The following highlights CEPR's latest research, publications, events and much more.
CEPR on Latvia CEPR’s recent paper, “Latvia's Internal Devaluation: A Success Story?” by CEPR Co-director Mark Weisbrot and Research Associate Rebecca Ray, concludes that Latvia’s deep recession and slow recovery hold important lessons for other eurozone countries that may rely on an “internal devaluation” in an attempt to boost their economies through exports. According to Mark, “The economic and social costs of Latvia’s economic strategy since the global financial crisis and world recession of 2008-2009, of ‘internal devaluation,’ have been enormous for the people of Latvia,” not the least of which have been the high unemployment and other harmful impacts on working people that are inherent to such “internal devaluations.” “The case of Latvia has important implications for the current debate on the eurozone crisis, since similar pro-cyclical policies are being implemented in a number of countries,” Mark concludes.
The paper received a great deal of press, both in Europe and the United States, including this mention by Paul Krugman and it was the focus of this story in The Guardian and this article on CBS’ Moneywatch. The paper was also widely discussed in the Latvian Press.
CEPR on the Eurozone CEPR has written extensively on the ongoing eurozone crisis, having a significant influence on the policy debate. In columns for Al Jazeera and The Guardian, Co-directors Dean Baker and Mark Weisbrot were among the first to suggest that if the European Central Bank (ECB) were to continue to refuse to fulfill its mission as a lender of last resort then the U.S. Federal Reserve should consider doing so, since the impact of the eurozone crisis is already projected to slow the U.S. economy. This helped to push the Fed to reduce emergency dollar borrowing costs for European banks, which Dean and Mark praised in this joint press release, though they added that more needs to be done. Dean and Mark each wrote about the ECB’s role in perpetuating the crisis as well. The ECB, they point out, could end the crisis at any time. However, Dean suggests that the ECB may be prolonging the crisis in order to extract painful austerity concessions from weaker eurozone countries.
CEPR staff took to the airwaves as well. Mark was interviewed about the eurozone on Al Jazeera, PRI’s The World, and CTV (Canada), while CEPR Senior Economist John Schmitt discussed the Fed’s response on the Rick Smith radio show [MP3].
According to the latest Bureau of Labor Statistics' reports on the consumer price, U.S. import/export price and producer price indexes, the Consumer Price Index was unchanged in November and has grown at a 0.8 percent annualized rate over the last three months. Energy prices fell 1.6 percent last month, dropping below prices in March of this year. Core inflation rose 0.2 percent, only slightly faster than the 0.1 percent reported in October (0.17 percent compared with 0.14 percent.) Over the last six months, core prices grew at a 2.2 percent annualized rate.
There continues to be weak inflationary pressures in the economy, with a rebounding dollar that is helping keep import prices low and a decrease in the real hourly wage.
For an in-depth analysis, check out the latest Prices Byte.
This post is part of a month-long discussion on Cato Unbound on John Maynard Keynes.
After Tim Congdon’s response to my earlier piece, I am a bit confused what we are debating. First, to finish up the simplest point, Congdon’s original post expressed unhappiness about President Obama’s $800-billion-a-year fiscal stimulus. I pointed out that it was actually closer to $300 billion a year. Now Congdon has come back with data from the International Monetary Fund showing the structural deficit was almost $800 billion higher in 2011 than in 2007.
That’s fine, except that most of the increase in the structural deficit (measured as a share of GDP) came in 2008, under President Bush’s watch. Fiscal 2009 began in October of 2008, which means that one-third of the fiscal year was over before President Obama entered the White House. I don’t work for President Obama, and furthermore I am not troubled by someone raising the deficit in response to an economic collapse, but I just don’t understand the logic of his assertion: “In that sense they [the Obama administration] did endorse a fiscal boost that amounted to almost $800 billion, at an annual rate, relative to the last recession-free year of 2007.” Most of this boost was the result of President Bush’s policies.
I referred in my original note to research that indicated the stimulus was as effective as, or even somewhat more effective than, had been predicted. Congdon responds by saying:
Like Milton Friedman, I reject this sort of analysis. As Friedman said in a 1996 … “I believe it to be true…that the Keynesian view that a government deficit is stimulating is simply wrong. A deficit is not stimulating because it has to be financed, and the negative effects of financing it counterbalance the positive effects, if there are any, on spending.”
While interest in a financial speculation tax, also known as a financial transaction tax (FTT), is picking up in the United States, the European Union is getting close to actually approving a tax. As part of this process, the European Commission (EC) had its staff put together a model that would project its impact on investment and growth.
This model, which the staff admits is very much a work in progress, projected that in the long-run the tax would lead to a 1.76 percent decline in output. Opponents of the tax were quick to seize on this projection as a basis for opposing the tax.
As I noted earlier, there are good reasons for questioning this projection from the model. It implies that the cost of financial transactions (a tax would have no different effect than brokerage fees and other trading costs) have an extraordinarily large impact on growth and productivity growth. This is completely at odds with nearly all of the economic literature on growth, which does not mention financial transactions costs at all.
Extrapolating from the model, the decline in the average cost of financial transactions in the United States over the last three decades would explain close to 15 percent of the productivity growth in over this period. If this is true, then the U.S. should anticipate slower productivity growth in the years ahead, since there is little room for transactions costs to decline further, now that they getting close to zero. (The Congressional Budget Office and the Office of Management and Budget have not incorporated any such slowdown into their growth projections.)
Another implication of the EC model’s projection is that the U.K. could quickly see a jump in its GDP of close to 9 percent if it got rid of its 0.5 percent tax on stock trades. It is unlikely that anyone really believes this. Of course, if the EC model’s projections are accurate then the UK should have seen its GDP increase by close to 9 percentage points above its baseline in the years following 1986. That was the year it lowered its tax from 1.0 percent to 0.5 percent. (There was no increase in growth that was close to this size.)
Not long after I first came to Washington 20 years ago I was at a conference dealing with Social Security privatization. One of the panelists used a number for the administrative costs of private accounts that was far lower than the numbers I had seen in the literature. After the panel, I asked one of the other panelists about her best estimate of the administrative costs of private accounts. She said that this depended on whether I was interested in advocacy or policy.
I was somewhat taken aback by her response, but after a moment I told her that I was interested in accuracy. I have always felt that this is the best approach to policy questions.
Accuracy has not featured prominently in Washington budget debates in recent decades. There is an enormous amount of misunderstanding about the deficit, much of it deliberately promoted by politicians. We hear endless tales of out-of-control government spending and chronic deficits. This is nonsense as the data clearly show, but unfortunately both parties have an interest in promoting the deceptions.
This post is part of a month-long discussion on Cato Unbound on John Maynard Keynes.
Tim Congdon covers a lot of ground in his essay on Keynes, Krugman, and the liquidity trap. I will narrow my focus to the current crisis and the relevance of Keynes to the policies being pursued.
First, it is important to focus on an issue where there should really be no grounds for disagreement: the size of the stimulus and its expected impact. Contrary to what Congdon states in his piece, the stimulus was closer to $300 billion a year (@ 2 percent of GDP) in 2009 and 2010, not $800 billion a year. The total stimulus package came in at close to $800 billion. Nearly $100 billion involved a technical fix to the alternative minimum tax, which is done every year and has nothing to do with stimulus. Approximately $100 billion was slated to be spent after 2010 in longer term projects. This leaves $600 billion, or roughly $300 billion to be spent in both calendar years, 2009 and 2010.
The expected impact of the stimulus can be determined by reading what the Obama administration was saying about it at the time. The projections in the paper by Christina Romer and Jared Bernstein, which outlined the original proposal, showed that they expected it to create just 3.7 million jobs. The package that they got through Congress was smaller and less oriented toward spending than their original proposal, so the number of jobs projected would have to be adjusted downward accordingly.
On Saturday, Dec. 3 – while most of the U.S. media was focused on the political demise of Republican presidential candidate Herman Cain and the growing financial meltdown in Europe – the Community of Latin American and Caribbean States (CELAC) was officially launched at a summit in Caracas, Venezuela. The new regional organization includes every nation in the Western Hemisphere with the exception of the United States and Canada and is seen by many as a potential rival to the region’s foremost multilateral organization, the Washington-based Organization of American States (OAS). Though it generated a great deal of media attention within Latin America and was attended by the majority of the hemisphere’s heads of state, the U.S. press largely overlooked the Caracas summit with, for instance, the New York Times limiting its coverage to a brief 100 word blurb from the Associated Press.
The minimal coverage that the summit garnered in the U.S. media was mostly limited to reports that downplayed the significance of the new regional bloc. It was depicted in some articles as “Chávez’s baby” and – according to one U.S. pundit – “will probably last as long as Chávez is willing to underwrite it.” Miami Herald columnist Andres Oppenheimer insisted in a headline that the “Group will have no Teeth.” Based on conversations with a White House official and a representative of a right-wing Latin American government, Oppenheimer was able to determine with certainty that CELAC “will hardly make it into the history books.”
As is typically the case with U.S. media coverage of Latin American politics, reporters and commentators appeared incapable of recognizing yet another watershed development in a region that has undergone major political transformations over the last dozen years. In this, they closely resemble the U.S. administration which – under Barack Obama as much as under George W. Bush – has failed to acknowledge these transformations and maintained the same stale policies that have been in place for decades. On Dec. 2, while the Caracas summit was in full swing, State Department spokesperson Mark Toner confidently stated that the OAS remains “the pre-eminent multilateral organization speaking for the hemisphere.” Many Latin Americans would take exception at the notion that the OAS “speaks for the hemisphere” and with CELAC now steaming ahead again, following a brief hiatus, it appears increasingly likely that the aging organization will fade into irrelevance.
Today is the first day of a week-long protest, “Take Back the Capitol” (#99inDC). A collaborative effort between grassroots organizations, Occupy movements and unions, this protest strives to bring attention to the amount of corporate control in politics, and demand that Congress represent the 99%. Today the protesters will arrive in the District and begin to set up the “People’s Camp,” located at 14th and Constitution Ave. NW. This will be the protestors’ home base, while they move about DC with a busy five-day agenda, including scheduled protests on Capitol Hill and K Street.
With many local governments recently ordering evictions of #ows camps, Take Back the Capitol’s short term stay is a smart tactic. The movement has great timing - unemployment insurance extensions are up for difficult debate on the Hill, and Take Back the Capitol is bringing the focus back to the job crisis, and getting Americans back to work. The unemployment rate did fall by 0.4 percentage points in November – however, this is no cause for celebration. A main factor for this decrease is that many Americans, mostly women, dropped out of the labor force - for more info on the latest unemployment numbers, check out CEPR’s recent Jobs Byte.
My friends at the Political Economy Research Institute at the University of Massachusetts did a new study examining the evidence on the military spending fairy. The issue at hand is the whine heard across the country that cuts in military spending will cost jobs.
In a severe downturn like the current one, cuts in any government spending will cost jobs, the question is how many. Using the Bureau of Labor Statistics' employment requirement tables, they find that on a per dollar basis spending on health care or energy conservation creates 50 percent more jobs than spending on the military. Spending on education creates more than twice as many jobs as spending on the military.
In other words, if the point of spending is to create jobs, then the military is the last place that we would want to put our dollars. But, many in Washington believe in the military spending fairy who blesses the dollars spent on the military with unmatched job creating power that has no basis in normal economic analysis.
According to the latest Bureau of Labor Statistics' employment report, 315,000 people left the labor market in October. This move pushed the unemployment rate down by 0.4 percentage points to 8.6 percent. BLS' establishment survey also showed a weaker-than-expected 120,000 job gain for October, but this bad news was largely offset by upward revisions of 72,000 to the job growth numbers for the prior two months.
The drop in labor force participation was entirely among women, especially black women. Participation numbers among white women fell by 0.2 percentage points to 199,000. The drop among black women was 164,000, a drop of 1.2 percentage points. These monthly numbers are highly erratic, and it is likely that at least part of this drop will be reversed in future months. Nonetheless there had been a trend of declining participation rates among both white and black women even prior to the November plunge. This suggests that there is a real issue of women losing access to jobs; although the December figures may show some reversal.
For more in-depth analysis, read the latest Jobs Byte.
As a follow up to our Tuesday post on government regulation and mass layoffs, we highlight another Washington Post article helping debunk the myth that government regulation is smothering job creation. Suzy Khimm recently wrote a piece for the Post’s Wonkblog about barriers to small business success. A study conducted by the Hartford Financial Services Group asked small businesses what, in their opinion, was the biggest threat to their success.
Source: The Hartford Group via the Washington Post Wonkblog
As the graph above shows, the biggest barriers to success for businesses that identify as “slightly-” or “moderately successful” are those that have to do with a lack of demand: "the economy," “customers have no money" or "no clients or work." Even about 10 percent of businesses who identify as “extremely successful” pinpointed the economy as their main obstacle. Khimm notes that most of the “extremely successful” businesses identify government regulation as the culprit (11.4 percent) and explains that as businesses become more successful, they become more likely to identify problems other than the economy as the major roadblock to their further success.
The Hartford findings are completely consistent with the data on mass layoffs that we presented on Tuesday, and the National Federation of Independent Businesses (NFIB) data, discussed earlier here at the CEPR Blog.
The following highlights CEPR's latest research, publications, events and much more. CEPR on the Eurozone As the eurozone debt crisis continues to deepen, CEPR Co-directors Mark Weisbrot and Dean Baker released this joint statement calling for the Federal Reserve to intervene where the European Central Bank (ECB) won’t, and stabilize European bond markets by buying Italian and Spanish bonds – and other sovereign bonds as necessary – thereby lowering interest rates on these bonds. Dean followed up with this piece in Al-Jazeera that expands on the argument for why such intervention may be needed, Senior Economist Eileen Appelbaum was interviewed about it on Canada’s Business News Network, and Mark was interviewed for this piece that appeared in the Global Post.
CEPR has written extensively on Greece, Italy, the ECB and the future of the eurozone. CEPR’s research has had an influence on the debates, as evidenced by this article on CBS’s Moneywatch blog that references CEPR’s work on Argentina as a possible model for Greece, and this debate that Mark Weisbrot did opposite Dutch MEP Corien Wortmann-Kool with Channel 4 in the U.K. Mark also debated University of Bologna economist Paolo Manasse, in this video for The Real News Network.
Mark, who has appeared repeatedly on NPR, PBS, the BBC, and other media outlets to discuss the eurozone crisis over the past year, has continued to write attention-grabbing columns on the topic, such as this one for The Guardian, which argues that the ECB’s ideological commitment to austerity is driving the crisis deeper. Dean made a similar case against the ECB’s policies in columns for The Guardian and Al-Jazeera, and discussed these ideas on Irish national radio (RTE) and Pacifica’s KPFK among others.
Mark took this important analysis to Europe, where he presented at a conference in Riga, Latvia organized by the Friedrich Ebert Stiftung. Mark’s participation was widely covered in the Latvian media, and he was interviewed by numerous TV, radio, and newspaper outlets. Videos of Mark’s presentation, and a post-presentation interview, are available here.
Mark also participated in a discussion titled “The Future of Europe - How to Solve the Euro Crisis?” sponsored by the Georgetown University European Club. Other speakers at the November 14th event included Georgetown Professors Jeffrey Anderson and James Vreeland; and Heiko Hesse, an economist at the IMF and President of Washington European Society.
Many conservatives argue that “excessive” government regulations are “a big wet blanket” smothering the economic recovery. But, mass layoffs data from the Bureau of Labor Statistics (BLS) suggest otherwise. A recent article in the Washington Post reported that in “2010, 0.3 percent of the people who lost their jobs in layoffs were let go because of ‘government regulations/intervention.’ By comparison, 25 percent were laid off because of a drop in business demand.”
The graph below shows the relevant data cited in the Washington Post story back to 1995, when the data series starts. The top line ("Total Initial Claimants") shows the BLS measure for the total number of workers laid off each quarter in what the BLS calls "mass layoff events," expressed as a share of total private-sector employment. For most of the period since 1995, mass layoffs were never more than 0.4 percent of total private-sector workers. At the peak of the recession in 2009, mass layoffs spiked at over 0.7 percent of private-sector workers per quarter, before falling back down closer to historical levels. What is most interesting about the graph is that the middle line -- which tracks layoffs due to declines in business demand --is driving almost all of the overall level of mass layoffs. The thick, almost flat line at the bottom tracks the portion of mass layoffs caused by government regulation. Government regulation has essentially no impact on layoffs and can't explain any of the increase in layoffs in the last several years.
The seasonally adjusted Case-Shiller 20-City index fell for the fifth consecutive month, dropping 0.6 percent in September. The index has now fallen at a 4.1 percent annual rate over the last three months and is down by 3.6 percent from its level a year ago. The unadjusted 20-City index also fell by 0.6 percent with prices dropping in 17 of the 20 cities.
While prices have fallen almost everywhere since the peak of the housing bubble, it's striking how badly bottom-tier homes have been hit in some of the most bubble-affected cities. Prices of bottom-tier homes are down by more than 50 percent from their bubble peaks in Chicago, Minneapolis and Los Angeles; by more than 60 percent in Tampa; and by more than 70 percent in Phoenix. Buying a moderate-income house in these markets near the peak of the bubble was an incredibly bad investment.
The current pattern of slowly declining house prices will likely persist into next year. There continues to be enormous excess supply in most areas, as evidenced most directly by the persistence of near-record vacancy rates. The continuation of extraordinarily low interest rates will be helpful, but on the other side the slow rate of job growth seems likely to persist through 2012.
In a recent report, Arloc Sherman of the Center on Budget and Policy Priorities concluded that the current income poverty rate would be much higher if not for social insurance, including temporary expansions of social insurance included in the 2009 Recovery Act. For example, Sherman concludes that about 6.9 million more Americans would have fallen below the income poverty line if not for six initiatives in the Recovery Act (specifically, three tax credit provisions, two unemployment insurance expansions, and an expansion of Supplemental Nutritional Assistance).
Both Sherman and I think this helps show that social insurance is doing one of the things it is designed to do: insuring working- and middle-class families against steep income declines during a recession. In an Economix post today, Casey Mulligan offers a less charitable interpretation:
... the safety net has taken away incentives and serves as a penalty for earning incomes above the poverty line. For every seven persons who let their market income fall below the poverty line, only one of them will have to bear the consequence of a poverty living standard. The other six will have a living standard above poverty.
Note the criminological rhetoric deployed by Mulligan: Social insurance effectively pardons six out of every seven evildoers who apparently connived and conspired to get laid off, have their hours or benefits reduced, or not get hired during the Great Recession knowing full well that they could likely do so without having to "bear the consequence of a poverty living standard." And, to add injury to this insult, social insurance "penalizes" people who aren't currently receiving it.
My first reaction is befuddlement. Does Mulligan think that private insurance penalizes people who don't submit claims? Am I penalized when my neighbor's home is burgled and his insurance company partially compensates him for his losses?
When California passed its Paid Family Leave Act, it became the first state in the nation to make paid family leave available to virtually every private sector worker, a distinction it still shares with just one other state. The hope was that this groundbreaking legislation would provide access to paid leave for family caregiving for the vast sectors of the workforce – particularly low-wage workers – that have little or no access to paid sick days, paid vacation, or paid parental or family leave.
A recent CEPR-CUNY study based on a poll of California voters found that well under half (42.7%) of respondents had seen, read or heard of the PFL program. Even among those who had voted in the previous general election, just 44.9 percent knew about the program. This is an important improvement over the 29.7 percent of voters who knew about PFL in 2003. The increase in awareness over the past eight years occurred overwhelmingly among women. This may be due to the fact that the state now informs new mothers about the paid family leave program. Nevertheless, it is worrying that awareness of paid family leave is lowest among those workers who need it most – Black and Latino workers, and workers with lower wages or less education. The Poll results indicate clearly that more needs to be done to reach these workers.
Providing doctors with brochures that explain the program and requiring them to display the information prominently in their offices would help. Making the brochures available at WIC centers, which help new mothers and babies meet their nutrition needs, is another way to let low-income workers know about the program.
Today's Wall Street Journal profiled Pilgrim Screw Corp.'s successful use of work sharing — reducing workers' hours instead of laying them off, with the workers getting partial unemployment benefits to make up much of their lost pay — in this detailed article, "Cutting Hours Instead of Jobs."
The WSJ points out that even a conservative, Kevin Hassett of the American Enterprise Institute:
also is a fan, and noted that he hasn't encountered any hostility when he has raised the topic with fellow Republicans. "This thing could have a big impact on the labor market," he added.
At the other end of the media spectrum, earlier this month PBS television's Need To Know described work sharing as an "innovative job-saving program, which seems to be paying off" in Rhode Island and across the nation (and included an interview with CEPR's Dean Baker):