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The Great Gatsby Curve Print
Written by John Schmitt   
Wednesday, 18 January 2012 15:15

Source: Alan Krueger, Council of Economic Advisers.

Economist Miles Corak, one of the world’s leading experts on economic mobility, has written a devastating take-down of the core of two recent pieces by the Brookings Institution’s Scott Winship. Winship has been arguing that President Obama, his economics team, and many others on the political left are wrong to claim that economic mobility has been on the decline in recent decades. But, as Corak documents, it is Winship that is misreading the data.

Winship’s first piece was written in response to President Obama’s much-commented-on speech last December in Osawatomie, Kansas, where the president argued that a child born into poverty today has a lower chance of reaching the middle class –about 33 percent– than a child born into poverty just after World War II – about 50 percent.

Writing in the National Review Online, Winship said that the president’s “claim of falling upward mobility … rang false” and “is contradicted most of the research that has been conducted to date.” Winship’s criticisms focused on some pretty technical issues in research conducted by Berkeley economist David Card, one of the country’s foremost labor economists and winner of the 1995 John Bates Clark medal. After reviewing Card’s numbers, Winship concludes that upward mobility today “is no worse than it has ever been and it does not translate into a general lack of opportunity for the middle class.”



Plain Talk about Private Equity Print
Written by Eileen Appelbaum   
Sunday, 15 January 2012 16:05
There is clearly a role for private equity in the US economy. Successful companies too small to go public that are having difficulty raising capital for expansion  to capitalize on their success may turn to private equity for the infusion of capital they need to make acquisitions or to grow organically. Publicly traded companies that are doing okay but lag the industry’s leading firms can benefit from an influx of management know-how as well as capital if they are taken over by a private equity firm that includes among its partners managers with experience operating companies in the industry. Unfortunately, adding value and selling companies at a fantastic profit is not the only way that the partners in a private equity firm make fantastic amounts of money.
Private equity is part of the large shadow banking system in the US. It raises huge unregulated pools of money – not only from pension funds and endowments but from sovereign wealth funds like the Abu Dhabi Investment Authority and the China Investment Corporation – and spends these funds out of view of agencies responsible for assuring the stability of the financial system and out of sight of the American people. Incentives favor the high use of leverage – the borrowed money that is used to finance private equity transactions – and raise the odds of bankruptcy or other financial distress.  First, and most importantly, responsibility for repaying the debt incurred when the private equity firm borrows money to buy a company falls on the company that was acquired – not on the private equity firm.  The only money the private equity firm and the investors in its investment funds have at risk is the initial equity they put up as a down payment. Not surprisingly, they would like this to be as small as possible. Second and following from the first point, greater use of leverage magnifies the returns to private equity from its successful investments while minimizing the losses from its unsuccessful efforts.  Thus, a private equity fund can have strong returns even if some of the companies in its portfolio perform poorly or even go bankrupt. And third, the US tax code treats debt more favorably than equity since interest on the debt can be deducted from income.  In what might be called tax-payer funded capitalism, the reduced taxes from the higher interest deduction increase the firm’s value and returns to investors without creating any new value. My colleague at CEPR, Dean Baker, provides a simple example.


CEPR Co-Director Mark Weisbrot Pushes for UN Accountability on Haiti, in ABC News Reports Print
Written by Dan Beeton   
Friday, 13 January 2012 16:29

CEPR Co-Director Mark Weisbrot continued to push for UN accountability in Haiti over the past week, for UN responsibility in introducing a cholera epidemic that has killed thousands, and for the sexual assaults that UN troops have perpetrated against Haitians.

A new ABC News article cites scientists as saying that there is “no doubt” that troops with the UN Stabilization Mission in Haiti (MINUSTAH) are responsible for bringing cholera to Haiti:

"The scientific debate on the origin of cholera in Haiti existed, but it has been resolved by the accumulation of evidence that unfortunately leave no doubt about the implication of the Nepalese contingent of the UN peacekeeping mission in Haiti," French epidemiologist Renaud Piarroux told ABC News’s Brian Ross Investigative Unit.

But the UN continues to deny the facts, and Mark Weisbrot is quoted as saying, “It's outrageous for the UN to try to deny responsibility for bringing cholera to Haiti.” Weisbrot has repeatedly pushed for the UN to own up to its responsibility in causing the epidemic, and provide compensation to victims, such as in this Guardian column and this press release.



Labor Market Policy Research Reports, Jan. 7 – 13, 2011 Print
Written by Marie-Eve Augier   
Friday, 13 January 2012 12:00

Recently released reports from CBPP and NELP:

Center on Budget and Policy Priorities

Chart Book: The Legacy of the Great Recession

Policy Basics: Introduction to the Supplemental Nutrition Assistance Program (SNAP)

Proposal to Greatly Expand "Moving to Work" Initiative Risks Deep Cuts in Housing Assistance Over Time
Douglas Rice and Will Fischer

Romney's Charge that Most Federal Low-Income Spending Goes for 'Overhead' and 'Bureaucrats' is False

For Major Low-Income Programs, More Than 90 Percent Goes to Beneficiaries
Robert Greenstein and CBPP staff

SNAP Is Effective and Efficient
Dottie Rosenbaum

National Employment Law Project

Sticking to Principles: Congress Should Oppose Barriers to Unemployment Insurance And Instead Provide Meaningful Reemployment Tools

On Second Anniversary of Quake in Haiti the Situation Remains Dire Print
Written by Matt Sedlar and Dan Beeton   
Thursday, 12 January 2012 12:30
Today marks the second anniversary of Haiti’s devastating earthquake, but despite some rosy headlines from publications such as the Washington Post about recovery efforts, the situation for Haitians has barely improved. “It is hard to see how the situation today is any better than a year ago,” CEPR Co-Director Mark Weisbrot wrote in a recent statement. “In many areas, such as provision of sanitation facilities and housing to internally displaced persons (IDPs), there has been very little improvement. Meanwhile, the cholera epidemic has infected hundreds of thousands more Haitians during the past year, and killed thousands, with no end yet in sight.” As Mark told USA Today, "There's been a remarkable lack of progress.”

Since the earthquake, CEPR has closely followed the recovery and reconstruction process, tracking official data, using information from inside UN and NGO meetings, scrutinizing reports, and making our own on-the-ground investigations. This information has been useful for officials, members of Congress, NGO’s, and the media. The Miami Herald cited CEPR this week in reporting “beltway area for-profit development companies received 83 percent of U.S. Agency for International Development Haiti contracts. About 2.5 percent of the funds went to Haitian companies, and less than half of one percent went to Haitian non-profit groups.”



Why GDP Per Capita Can Start A Bar Fight Print
Written by Dean Baker   
Tuesday, 10 January 2012 11:51

In his latest New York Times Magazine column, "The Other Reason Europe Is Going Broke," Adam Davidson writes, "One great way to start a bar fight during an American Economic Association conference is to claim that the U.S. economy is preferable to Europe's. Someone will undoubtedly start quarreling about how GDP per capita doesn't measure a person's happiness."

NPR's Planet Money blog asked Dean Baker, co-director of the Center for Economic Policy Research, to explain why GDP per capita, the total GDP of a country divided by the number of people in the country, is such a controversial measure. This post originally appeared there.

The gap in per capita income between the United States and Europe is striking, but these numbers do not tell the whole story in comparing living standards There are three important issues to keep in mind.

First, there are some very big measurement issues in international comparisons of GDP. At the top of this list, I would put our spending on health care. We spend 17 percent of GDP on health care, whereas the average across Europe is less than 10 percent GDP. What do we get for this extra 7 percentage points of GDP? That is not obvious to say the least. The U.S. ranks behind every West European country in life expectancy and does not stand out in most other outcome measures.

There are also important areas of spending that don't directly improve living standards. The United States spends more than 4.0 percent of GDP on the military as opposed to less than 1.0 percent across Western Europe. One can argue whether this spending is necessary, but this is another 3.0 percent of GDP that is not improving living standards. The same applies to spending on criminal justice, which is more than 1.5 percent of GDP in the United States and perhaps one-tenth this amount across Western Europe.



Fracking Nonsense: The Job Myth of Gas Drilling Print
Written by Helene Jorgensen   
Sunday, 08 January 2012 12:02

Natural gas companies are trying to sell fracking as the solution to all of the economic ills ailing this country.  Supposedly fracking can bring the economy out of its current stagnation by creating uncountable new jobs, without running up government deficits, and even save us from global warming in the process.  So how come local residents and environmentalists oppose fracking? The short answer is that fracking does not create local jobs, it lowers property values, and pollutes the water we drink and the air we breathe.

Hydraulic fracturing, or fracking for short, is drilling for gas buried more than a mile under ground in hard rock layers. In order to extract the gas, a toxic cocktail of chemicals is pumped deep into the ground to fracture the rock. In recent years, the state of Pennsylvania has embraced the fracking boom and more than 4,500 wells have been drilled there since 2007. The state of New York has taken a more prudent approach by implementing a moratorium until the environmental and economic effects have been evaluated. The New York Department of Environmental Conservation is currently seeking public comments on the issue (deadline January 11).

In an intensive lobbying campaign to influence a skeptical public’s opinions about fracking, the gas industry has commissioned a number of economic studies that find huge job gains from fracking. A recent study by the economic forecasting company IHS Global Insight Inc., paid for by the America’s Natural Gas Alliance, projects that fracking will create 1.1 million jobs in the United States by year 2020. However, a closer read of the study reveals that the analysis also projects that fracking will actually lead to widespread job losses in other sectors of the economy, and would result in slightly lower overall employment levels the following 10 years, compared to what it would be if fracking were restricted. In another study, commissioned by the Marcellus Shale Coalition, researchers with Penn State University estimated that gas drilling would support 216,000 jobs in Pennsylvania alone by 2015. The most recent data from the Bureau of Labor Statistics show employment in the oil and gas industry to be 4,144 in Pennsylvania.

Rather than trying to project what will happen in the future, one could look at what the employment impact has been from Pennsylvania’s love affair with fracking since 2007, using actual employment data readily available from the Bureau of Labor Statistics.



Labor Market Policy Research Reports, January 2-6, 2011 Print
Written by Matthew Sedlar   
Friday, 06 January 2012 15:20

Recently released reports from CEPR, CBPP, Demos and EPI.

Center for Economic and Policy Research

Down and Out: Measuring Long-Term Hardship in the Labor Market
John Schmitt and Janelle Jones

Center on Budget and Policy Priorities

Hundreds of Thousands of Lower-Wage Workers, Many of Whom Worked for Decades, Would Be Denied Unemployment Insurance Under Provision Now Under Consideration
Robert Greenstein, Hannah Shaw and Chad Stone


The State of Young America: Key Facts

Under Attack: New York’s Middle Class and the Jobs Crisis
with the Drum Major Institute for Public Policy

Economic Policy Institute

Working Hard to Make Indiana Look Bad: The Tortured, Uphill Case for ‘Right-to-Work’
Gordon Lafer

Washington Post to Host Q&A with Dean Baker on Jobs Numbers Print
Written by CEPR   
Friday, 06 January 2012 11:23

According to the Bureau of Labor Statistics' latest employment report, the unemployment rate fell to 8.5 percent in December, the lowest level since February 2009, when Congress approved the stimulus package. Discounting a 42,200 job gain reported for couriers — likely the result of seasonal adjustment, not real job growth — the economy created 158,000 jobs in December, in line with expectations.

Pulling out the courier jobs, growth has averaged 145,000 per month over the last four months, which is somewhat better than the 90,000-100,000 a month needed to keep pace with the growth of the labor force, but certainly not rapid enough to explain a 0.6 percentage point drop in unemployment. At this pace, we may not get back to pre-recession levels of unemployment until 2027.

CEPR Co-Director Dean Baker will take part in a live Q&A on the Washington Post at 1 p.m. today on the jobs numbers.

BlackRock's Surprising Reach into the US Economy Print
Written by Eileen Appelbaum   
Thursday, 05 January 2012 17:20

While attention has been focused on the activities of that great vampire squid, Goldman Sachs, investment firm BlackRock has been quietly taking over the American economy. In a presentation scheduled for 2:30 pm on Saturday, January 7 at the Labor and Employment Relations Association meetings at the Palmer House in Chicago, Professor Gerald Davis of the University of Michigan’s Ross School of Business documents the extensive reach of BlackRock. Aided by the growth of defined contribution pension plans and abetted by the weakness of other financial services firms, notably Barclay’s, during the financial crisis, BlackRock catapulted into first place in 2011 among the top holders of large blocks of shares of publicly-traded companies in the US. With $3.5 trillion in assets under management that they invest on behalf of their clients, the company has become the world’s largest investor. BlackRock manages assets for institutions such as pension funds and mutual funds, and its iShares business is popular with both retail investors and hedge funds who delegate all proxy votes for their iShares to BlackRock.

Among Professor Davis’ startling findings:

  • Ownership of US corporations is no longer highly dispersed.
  • In 2011 BlackRock held a 5% stake in 1,803 US listed companies. This is almost triple second place Fidelity’s 677 companies and more than triple third place Vanguard’s 524 companies.
  • As a result of changes in the nature of equity markets – the growth of exchange traded funds (ETFs) and the decline in the number of new firms going public (IPOs) –  the number of publicly-traded corporations has dropped by half since 1997 to about 4,300 listed US companies in 2011.
  • BlackRock owns a 5 percent stake in more than two-fifths of publicly-traded US companies.

Professor Davis concludes: “Prospects for control of corporations by financial institutions have never been this high in a century.”


A July 2011 ruling by the DC Circuit Court vacated the SEC's 2010 proxy rule that allowed long-term shareholders’ that own at least 3% of a company’s shares to nominate directors.

Down and Out Print
Written by Janelle Jones   
Thursday, 05 January 2012 15:15

As states get ready for cuts to the federal Extended Benefits program, those who have been unemployed the longest get ready for their struggle to become even more difficult. Our most recent recession has caused an unprecedented increase in the number of people unemployed for at least six months. In our new paper, John Schmitt and I make the case for two significant changes to our thinking on long-term unemployment.

First, we suggest expanding the current discussion on long-term unemployment to include all workers facing “long-term hardship” in the labor market. This broader category would include “discouraged,” “marginally attached” and involuntary part-time workers. While these workers are not included in the long-term unemployment rate, they have faced a good deal of long-term hardship in recent years due to the weak labor market. The figure below shows that the number of people facing long-term hardship, by this expanded definition, is more than double the amount of long-term unemployed.


Second, we suggest adding an alternative to the standard measure of long-term unemployment, which calculates the share of the unemployed who have been out of work for 27 weeks or more.  The alternative measure would express those same individuals as a share of the total labor force. As we show in our paper, this alternative measure has several features to complement the standard long-term unemployment rate.
Sun Capital's "Gift" to Taxpayers Print
Written by Eileen Appelbaum   
Sunday, 01 January 2012 12:15

In September and October of 2011, several restaurant chains owned by private equity firm Sun Capital – Friendly’s, the iconic ice cream parlor and family restaurant, SSI Group, which operates Grandy’s and Souper Salad restaurants, and Real Mex, which operates El Torito Restaurant and Chevys Fresh Mex – all entered bankruptcy. In the case of Friendly’s, Sun Capital sought to use the bankruptcy proceedings to write off debt and to rid itself of the company’s pension obligations to its nearly 6,000 employees and retirees while continuing to own the restaurant chain. Immediately after Friendly’s entered bankruptcy another Sun Capital affiliate announced its intention to acquire Friendly’s. With less than two months between the bankruptcy announcement and the date set for the auction of Friendly’s, no other bidders came forward. On December 29 Judge Kevin Gross approved the sale and Sun Capital closed out 2011 allowed to “buy” Friendly’s in a “credit-bid” sale – that is, Sun Capital got to hold onto ownership of Friendly’s just by wiping out a $75 million loan it had made to Friendly’s and assuming Friendly’s liabilities. A key part of Sun Capital's restructuring plan is to shift liability for Friendly’s pension plan to the federal government's Pension Benefit Guaranty Corporation (PBGC). Generally, PBGC does not require companies to make good on pension plans they can no longer afford. But in an unusual move, PBGC accused Sun Capital of fraud and announced that it will fight Sun Capital's attempt to stick US taxpayers with the bill. PBGC objects to what appears to be a transparent effort by Sun Capital to take advantage of the bankruptcy process to abandon pension obligations while continuing to keep its ownership of Friendly's.

Congress Places Conditions on Military and Police Aid to Honduras Print
Written by Alexander Main   
Wednesday, 28 December 2011 11:46
In response to widespread concern in both the House and Senate over human rights abuses involving the Honduran police and military, the United States Congress has placed new conditions on a portion of U.S. police and military aid to Honduras.   The legislative language that establishes these new conditions can be found in the Department of State, Foreign Operations and Related Programs Appropriation Actwithin the Consolidated Appropriations Act for Fiscal Year 2012, which was passed by Congress on December 16.  It now requires that, before allocating 20% of the funds allocated for Honduras, the State Department must investigate and report back to the Committee on Appropriations whether the Honduran government "is implementing policies to protect freedom of expression and association, and due process of law," whether it is prosecuting "military and police personnel who are credibly alleged to have violated human rights,” and whether the Honduran police and military "are cooperating with civilian authorities in such cases."  

The human rights situation in Honduras has steadily deteriorated since the military coup d’etat that led to the forced removal of the country’s elected president in June 2009.  Honduras currently has the highest homicide rate in the world and, since 2010, at least 17 journalists have been assassinated, the majority of whom were critical of the coup.  Dozens of anti-coup political activists have also been killed, as well as union leaders, LGBT activists and Afro-indigenous representatives. In the northeastern Bajo Aguan region, forty-two land rights advocates have been murdered since the 2009 coup.  Honduran military and police have been allegedly implicated in a number of the many political murders and other politically-motivated acts of violence that have taken place since the coup.  Only a tiny number of these crimes have been investigated or prosecuted.

In October, police agents charged with killing two unarmed students, including the son of the Rector of the National Autonomous University of Honduras in Tegucigalpa, were briefly detained and then let go.   Earlier this month, a prominent critic of the police, Alfredo Landaverde, was murdered in broad daylight in Tegucigalpa by unidentified assailants.  On December 5th, President Lobo signed a decree allowing the military to take on policing functions for a period of 90 days.

Though the U.S. administration has not commented on Honduran police and military involvement in human rights abuses, concern over U.S. support for the country’s security forces has grown in Congress.  In July, 87 members of the House of Representatives called on Secretary of State Hillary Clinton to suspend police and military assistance to Honduras.  On November 28, Howard Berman – the highest-ranking Democrat on the House Foreign Affairs Committee – sent a letter to Secretary Clinton which expressed “grave concern” regarding the “role of Honduran state security forces in human rights abuses.”  The letter called on Clinton to “evaluate immediately United States assistance to ensure that we are not, in fact, feeding a beast.”



Labor Market Policy Research Reports, Dec. 19 – 23, 2011 Print
Written by Matthew Sedlar   
Friday, 23 December 2011 12:25

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


The Year in Review: What 2011 Meant for the 99%
Tamara Draut and David Callahan

Employment Policy Research Network

A Jobs Compact for America
Thomas A. Kochan

UCLA Institute for Research on Labor and Employment

Project Labor Agreements in Los Angeles
Lauren D. Appelbaum

CEPR News December 2011 Print
Written by Dawn Lobell   
Thursday, 22 December 2011 12:45

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].



Labor Market Policy Research Reports, Dec. 5 – 16, 2011 Print
Written by Alexandra Mitukiewicz   
Friday, 16 December 2011 15:45

Recently released reports from CBPP, EPI, NELP, and PERI:

Center on Budget and Policy Priorities

House Unemployment Insurance Proposal Would Harm Jobless Workers, Weaken Economy, and Undermine UI System
Chad Stone and Hannah Shaw


Economic Policy Institute

A jobs-centered approach to African American community development: The crisis of African American unemployment requires federal intervention
Algernon Austin

The Restore the American Dream for the 99% Act: An analysis of job-creation provisions
Andrew Fieldhouse and Rebecca Thiess



Consumer Price Index Unchanged, Rebounding Dollar Restrains Import Prices Print
Written by David Rosnick   
Friday, 16 December 2011 13:00

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.

Faith-Based Economics? Print
Written by Dean Baker   
Thursday, 15 December 2011 11:15

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.”

Read the rest of the post here at Cato Unbound.

The Impact of a Financial Speculation Tax on GDP: Problems with the European Commission Model Print
Written by Dean Baker   
Wednesday, 14 December 2011 09:40

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.)



A Tale of Two Deficit Charts Print
Written by Dean Baker   
Monday, 12 December 2011 09:15

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.



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