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Strong Increase for the Case-Shiller Index in July, But How Long Will it Last? Print
Written by Dean Baker   
Tuesday, 27 September 2011 11:30

The Case-Shiller 20-City Index saw another strong increase in July, this time rising 0.9 percent. The index rose 1.1 percent in June and has now increased at a 13.1 percent annual rate over the last three months; although it is still down by 4.1 percent over the last year. But unlike in June, when all 20 cities showed house price increases, 18 of the 20 cities had price increases in July, with only Phoenix and Las Vegas showing modest price declines (0.1 percent and 0.2 percent, respectively).

The strongest factor pushing up prices is the reversal of the sharp price declines in bottom-tier home prices in the period immediately following the end of the first-time buyers tax credit. Recent extraordinarily low interest rates will provide a boost to the market — though the scaling back of Fannie and Freddie’s higher mortgage limits will be a factor going in the other direction — but this upward bounce is surely coming to an end. The inventories of new and existing homes for sale remain above normal levels. In addition, there is a large amount of inventory not showing up on the market, which is best demonstrated by the near-record vacancy rate nationwide.

For more, read the newest Housing Market Monitor.

 
Nobody Gets Rich On Their Own: Richard Posner Edition Print
Written by Shawn Fremstad   
Tuesday, 27 September 2011 08:10

In a recent column, Paul Krugman cites Elizabeth Warren to make the important point that today's libertarian conservatives:

... miss[] the point that all of us live in and benefit from being part of a larger society. Elizabeth Warren, the financial reformer who is now running for the United States Senate in Massachusetts, recently made some eloquent remarks to this effect that are, rightly, getting a lot of attention. "There is nobody in this country who got rich on his own. Nobody," she declared, pointing out that the rich can only get rich thanks to the "social contract" that provides a decent, functioning society in which they can prosper.

In the National Review Online, Rich Lowry refers to the idea of an underlying social contract as "Elizabeth Warren's piffle" and "folly." Lowry's dismissal of what he calls the "supposed" social contact is worth contrasting with the views of a more substantive conservative intellectual, the jurist and legal theorist Richard Posner. Here's what Posner had to say in his 1990 book, Problems of Jurisprudence

In a state of nature people would not have much in the way of life, liberty, or property to protect. The long life, spacious liberties, and extensive property of the average American citizen are the creation not of that American alone but of society—a vast aggregation of individuals, living and dead—and of geographical luck (size, topography, location, natural resources, climate). Assuming two equally able and hard-working people, one living in a wealthy society and the other in a poor one, the former will almost certainly have more income and wealth than the latter, and the difference will be due to the efforts of other members, living and dead, of the wealthier society, as well as to the accidents of geography. Human nature being what it is, the employment of the government's taxing and spending powers to redistribute the "social" component (as one might call it) of a person's income will adversely affect the incentives of both the taxpayer and the welfare recipient. But there is no necessary breach of the social contract. The taxed person is still much better off than he would be in the state of nature. ...

The point can be made in slight different terms, with the help of the Hegelian insight that the idea of individual rights—indeed of individuality—is socially constructed rather than presocial. Men's natural state is not one of equality and sturdy independence; it is one of dependence on more powerful men. Economic freedom in the classic liberal sense is one of the luxuries made possible by social organization. The individual's right to property is not "natural." His possessions are a product of social interactions rather than of his skills and efforts alone. Moreover, these skills may be, at least in part, a social product too. American workers are paid more than South Korean workers; are they better workers? Better people?

Of course, Posner's assertion that redistribution of the social component "will" adversely affect the incentives of both the "taxpayer and the welfare recipient" is simplistic, too sweeping, and empirically incorrect.  (Most "redistribution" happens between "taxpayers and taxpayers" and between "taxpayers and corporations that don't pay taxes," and incentives can be affected either positively or negatively depending on the specifics of the redistribution.) But other than this misstatement, there isn't much in Posner's account to argue with.

On the other hand, while Lowry is willing to acknowledge that "the average earnings of the typical man working full time are beneath 1978 levels," he (and today's libertarian conservatives in general) have no serious program for doing anything other than making things worse. As the legacy of the Bush tax cuts have shown, reducing the federal income taxes of the fabulously wealthy—those "lucky duckies" who have benefitted so much from, in Posnerian terms, the efforts of others living and dead and the accidents of geography—has failed to create more good jobs for most Americans. 

 
Krugman Notes That Low Inflation Is a Problem Print
Written by Dean Baker   
Sunday, 25 September 2011 07:32

For far too long economists and economics reporters have fixated on the prospect of deflation, as though something really bad happens if the inflation rate falls below zero and becomes negative. This is another one of the ungodly silly things that otherwise intelligent people are inclined to believe.

Of course there is zero magic to zero. The problem is not a negative inflation rate per se, the problem is an inflation rate that is too low.

Given the weakness of the economy, we would like a large negative real interest rate. The federal funds rate is zero, which is as low as it could go, and even the long-term rate is approaching its lower limits. (People holding long-term bonds at very low interest rates risk large capital losses if interest rates rise at some future point.) This means that to get the real interest rate down, we need to get the inflation rate up.

One can dispute how large a negative real interest rate we would want (according to some measures of the Taylor Rule, it should be as high as - 6.0 percent), but the basic story is the higher the better. In this context a prolonged period of very low inflation is bad, even though a period of low deflation would be even worse. However, crossing zero is just a difference of quantity, not quality. There is no reason to be more upset about a drop in the inflation rate from 0.5 percent to -1.5 percent, than a drop from 1.5 percent to 0.5 percent.

Krugman essentially makes this point in his blogpost yesterday. Hopefully this will help to end the obsession with deflation. The point being that everything is not okay as long as the inflation rate just stays positive. Some of us have been saying this for a while (e.g. here, here and here), but it helps hugely to have Krugman making this point.

 
Labor Market Policy Research Reports, Sept. 19 – 23, 2011 Print
Written by Alexandra Mitukiewicz   
Friday, 23 September 2011 14:45

A roundup of the labor market research reports released this week.


Center for American Progress

The Jobs Case for Conservation: Creating Opportunity Through Stewardship of America’s Public Lands
Jessica Goad, Christy Goldfuss and Tom Kenworthy

A Better, More Diverse Senior Executive Service in 2050: More Representative Leadership Will Improve the Effectiveness and Efficiency of the Federal Government
Jitinder Kohli, John Gans and James Hairston


Center for Law and Social Policy

American Jobs Act: New Work and Learning Opportunities for Low-Income, Unemployed Adults and Youth


Employment Policy Research Network

The Continued Collapse of the Nation’s Teen Summer Job Market: Who Worked in the Summer of 2011?
Andrew Sum, Ishwar Khatiwada and Sheila Palma


National Employment Law Project

Coming Back for More: Michigan Lawmakers Aim to Cut Unemployment Insurance for Second Time in Six Months
Mike Evangelist and Rick McHugh

The Rights of Migrant Workers and Their Families in an Irregular Situation
Rebecca Smith

 
Why is Elaine Kamarck So Hung Up on Defending Conservative Social Policy? Print
Written by Shawn Fremstad   
Friday, 23 September 2011 10:10

In a recent Washington Monthly blog post, Elaine Kamarck argues that the conservative 1996 law that eliminated AFDC and replaced it with a block grant (known as TANF) is a success. Kamarck is quite right when she argues that "TANF is not, nor was it meant to be, the central pillar of the social safety net"—but she then goes on to effecitvely make TANF the central pillar of "welfare reform."

This is both an analytical and political error. As I argued previously here, it conflates the progressive welfare reform efforts that took place in the late 1980s and early 1990s—including the large-scale expansion of the EITC in 1993, increases in the federal minimum wage, and successful demonstration programs like New Hope and the Minnesota Family Investment Project—with the "truly conservative" hijacking of progressive reform in the 1996 block grant law. Making TANF the central pillar of welfare reform as Karmarck does only bolsters conservative arguments for more block grants, and makes it harder to reform TANF along the lines of previous progressive initiatives that have been shown to be successful based on hard data.

The question that Karmack needs to ask is: of the various policies that fell under the banner of "welfare reform" in the 1990s, which ones are working (or worked, if they were demonstrations), which ones have failed, and which ones do we not know enough about to judge whether they have been a success or failure?

Read more...

 

 
Operation Twisted Print
Written by Dean Baker   
Wednesday, 21 September 2011 20:31

The Republican congressional leadership took the unusual step of sending Federal Reserve Board Chairman Ben Bernanke a letter warning against "additional monetary stimulus."This drew an outraged response from many Washington pundits, although for the wrong reasons.

Many in the pundit class expressed outrage that politicians would dare to influence the policy decisions of the "independent Fed." This is the high priest theory of central bankers. In this worldview, the Fed and other central banks are run by people who get the truth directly from the economy and make their judgements after carefully meditating on the latest economic data and connecting it to the sacred texts of the economics profession.

The high priest theory always warranted ridicule, but after the economic collapse of 2008 no self-respecting person should ever be associated with this view. The housing bubble that wrecked the economy was cleaarly visible from at least 2002. If the central bankers had any superior knowledge of the economy, they would have been shooting at the bubble at that point rather than allowing it to grow large enough so that its collapse would wreck the economy.

Note that shooting at the bubble does not mean raising interest rates. Note that shooting at the bubble does not mean raising interest rates [corrected -- thanks Sandwichman]. (Sorry, I had to say that twice for the economists who might be reading this.) It meant first documenting the bubble, showing that house prices had grown far out of line with historical trends and with rents. This information should have been at the center of every public appearance by Greenspan and other Fed officials. The Fed also should have used all its regulatory authority to crack down on the fraudulent mortgages that were being issued.

Read more...

 

 
Why Do the Bankers Decide How Many People Will Be Unemployed? Print
Written by Dean Baker   
Wednesday, 21 September 2011 14:02

The Federal Reserve Board's Open Market Committee (FOMC) met today and decided on a modestly expansionary monetary policy. It decided to unload $400 billion worth of short-term assets over the next 9 months and replace them with longer term government bonds. The idea is that this would place some downward pressure on long-term interest rates.

The effect on interest rates and the economy is likely to be very modest. It is unlikely that long-term rates would fall by even 20 basis points (0.2 percentage points) as a result of this action and more likely the effect would be closer to 10 basis points, but at least it is a step in the right direction. This will make it cheaper for people to buy a car or refinance a mortgage. It will also be cheaper for firms to borrow to invest. It would have been good to see stronger action, but this is what the FOMC was prepared to do.

However what was most striking about this decision was the breakdown on the vote. Five of the people voting were members of the board of governors. (There are 7 positions, but 2 are currently vacant.) The governors are appointed by the president and approved by Congress for 14-year terms. Of the 5 sitting governors, 3 were appointed by President Obama, 1 was appointed by President Bush, and 1 governor (Chairman Ben Bernanke) was appointed by both.

The other members of the FOMC are the presidents of the 12 district banks. These presidents are essentially appointed by the banks in the district. All 12 district bank presidents sit in on the FOMC meeting, but only 5 vote at one time.

Read more...

 

 
What Skills Shortage? Print
Written by John Schmitt   
Wednesday, 21 September 2011 09:30

I remember well the gas shortages of the 1970s. Long lines at the pumps, and gas prices through the roof. Higher prices are, of course, the textbook free-market response to a shortage.

Some economic analysts argue that an important reason we have high unemployment today is because we have a shortage of skilled workers. Employers have good jobs to fill, but they can’t find qualified workers to fill them.

If there really is a shortage of skilled workers, though, we’d expect to see skilled workers’ wages rising. Back in the late 1990s, for example, when the economy experienced four years of sustained low unemployment, and employers really were beating the bushes to fill vacancies, inflation-adjusted wages for workers at all skill levels rose faster than they have during any period in  the last three decades.

Journalist David Wessel has posted a magnificent graph at the Real Time Economics blog that shows almost the exact opposite of what we’d expect if there were a shortage of skilled workers.

wessel_slaughter_wages-400x187

Source: Matthew Slaughter via David Wessel.

Read more...

 

 
Why I'm Not Surprised by Heritage's "Surprising" Poverty Facts Print
Written by Shawn Fremstad   
Wednesday, 21 September 2011 08:30

At the Inequalities blog, Brendan Saloner, citing a perennial report from the Heritage Foundation, notes: "… many of the so-called poor appear to be living at a more middle-class standard. Most of them have fridges, microwaves, televisions, and even air conditioning and game systems. There are data that support this point, and it needs to be addressed. I have not heard a clear response from leftwing commentators."

There's actually no dearth of responses, including ones from Stephen Colbert and the Center for American Progress. Here's Colbert: 

And you would not believe some of the stuff poor people have in their homes! Luxuries like ceiling fans, DVD players, answering machines, and coffee makers. I don't have those things. I have central air, a Blu-Ray player, voicemail, and I go to Starbucks every day. Must be nice. Must be pretty nice.

I also recently had the chance to respond to Heritage's Robert Rector in a public radio debate with him. Rector's message is that we shouldn't be too concerned about economic insecurity and declining real incomes among the working class and middle class. In support of this message, he points to data showing that among households with income below the federal poverty line in 2005—an austere $19,806 for a family of two parents and two children that year, less than half of the income most Americans say such a family needs to "get along" at a basic level—most have refrigerators and cars, and some have computers and even own homes.

Read more...

 

 
Someone Remind Cato's Michael Cannon That Private Health Insurance is Expensive Print
Written by David Rosnick   
Monday, 19 September 2011 14:30
Over at Cato, Cannon pimps for the Ryan Plan, but leaves out all the most important facts to make his case. Citing the Dartmouth Atlas, he writes, "one third of Medicare spending is pure waste. Since the amount of the [Ryan Plan] vouchers would be based on per-enrollee Medicare spending, they would essentially give Medicare enrollees 50 percent more money than they would need to purchase all the beneficial medical care that Medicare currently provides." Actually, this would be true only if they could use the voucher to buy back into Medicare, rather than purchasing private health insurance. According to the Congressional Budget Office, Medicare-equivalent health care spending is 12 percent larger when going through private insurance than through Medicare itself. CBO projects that private insurance will perform worse over time, so that by 2022 when Ryan's plan would go into effect, total spending through private insurance would be 52 percent higher than through Medicare.

Furthermore, the Ryan Plan increases the age of eligibility from 65 to 67 — greatly increasing the costs to those who would have been covered by Medicare. Combined with the higher prices, the Ryan Plan would raise individual spending on Medicare-equivalent health care by $256,000 over 20 years for each the first beneficiaries (currently age 54). In order save any money under the Ryan Plan, these first beneficiaries would have to cut their medical coverage by half. The problem only gets worse over time, so that today's 14 year olds would have to cut their coverage by nearly three-quarters.

 
Two Health-Care Graphs Print
Written by John Schmitt   
Monday, 19 September 2011 08:56

Lane Kenworthy has posted two extremely helpful graphs that try to gauge the efficiency of the US health-care system relative to those of other wealthy countries. The first shows life expectancy in each country, in 2007, against per-capita health expenditures in the same year.

americasinefficienthealthcaresystem-figure1-version2

Source: Lane Kenworthy.

The United States is a huge outlier. We spend the most –by far– and yet we also have the lowest life expectancy.

But, as Kenworthy notes, the US could be an outlier for reasons that don’t have to do with the efficiency of our health-care system. Our life expectancy might be lower because we have a much higher murder rate or a much higher incidence of obesity, for example. So, he offers a second graph that, for the same group of countries, traces out the relationship over time between life expectancy and per-capita health expenditures. In this graph, we can see to what extent additional health expenditures help to reduce life expectancy within each country.

Life expectancy versus health expenditures, 1970-2008

Source: Lane Kenworthy.

The United States is still a substantial outlier. In every other country in the sample, extra health-care spending is associated with much higher increases in life expectancy than we see in the United States.

Neither graph proves causality, but both –and especially the second graph– suggest that the US health-care system is expensive and inefficient relative to the systems in place in other rich countries.

This post originally appeared on John Schmitt's blog, No Apparent Motive.

 
Labor Market Policy Research Reports, Sept. 5 – Sept. 16, 2011 Print
Written by Alexandra Mitukiewicz   
Friday, 16 September 2011 14:45

A roundup of the labor market research reports released this week and last week.


Center for American Progress

Workers and Their Health Care Plans: The Impact of New Health Insurance Exchanges and Medicaid Expansion on Employer-Sponsored Health Care Plans
Alan Reuther


Center on Budget and Policy Priorities

Letting Payroll Tax Cut Expire Would Shrink Worker Paychecks and Damage Weak Economy
Chuck Marr and Brian Highsmith

Read more...

 

 
Workers of Color Less Likely to Have Pensions Print
Written by John Schmitt   
Friday, 16 September 2011 11:40

Workers of color are substantially less likely to participate in an employer-sponsored retirement plan than white workers are. Over the years 2003-2009, for example, almost half of white workers (49.0 percent) participated in an employer-sponsored retirement plan, compared to only 42.6 percent of Asian American and Pacific Islander (AAPI) workers, 41.3 percent of black workers, and 26.6 percent of Latino workers.

retirement-race-fig1

Women (43.7 percent) are also generally less likely than men (45.4 percent) are to be in an employer-sponsored retirement plan. This holds true for white, AAPI, and black workers. Latino men, however, are less likely (25.3 percent) than Latino women (28.5 percent) to participate in an employer-sponsored plan.

retirement-race-fig2(Data note: All data are from the March Current Population Survey for the years 2004 through 2010, covering calendar years 2003 through 2009. The sample is all workers ages 18 to 64. Participation in an employer-sponsored plan requires both that the employer has a plan and that the employee participates in the plan. Participation does not require that the employer make a financial contribution.)

 
Friday Failure: The Recession and Lost GDP Print
Written by David Rosnick   
Friday, 16 September 2011 10:45

Note: Requires latest version of Flash to play.

According to the Bureau of Economic Analysis, in the second quarter of 2011 the United States produced goods and services at a $15 trillion annual rate (Table 1.1.5). The Congressional Budget Office, meanwhile, figures that the economy was then capable of producing $16 trillion per year. This implies a loss of $250 billion income over just three months.

From October 2007 through June 2011, the difference between what Americans might have produced and what they actually produced has a total value of $3.21 trillion. Amazingly, CBO projects that there is another $2.56 trillion in lost income yet to come over the next five years. That is, if CBO’s projections come to pass, we will have foregone income of $5.78 trillion over the course of the recession.

Read more...

 

 
CPI Ticks Up as Average Earnings Continue to Fall Print
Written by David Rosnick   
Thursday, 15 September 2011 11:15

The Consumer Price Index rose 0.4 percent in August and at a 2.6 percent annualized rate over the last three months, according to the Bureau of Labor Statistics' latest reports on the consumer price, U.S. import/export price and producer price indexes. By contrast, the CPI rose at a 4.6 percent rate from February to May and at a 5.6 percent rate the three months before that.

Average real hourly earnings fell again in August, 2.0 percent from its peak in June 2010. Earnings have only increased by 0.7 percent in the last four years, which means it will take until sometime in 2062 to see an increase in real earnings of just 10 percent. As long as this slow growth in earnings remains along with weak job growth, there is no reason to expect much domestic price pressure.  Worldwide commodity prices and a falling dollar, however, may contribute to inflation—particularly in the short run.

For more, read our latest Prices Byte.

 
Is the Poverty Rate Today Reaching Reagan or Eisenhower Levels? Do We Need a "New War on Poverty"? Print
Written by Shawn Fremstad   
Thursday, 15 September 2011 09:00

In a news story in the Financial Times, historian Alice O'Connor—whose Poverty Knowledge: Social Science, Social Policy, and the Poor in Twentieth-Century History is must-read for any serious student of anti-povery policy—says "we are entering territory which looks like the period before we even starting fighting a 'War on Poverty' in the 1960s."

At 15.1 percent in 2010, the poverty rate appears quite a bit lower than the rates that prevailed in the 20th century before 1964. The official rate was 19 percent in 1964 when the Economic Opportunity Act was enacted, and 22.4 percent in 1959. What we have entered is Reagan-Bush I territory, when the poverty rate last crossed the 15-percentage-point level (15% in 1982, 15.2% in 1983, and 15.1% in 1993).

One important distinction between now and the Reagan era is that Congress and President Obama did more to help working-class people in 2009 and 2010—and less to harm them—than Reagan in the early 1980s. Unfortunately, things may get worse since Tea-Party inspired members of the current Congress seem hell-bent on blocking any new action to create jobs and bolster social insurance. 

Another important distinction between now and the period just before the War on Poverty is that income poverty had already been trending downward for more than a decade and a half back then—it was just over 40 percent in 1949 and had been cut in half by 1964. By contrast, over the last decade, poverty has been on the rise—going from 11.3 percent in 1999, it's lowest level since 1973 to 14.3 percent in 2009. In other words, things were steadily improving then, while today we've lost an entire decade of economic progress.

Read more...

 

 
How It Could Have Been Different This Time Print
Written by Dean Baker   
Thursday, 15 September 2011 06:57

I have been dismissive of the claim that the financial crisis has condemned the country to 8-10 years of high unemployment and low growth. This claim is derived from the book by Carmen Reinhart and Ken Rogoff, "This Time is Different."

Reinhart and Rogoff perform a valuable exercise in recounting the history of financial crises over the last six centuries. They note that these crises have been followed by a long period of adjustment in which economies are subject to weak growth and high unemployment. Based on this history, they and others have argued that the United States is condemned to a prolonged period of stagnation. The moral of the story is to stop your whining and live with it.

I find this to be a case of incredibly bad induction. If we had looked at the probability that newborns would live to age five, examining random 20-year intervals in different countries over the last six centuries, we would find that in most of these intervals, most newborns do not live to age five. If we therefore concluded that we should expect children born today to die before the age of five, we would be utterly crazy. The advances in health care, nutrition and sanitation over this period make it possible for the vast majority of children almost everywhere to survive to adulthood.

Read more...

 

 
2000-2011: A Lost Economic Decade Print
Written by CEPR   
Tuesday, 13 September 2011 12:45

The Census Bureau has released its annual report on income and health insurance coverage in the previous year, and as expected the report shows a substantial deterioration in Americans' economic security between 2009 and 2010. Substantial income losses for middle- and working-class Americans and an increase in the number of Americans without health insurance cap off what can only be called a "lost decade" in economic terms. However, things could have been worse: The 2009 Recovery Act and the 2010 Affordable Care Act, as well as existing social insurance, moderated the declines.

The latest CEPR Poverty Byte looks at the new Census numbers, and in a new paper Shawn Fremstad offers recommendations for addressing poverty in a jobs and economy framework.

 
Small Business Bust Print
Written by John Schmitt   
Monday, 12 September 2011 09:02

Back in the summer of 2009, Nathan Lane and I wrote a CEPR report (pdf) documenting something that is surprising to many Americans. The United States has just about the smallest small-business sector in the world’s rich economies.

Our report used OECD data to look at the share of workers in small businesses in each of a variety of industries (manufacturing, computer-related services, research and development, “restaurants, bars, and canteens”, real-estate activities, “renting of machinery and equipment”). These were all of the industry categories for which the OECD had produced comparable data on the employment share by enterprise size. Unfortunately, at that time, the OECD had no numbers for the distribution of employment by enterprise size for the economy as a whole.

But, the OECD’s Entrepreneurship at a Glance 2011 now reports internationally comparable data on total small-business employment for a collection of rich and selected middle-income countries. The first figure below shows the share of total national employment in each country in enterprises with one to nine employees. The United States is dead last, with about 11 percent...

Read more...

 

 
Do Tax Cuts Boost the Economy? Print
Written by David Rosnick   
Friday, 09 September 2011 16:57

This is an abridged version of a CEPR paper available here.

There are many economists who argue that temporary tax cuts, like those in 2009 stimulus and the ones proposed by President Obama last night, have no impact on the economy. They argue that people will save a temporary tax credit rather than spend it.

Stanford University Professor (and Hoover Fellow) John Taylor is one of the economists making this argument. He purports to show that there was no statistically significant increase in private consumption of goods and services as a result of certain types of government transfers made over the last decade.  According to his analysis, it is unclear whether an additional dollar of government transfers led to any additional spending, or, alternatively, whether it raised personal savings by more than one dollar.

However, a closer look reveals something quite different.

Read more...

 

 
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