the federal minimum would be $10.01 per hour.


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