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Returns on Public Pensions: What Rates Should We Assume? Print
Written by Dean Baker   
Sunday, 06 March 2011 13:05

It seems that Andrew Biggs, at the American Enterprise Institute, is taking issue with my argument on the rate of return that public pensions should assume on the portion of their assets held in stock. (The rate of return on the asset is the same issue as the rate of discount applied to future liabilities. I use rates of return just because it makes the discussion easier to follow.)

To start, we should be clear on what exactly is at issue. Andrew and I are not debating the expected rate of return on stocks. Both of us agree that the pension funds are at least close to the mark in their assumptions on stock returns. Rather, Andrew feels that their return assumption does not correctly account for the risk associated with stock returns. He notes that the higher return on stocks comes in exchange for higher risk. Since the pension obligation is an absolute commitment, he argues that pensions should assume a risk-free rate of return on their assets.

My contention is that because a state or local government is essentially an infinitely lived entity, it need not be as concerned about the variance in returns as individuals. Therefore state pension plans can make their projections based on the expected value of their stock holdings.



Economic Policy Still Failing U.S. Workers Print
Written by Eileen Appelbaum   
Saturday, 05 March 2011 15:00

Since the Great Recession was formally declared over in June 2009, the economy has experienced only two quarters of above-trend growth in real GDP – growing at an annual rate of 5.0 percent in the fourth quarter of 2009 and 3.7 percent in the first quarter of 2010. For the rest of 2010, real GDP growth was disappointing – a point driven home in the recent downward revision of fourth quarter GDP growth from 3.2 to 2.8 percent. Employment -- which in February 2011 was still below its December 2007 level by nearly than 7.5 million jobs -- will add just 2 million jobs this year at this rate of growth. That’s a scant 1 million more jobs than are needed to keep up with the growth of the working age population, and will reduce unemployment by just half a percent over 2011.

The economic problem is clearly one of slack demand. The pain experienced by workers as a result of the slow growth in real GDP is palpable. Yet, there is no leadership in Washington and no grassroots political pressure to renew, let alone expand, government stimulus measures. Quite the contrary: Fiscal policy in 2011 and 2012 looks set to embrace spending cuts that will reduce the rate of real GDP growth below CBO’s forecasts of 3.1 percent in 2011 and 2.8 percent in 2012 – rates of growth already too low to make much of a dent in the unemployment rate. Unemployment in the CBO projections is expected to end 2011 above 9 percent and 2012 above 8.



Unemployment Rate Drops Again for Third Consecutive Month Print
Written by Dean Baker   
Friday, 04 March 2011 10:52

The economy generated 192,000 new jobs in February, knocking the unemployment rate down to 8.9 percent, according to the latest Bureau of Labor Statistics report. The unemployment rate has now dropped by 0.9 percentage points in the last three months. According to BLS' establishment survey, job growth during this period has averaged just 136,000, which is only slightly faster than the 90,000 rate needed to keep pace with the growth of the labor force.

It is difficult to reconcile the sharp drop in unemployment with the weak job growth. Generally, the establishment survey is much more accurate since it has a far larger sample and it is benchmarked every year to unemployment insurance data, which provide a near census of payroll employment. Other data in the establishment survey are consistent with the picture of modest job growth. However, there is nothing to suggest the strong job growth necessary to restore full employment. At the rate of job growth over the last three months, it would take almost 14 years to get back to normal rates of unemployment.

For more, check out our latest Jobs Byte.

Bottom is Falling Out for Private-Sector Workers Print
Written by John Schmitt   
Thursday, 03 March 2011 09:45

Conservatives have tried to argue that the problem state and local governments face is that the public-sector employees have used union power to pull away from the rest of us. What has really happened over the last 30 years is almost the opposite. Since the end of the 1970s, the policy changes that got into full swing under Ronald Reagan have actually pulled the bottom out of the private sector. The public sector isn't pulling ahead --the private sector is falling behind the standard that it long provided.

As an example, the figure here shows the share of workers in the private sector and in state and local governments that have employer-provided health insurance where the employer pays at least a portion of the premium. In 1979, the earliest year of data available, the private, state, and local sectors were not far apart. (Then, as now, state and local employees tend to be older and have more education, two factors that are highly correlated with better pay and benefits.) Over the next 30 years, the health-insurance coverage rates remained essentially unchanged for state and local government workers. But, the share of private-sector workers with employer-provided health insurance fell more than 15 percentage points --from over 70 percent to just under 55 percent.




Structural Unemployment: The Data Just Doesn't Match Up Print
Written by Sairah Husain   
Wednesday, 02 March 2011 14:00

Structural unemployment – unemployment stemming from a mismatch of workers' skills and job requirements – has been cited in mainstream media as the main cause of current, high unemployment. Data from the National Federation of Independent Business (NFIB), however, suggest that structural unemployment is not what is ailing the economy. The graph below draws on data from the NFIB's monthly survey from December 2007 (the official start of the recession) to January 2011. Each month, the NFIB asks its sample of small businesses to state the single most important problem facing their business today. Since the recession began, respondents overwhelmingly have cited "poor sales," suggesting that today's unemployment is primarily due to a lack of demand. "Quality of labor," the factor most consistent with structural unemployment, barely made the list.


In fact, as the recession deepened, "poor sales"  became increasingly important, while "quality of labor" was cited less and less often. Furthermore, through an analysis of the NFIB data, we looked at the indicators that had the largest increase since and decrease since 2007, and they ended up being  "poor sales" and "quality of labor" respectively. These findings suggest that the current, high unemployment is indeed cyclical and not structural.



FactCheck Gets It Wrong on Social Security and the Deficit Print
Written by Dean Baker   
Saturday, 26 February 2011 21:12

FactCheck.org, a project of the Annenburg Public Policy Center, wrongly attacked a number of prominent Democrats for correctly pointing out that Social Security does not contribute to the deficit. The people attacked included New York Senator Charles Schumer, Senate Majority Whip Richard Durbin, and President Obama’s Budget Director Jacob Lew.

This point should be pretty straightforward. Under the law, Social Security is financed by a designated tax, the 12.4 percent payroll that workers pay on their first $107,000 of income each year. The money raised through this tax is used to pay benefits. Any surplus is used to buy U.S. government bonds. All funding for the program comes either from this tax or from the bonds held by the program’s trust fund. (The Social Security system is also is credited with a portion of the income tax paid on Social Security benefits.)



Labor Market Policy Research Reports, Feb. 12 – 25, 2011 Print
Written by Sairah Husain   
Friday, 25 February 2011 16:15

This is the fifth installment of a new weekly feature at the CEPR Blog. Every Friday, we'll post a list of labor market related policy research reports from progressive research centers around the country. This week, reports from Center for American Progress, Center on Budget and Policy Priorities, Center for Economic and Policy Research, Center for Law and Social Policy, Economic Policy Institute, Political Economic Research Institute, and UCLA Institute for Research on Labor and Employment.



CEPR News February 2011 Print
Written by Dawn Lobell   
Friday, 25 February 2011 15:00

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

Praise for CEPR’s work on Haiti
Here's a quote from The Notion, the Nation magazine's blog: ”Praise to the Center for Economic and Policy Research for being the only Washington think-tank to pay consistent, skeptical attention to Haiti. As usual, they have been doing invaluable work on the issue, including a statistical analysis of the stolen vote”.

CEPR's work continues to have a major influence on the debate over the Haitian elections. CEPR Co-Director Mark Weisbrot has been all over the airwaves talking about the most recent developments in Haiti, including the ongoing debate over the election results and the return of former Haitian President Jean-Bertrand Aristide. Mark was interviewed by FAIR’s CounterspinAl-Jazeera and KPFA 94.1FM Berkeley.

He was also quoted numerous publications, including in this AP article. And he authored several columns on the elections and Aristide.



Job Gains Concentrated in Low-Wage Industries Print
Written by John Schmitt   
Wednesday, 23 February 2011 15:30

The economy lost more than eight million jobs during the Great Recession. Last year, it recovered just over one million of those lost jobs. But, a new report from the National Employment Law Project demonstrates that the new jobs were heavily concentrated in low-wage industries such as retail, restaurants, and temp agencies.


As the NELP figure above shows, about 3.5 million of the jobs lost in the downturn were in high-wage industries, but fewer than 200,000 of the jobs created in the last year were in those same industries. Over half of the jobs created since the economy bottomed out were in the lowest-paying industries.

As the report's author, Annette Bernhardt, says: "[T]he job opportunities currently available to workers have deteriorated compared to what was available before the recession." The NELP data flatly contradict the idea that the economy is currently facing a structural "mismatch" where workers don't have the skills that employers are demanding. The recession-related job losses were concentrated in high-wage industries and the new jobs have been in low-wage industries, leaving millions of workers from middle- and high-wage industries high and dry.

Human Capital and the Public Sector Print
Written by John Schmitt   
Wednesday, 23 February 2011 11:00

For over a year now, a debate has been raging over whether public-sector workers are paid too much. In the last few days, spurred by the protests in Wisconsin, Jim Manzi, Kevin Williamson and other conservative newcomers to the debate have been embarrassing themselves and making things uncomfortable for some of their fellow conservatives who have been engaged in the debate longer.

If like Manzi, you are new to this, you'd be excused for thinking that the main issue is whether or not it makes sense to gauge the level of public-sector pay using what economists call "human capital" models. These models are among the oldest and most successful empirical models in all of economics. They argue that workers' wages and benefits generally reflect their level of education and their work experience, both of which are proxies for their underlying skills or productivity on the job. A vast empirical literature supports this view, showing a strong relationship between pay, education and experience, in virtually every country and every period that economists have ever examined. That said, even this strong empirical relationship leaves a lot of the variation in wages across workers unexplained. Even with identical levels of education and experience, women make less than men, blacks less than whites, residents of Wyoming less than residents of Connecticut. And even among, say, white women who live in Connecticut and have the exact same level of education and experience, pay can vary substantially. Typically, "human capital" models are lucky to explain 30 or 40 percent of the total variation in wages.



Housing Prices Continue to Drop in December Print
Written by Dean Baker   
Tuesday, 22 February 2011 12:30
For the third consecutive month, the Case-Shiller 20-City index fell by at least 1.0 percent, with home prices continuing their plummet from the index's peak in July. Nineteen of the 20 cities had a drop in prices in December. The exception was Washington, D.C. where prices rose by 0.3 percent.

While in prior months the sharpest declines had been in the Midwest, the December data shows a more diverse pattern. Tampa — one of the epicenters of the housing bubble — experienced the sharpest price decline at 2.6 percent, followed by a 2.3 percent drop in Detroit and a 2.0 percent decline in Seattle. The situation in Seattle is interesting since the city, like Portland, had previously been shielded from the worst effects of the housing bust. It seems that this is no longer the case as prices in both cities are now falling rapidly.

For more, check out our latest Housing Market Monitor.

Go After Wall Street, Not the Teachers Print
Written by Dean Baker   
Friday, 18 February 2011 16:09
You have to give Wisconsin Gov. Scott Walker and his wealthy patrons credit. Here we have a situation where Wall Street fat cats wrecked the economy — people like Richard Fuld, Robert Rubin, and Angelo Mozilo — and they've somehow managed to blame schoolteachers and the highway patrol.

Now we have a situation where the villains are sitting on their hundreds of millions of dollars, while tough guys like Gov. Walker are beating up school teachers to take away their $2,000-a-month pension. And, the best part of the story is the Walkers are being heralded as statesmen for their efforts.

This situation speaks to the incredible corruption of U.S. politics. There have been numerous studies done by serious economists that all show the same thing, public-sector employees are not paid on average more than their private-sector counterparts.



Why Is Gov. Christie Afraid to Tackle the REALLY Big Thing – Jobs? Print
Written by Eileen Appelbaum   
Thursday, 17 February 2011 16:00

Yesterday, the American Enterprise Institute hosted an address by New Jersey Gov. Chris Christie titled ‘It’s Time to Do the Big Things.’ So, how is New Jersey doing on the big things that really matter to the living standards of the state’s middle class and working class families?

As it turns out, not so well.

Even as employment in the U.S. slowly increased during 2010, New Jersey continued to experience job losses. In the year after Christie took office, non-farm payroll employment in the Garden State fell by 30,700 jobs from 3.859 million in December 2009 to 3.828 million in December 2010.

Average hourly earnings are down in nominal terms over the year to November 2010 (most recent available data) from $26.84 to $25.78 and weekly earnings over the same period declined by nearly $31, from $909.88 to $879.10.

New Jersey’s unemployment rate remains above 9 percent, with much of last year’s modest improvement in the unemployment rate due to the shrinking labor force, with nearly 41,000 workers going missing during the year.

Attacking teachers and public sector workers, failing to make required payments to the state’s pension fund, reducing payments to cash-strapped cities and municipalities, and cutting state programs may make great political theater, as a self-satisfied Christie seems to think. And it may mesmerize his fellow Republicans. But the evidence is clear – these policies have hurt, not helped, New Jersey’s economy.

January CPI Data Shows Little Evidence of Inflation Print
Written by David Rosnick   
Thursday, 17 February 2011 14:00

The latest Bureau of Labor Statistics' report on the Consumer Price Index found the index rose 0.4 percent in January while core prices rose only 0.2 percent, providing little evidence of inflation. Energy prices rose 2.1 percent in the month and were once again the main cause of the greater headline inflation.  By contrast, food prices have not seen high inflation.  Food prices rose 0.5 percent in January, but over the last 12 months food prices have risen only 1.8 percent compared with a rise of 1.6 percent overall.

Among categories of core consumer prices, housing prices rose 0.1 percent in January as rent and owners’ equivalent rent remained stable at 0.2 and 0.1 percent respectively. Transportation prices rose 1.3 percent in the month—assuredly all due to higher fuel prices. The price of medical care rose 0.1 percent in January as hospital services fell 0.1 percent following last month’s 0.7 percent rise.  Over the last six months, the price of medical care overall has remained at a relatively modest 3.0 percent rate of inflation.

There continues to be little indication of core consumer price inflation within the economy.  Where core prices do appear to be growing, much of the price growth appears to be capturing energy prices.

For more, check out our latest Prices Byte.

Is New Jersey Gov. Chris Christie Presidential Material? Print
Written by Dean Baker   
Wednesday, 16 February 2011 15:00

POLITICO's blog, The Arena, recently asked: In a Wednesday afternoon speech at the American Enterprise Institute in Washington D.C., New Jersey Gov. Chris Christie called for raising the retirement age on Social Security. His willingness to tackle politically delicate entitlement programs follows his approach in New Jersey of taking on teachers’ unions and other groups.

Can Christie portray himself as a teller of difficult truths and become a credible White House candidate in 2012 or 2016? Or will his YouTube-friendly shtick soon wear thin and render him largely irrelevant in Democratic-leaning New Jersey?

The fact that Gov. Christie is willing to do whatever Wall Street and the elite media tell him does not suggest that he has strong leadership qualities. If he had strong leadership qualities, he might take a moment to look at the Social Security trustees report himself, or at least talk to someone who had.

He would discover that the program can pay 100 percent of all scheduled benefits through the year 2037 and nearly 80 percent of scheduled benefits after this date for the indefinite future. After 2037 retirees would always get a larger benefit than current retirees even if Congress never does anything.



Is Obama's Budget a Deficit Enabler? Print
Written by Dean Baker   
Monday, 14 February 2011 12:37

Do people who write on the budget have any understanding of the topic? The answer seems to be "no," since we have an obsession with the size of the budget deficit when the economy has 9.0 percent unemployment.

If budget reporters understood their topic, then they would be asking politicians like President Obama and the Republican congressional leaders why they are not doing more to create jobs. The reason that we have 9.0 percent unemployment is that private sector demand plummeted in the wake of the collapse of the housing bubble. In the short-term, the only way this demand can be replaced is by increased demand from the government.

This is why reporters should be pressing politicians as to why they are not supporting larger deficits in order to get people back to work. Tens of millions of workers are suffering from unemployment or under-employment not because they lack the skills or desire to work, but because people like Alan Greenspan and Ben Bernanke failed disastrously in their roles as managers of the economy. This amount of needless suffering should be unacceptable in the United States.



Labor Market Policy Research Reports, Feb. 5 - 11, 2011 Print
Written by Sairah Husain   
Friday, 11 February 2011 13:15

This is the fourth installment of a new weekly feature at the CEPR blog. Every Friday, we'll post a list of labor market related policy research reports from progressive research centers around the country. This week, reports from Center for American Progress, Center on Budget and Policy Priorities, Economic Policy Institute, Institute for Women's Policy Research, National Employment Law Project, and Political Economy Research Institute.



Arithmetic and the Fannie/Freddie Fix Print
Written by Dean Baker   
Thursday, 10 February 2011 16:47

Arithmetic is a skill that is in short supply among economists in policymaking positions. The Obama administration is about to come out with its plans for replacing Fannie and Freddie. The word in the media is that the administration will propose a range of options, with one option maintaining a Fannie/Freddie type structure and one option going to a completely private system for the main sector of the housing market. (Presumably the Federal Housing Authority would remain in place even in the private system to provide credit to moderate income households.)

The third option, that apparently many Washington policy wonks are smiling upon, is a hybrid system with private institutions buying mortgages with a government guarantee standing behind them. (Depending on the construction, the government may either guarantee the institution or the mortgage backed security -- more likely it will be the latter.) According to a new paper by Moody's, this sort of hybrid system will reduce the cost of a 30-year mortgage by 90 basis points (9/10ths of a percentage point) compared to a purely privatized system. The Moody's analysis also calculates that it will raise house prices by 8 percent compared to a privatized system.



What Wikileaks Teaches Us About Obama and Latin America Print
Wednesday, 09 February 2011 18:13

President Obama has given little indication of the strategy for his upcoming trip through Chile, Brazil, and El Salvador. Will "the great listener" promote cooperation and understanding, or carry on the Bush administration’s approach of fighting against regional alliances?

Words of Wisdom from Past Leaders

Diplomatic cables released by WikiLeaks show that last year Chilean President Bachelet urged the Obama administration to avoid separating South American nations into ideological pigeonholes:

President Bachelet emphasized the need to understand the nuances of Latin America’s leaders and their countries rather than lumping them into populist and pro-western camps … emphasizing that Morales was very different from Venezuela’s Hugo Chavez.


Milanovic Graph on International Inequality Print
Written by John Schmitt   
Tuesday, 08 February 2011 09:29
This graph by World Bank economist Branko Milanovic made the rounds last week.


Income ventiles, USA, Brazil, China, and India

Source: Branko Milanovic, The Haves and the Have Nots

To construct the figure, Milanovic first took the population of each of the four countries shown and ordered them from poorest to richest. Then, still within each country, he divided each of the ordered populations into 20 equal sized groups. The bottom group –a "ventile," for one-twentieth– has the poorest five percent of people in each country. The next ventile has the next-"richest" five percent, and so on, up to the last ventile, which contains the richest five percent of the country's population.

What is particularly interesting about this graph is that it allows us to compare the average earnings of the various ventiles across the four countries. So, for example, we can see that the average income in the poorest ventile in the United States appears to be higher than the average income of the richest ventile in India. This is an astonishing result and Milanovic, but especially many of the bloggers who covered the graph, make a lot of it.



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