The Cato Institute wishes to erase away an entire recession, but the facts are simply not on their side. "You never heard of it because it never happened. However, the 'Depression of 1946' may be one of the most widely predicted events that never happened in American history."
If true, this would have been a truly heroic feat on the part of the private sector, given that government spending fell by $56 billion dollars from 1944 to 1947. GDP was just over $200 billion in 1944. Today such a cut would be equivalent to $3.4 trillion, or 132 percent of government expenditures.
While the private sector did pick up much of the slack, the downturn from 1945 to 1946 alone was far more severe than the current recession.
In the current recession, real GDP fell 3.8 percent peak to trough. By comparison, real GDP fell 10.9 percent from 1945 to 1946, did not begin to rise until the fourth quarter of 1947, and still did not reach 1945 levels until the third quarter of 1950.
Cato is entitled to argue that the private sector did a fair job of picking up where the government left off. However, it is wholly illegitimate for the Institute to pretend that the largest economic downturn since the Great Depression "never happened."
In a critical commentary on the Obama Administration's proposed supplemental income poverty measure (SIPM), a proposal based almost exclusively on recommendations made by the National Academy of Sciences in the 1990s, Robert Samuelson makes the puzzling claim that "the administration is defining poverty up." As usual, Samuelson gets things precisely wrong, not surprising given that in a commentary that has the chutzpah to close with a call for "political neutrality," Samuelson cites only two "poverty experts", both of whom are conservatives at right-wing think tanks. In fact, the official poverty measure has defined deprivation down over the last few decades, moving it further and further away from mainstream living standards over time, as well as from majority public opinion of the minimum amount needed to "get along" at a basic level. As I detail in a recent paper, the biggest concern we should have with the SIPM is that it will lock in this defining down of the poverty standard, not that it will "define poverty up."
The extent to which the current poverty measure has defined deprivation down can be seen by comparing the poverty line's movement over time with public opinion on the minimum income families need to make ends meet. For several decades, Gallup has asked adults: "What is the smallest amount of money a family of four (husband, wife, and two children) needs each week to get along in this community?" When it was initially developed, the official poverty line was equal to about 72 percent of the average response to this "minimum get-along" question. By 2007, the poverty line had fallen to 41 percent of the average response to the get-along question (the 2007 poverty line was $21,500; the minimum get-along average was $52,087). If the poverty line had kept pace with public opinion on the minimum get-along amount over time (that is, remained equal to 72 percent of that amount), the poverty line would have been $37,500 in 2007 rather than $21,500.
Samuelson might respond that the American people don't have a very good sense of what it takes to make ends meet. But other concrete evidence suggests otherwise. In a 2008 paper, James Lin and Jared Bernstein of the Economic Policy Institute (EPI), using a fairly standard methodology for computing "basic family budgets", estimated that on average nationwide, working families with two parents and two children need an income of $48,778 to maintain a "safe but modest standard of living," a number quite consistent with public opinion.
CEPR's kicking off the summer vacation season with an appearance by CEPR Senior Economist John Schmitt on CBS Sunday Morning this weekend (click here for airtimes). He'll be talking about paid vacation and holidays in the United States -- or lack thereof.
In No-Vacation Nation, CEPR finds that we're the only advanced nation that doesn't guarantee its workers and paid vacation or holidays. In fact, 1 in 4 U.S. workers do not receive any paid holidays or vacation -- see the grim picture below.
When we become seriously ill, we put our lives in the hands of our doctors. We hope that the doctor has the knowledge to diagnose and treat our illness; and if not, will refer us to a specialist who does.But are patients getting the best standard of care, or even decent standard of care? Doctors look to treatment guidelines to guide them when making their decisions. Treatment guidelines are developed by medical associations, and they are thought to be based on the best available science.
The Infectious Diseases Society of America (IDSA) has developed treatment guidelines for a long list of infectious diseases, including Lyme disease. In their treatment guidelines for Lyme disease, the IDSA recommends very restricted treatment of 2 to 4 weeks of antibiotic therapy. Though many patients fail this treatment (treatment failure rates range from 15 to 69% in patients with neurologic Lyme disease), the IDSA recommends against additional treatment in patients who continue to be sick.
For the IDSA to make such a radical recommendation of no additional treatment for patients who fail recommended treatment, one would expect that several large clinical trials have been conducting to support it. But that is not the case. In fact, the recommendation is based on one single study by Klempner et al. (2001) that found no treatment effect in two trials they had conducted on a total of 114 patients. And the study was not even a good one. It suffered from design defects, and the statistical analysis was seriously flawed.
Patients enrolled in the study had been sick for a long time – 4.4 years on average – and had been treated with multiple rounds of antibiotics prior to entering the study.In fact more than 25 percent of the treatment group had already received more than 116 days of antibiotic treatment before the trial, including intravenous antibiotics. So the study was not, as claimed, set up to evaluate the effect of treatment in patients who failed 2-4 weeks of treatment. It is unlikely that 90 days of additional treatment administered to patients in the study would permanently cure patients who were still sick after having received an even longer period of treatment.
Last week, the CEPR March CPS Uniform Extracts, Version 0.9, for 1980-2009 was added to CEPR's consistent database of the Current Population Survey (CPS). The March CPS (also known as the Annual Social and Economic Supplement), collected by the Census Bureau every March, contains a series of supplemental information on income, non-cash benefits, health insurance, and work experience. Please visit the Census Bureau's website for more information on the CPS.
Available for download from the CEPR database are the uniform data or underlying Stata program files that were used to extract the data. You can also download our recently updated 2009 CEPR CPS ORG and Basic Monthly Uniform Extracts, Version 1.5.
CEPR makes wide use of the CPS extracts in our publications, available here. For example, CEPR recently published a study using the March CPS extracts, looking at the health-insurance coverage rates for U.S. workers in the past three decades. CEPR's CPS ORG extracts are frequently used to examine changes in the labor market.
***Note that this is a beta release. Please feel free to send us any comments or questions about the release.***
Almost the whole of the U.S. economics profession missed the build-up of the housing bubble that caused the Great Recession. So, it may surprise many non-economists to learn that for the last two decades U.S. economists have used standard tools to predict many of the economic problems currently facing the European Union.
The January 2010 edition of the Econ Journal Watch contains a fascinating review of U.S. economic research from the late 1980s through the early 2000s on the likely outcome of a single European currency. The authors of the paper --Swedish economist Lars Jonung and Irish economist Eoin Drea examined about 170 publications written between 1989 and 2002 by U.S. economists in academia and at the Federal Reserve.
The title of the new paper, which does a remarkable job of summarizing its main findings, is drawn from a quotation from the late MIT economist Rudiger Dornbusch. In 2001, Dornbusch described the U.S. economic profession's views on the euro as generally taking one of three positions: "It can't happen"; "It's a bad idea"; and "It can't last."
After a brief hiatus, trade popped back into the headlines this week, on two accounts.
First, several of the races in this past Tuesday’s primaries and elections focused on trade, with the critics of the past failed model coming out winners with the public. For example, as Mike Elk notes:
“Democrat Mark Critz ran on a much more progressive platform of job creation through trade reform. He blasted his Republican candidate for being in favor of tax loopholes that favor companies that outsource jobs, even as the Obama Administration just this week used a lobbyist memo to claim that outsourcing created jobs.”
Since being critical of our job-killing and wage-depressing failed trade policy has been a boon for Democrats in both 2008 and 2006 elections, it seems natural that President Obama would want to make good on his campaign commitment to renegotiate NAFTA. This was the reason for the second airing of trade issues this week: the visit of Mexican President Calderon to Washington DC. While his “war on drugs,” which has resulted in the deaths of over 23,000 people, garnered significant media attention, the 6.5 percent contraction in Mexico’s economy last year should be an equally troubling statistic in terms of its impacts on most Mexicans’ daily lives.
Welcome to the May, 2010 edition of the CEPR NEWS. This monthly newsletter highlights CEPR's latest research, publications, events and much more.
CEPR celebrates two important victories on Financial Reform
Last week, the Senate passed two amendments to the financial system reform legislation that CEPR has been championing for a long time. The first, an amendment offered by Bernie Sanders to audit the Federal Reserve, passed by a vote of 96-0. Under the amendment, the Government Accountability Office (GAO) would undertake a one-time audit of the emergency lending programs created by the Fed since December of 2007 and report the findings to Congress. The amendment would also require the Fed to make public by December 1 important details about these lending facilities.
According to CEPR Co-Director Dean Baker, "The country is best served by having an independent Fed, but one that is nonetheless accountable to Congress in the same way that the Food and Drug Administration is or any other government agency. This action by the Senate is an important step towards increasing the level of Fed accountability". Baker has written extensively in support of the audit the Fed measure throughout the past year, most recently signing on to an economist letter supporting the amendment. His most recent piece can be found here.
The second CEPR victory came in the form of an amendment offered by Senator Al Franken. Called the "Restore Integrity To Credit Ratings" amendment, it is aimed at preventing the securities industry from shopping around among credit rating agencies. Under the amendment, which passed by a 64-35 vote, the Securities and Exchange Commission would appoint a panel to develop a system that would independently match ratings agencies with firms that have securities that need to be rated. Dean Baker proposed this obvious fix to the conflict of interest in the current rating agencies system in his book Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also mentions it here.
Earlier this month, as the US loudly complained about Venezuela’s decision to purchase arms from Russia, South America’s ministers of defense came together in Guayaquil, Ecuador and put the finishing touches on an agreement to develop common mechanisms of transparency in defense policy and spending. The agreement, which also calls for the creation of a multilateral Center for Strategic Defense Studies, is the most recent example of the growing effectiveness of the Union of South American Nations (Spanish acronym UNASUR) as a forum for addressing the most urgent and sensitive issues on the regional agenda. Though the group remains unknown to most of the US public - and is rarely referred to by US policy makers - it has, in the space of a few years, emerged as one of the Western Hemisphere’s leading multilateral bodies and, in the process, is rapidly undermining the regional clout of the Washington-based Organization of American States (OAS).
UNASUR first began to take form in 2004 when South American leaders signed the Cusco Declaration that committed their governments to creating “a politically, socially, economically, environmentally and infrastructurally integrated South American area.” Despite the diverging political agendas of the region’s governments, the leaders agreed on prioritizing the group’s role as a geopolitical actor or, in the words of the declaration, pursuing “concerted and coordinated political and diplomatic efforts that will strengthen the region as a differentiated and dynamic factor in its foreign relations.”
Thus, the IMF's deal with Greece restricts "early retirement to age 60 by 2011, including those insured before 1993, workers in heavy and arduous professions, and those with 35 or more years of contributions."
It's time for another round of missing-the-point-on-entitlements. This time from the Cato Institute, which declared, "Our welfare state is already well on the path to bankruptcy. ... Compared to the damage done by native-born U.S. citizens and their cursedly long lifespans, the immigrants' overall effects are quite small. It would be unkind of us to set up such an ill-considered system and then pin its inevitable demise on others."
Unable to argue with the last point, it is unfortunate to see that Cato highlights long lifespans as a primary source of trouble in our entitlement programs. In fact, longer life expectancy accounts for very little of the long-run deficits. Rather, an expensive and increasingly costly health-care system drives the projections of long-term deficits.
In 2009, the Congressional Budget Office projected a budget deficit of 45 percent of GDP in 2083. Merely restricting health-care cost growth to overall growth in the economy plus aging of the population would eliminate more than three-fourths of the projected deficit. If the U.S. were to spend as much per-capita on health care as the Euro area (which has life expectancy two years longer than the United States) then by 2083 the federal government would be running surpluses of more than 10 percent of GDP.
Today "Robin Hood" the movie -- starring Russell Crowe and directed by Ridley Scott -- opens in theaters nationwide. With Wall Street turning profits and paying big bonuses again, less than 2 years after getting bailed out by Main Street taxpayers, this is a good time to remember what Robin Hood was all about -- taking from the rich and giving to the poor, in the interest of economic and social justice.
Who's against it? You guessed it: big banks and Wall Street. The Robin Hood Tax campaign even put together a fun video (directed by Richard Curtis, director of "Four Weddings and a Funeral") with the pirate actor Bill Nighy playing a big banker -- and showing how their arguments don't hold water.
Markets can be irrational, as Keynes famously pointed out, and the Eurozone/Greek crisis is a classic example. “The markets” for months have been demanding more blood from Greece, as the financial press has continuously and often unquestioningly reported. More commitment to spending cuts, tax increases, and “procyclical” policies that the bondholders, EU authorities and IMF have also demanded. As I noted yesterday, this just pushes Greece deeper into recession, and doesn’t even make it more likely that they will pay off their debt in full. The same is true, to varying degrees, for the other weaker Eurozone economies: Portugal, Ireland, Italy and Spain.
So why do they do it? I have been asked that question many times recently, and of course I can’t speak for the EU authorities or the IMF, which in this case is subordinate to the former. The most likely explanation is one proposed by George Soros nearly a decade ago to explain such attitudes during the Argentine crisis: punishment. The Greeks (and others) must pay for their governments’ “profligacy,” lest others be tempted to run up unsustainable debt. “The markets” and the authorities who follow their dictates don’t particularly care about the injustice of punishing the general population for decisions made by a few. But do they care if they are making the economy worse and possibly reducing the chance that the bondholders get paid in full? Or weakening the whole Eurozone economy? Or possibly worse, exacerbating “systemic risk,” as we saw in the wild ride of worldwide stock markets last week?
Upton Sinclair famously used to say that it was "difficult to get a man to understand something if his salary depends on not understanding it." It's also the case that it is difficult to get someone to change a mistaken belief when their deeply held preconceptions and world view depends on it. Facts, as various studies have shown, have a tendency to bounce off ineffectively when they don't fit the preconceptions (or mental "frame") people bring to an issue.
In a recent piece in The Forum, political scientist Brendan Nyhan compares how this process worked in both the Obama and Clinton health care reform proposals. Various misconceptions about the proposals, such as the "death panel" myth, were held most strongly by ideological opponents who believed they were particularly well informed:
... beliefs about the Clinton and Obama reform plans represented misperceptions rather than simple ignorance—a distinction that is emphasized by Kuklinski et al. (2000: 792). The difference between the two concepts is that members of the public who are uninformed typically know that they lack information about a given issue, while those who hold misperceptions are paradoxically more likely to believe that they are well-informed. For instance, Kuklinski et al. (2000) found that Illinois residents who held misperceptions about welfare benefit levels and the beneficiary population were the most confident in the accuracy of their beliefs. Using survey data from 1993 and 2009, we observe a similar dynamic in misperceptions about the Clinton and Obama health care plans among opposing partisans (i.e., Republicans). As noted above, the confidence with which these beliefs are held is one reason they are so difficult to correct.
The Heritage Foundation recently expressed concern that “unless entitlement spending is reined in, it will consume all federal revenue in just 42 years, with nothing left over for defense.”
Interestingly, Heritage made no mention of why entitlement spending is projected to rise so quickly. The fact is that the federal government is projected to spend a tremendous amount of money because the health-care system in this country is severely broken. According to the Congressional Budget Office, the cost of health care is rising so fast that per-capita consumption of all other goods and services is projected to rise only 6 percent between 2007 and 2035—less than 0.2 percent per year.
If serious efforts aren't made to rein in the cost of health care, in 29 years it will double as a share of GDP—accounting for fully one-third of the entire economic output of the country. In 70 years, health care will be nearly one-half the economy.
And yes, it is the cost of health care, not the quantity that accounts for the spending increase. If federal spending on health care rose only on account of economic growth and aging of the population, it would total 7.3 percent of GDP by 2083. Because of projected cost growth, federal spending is projected to reach 17.8 percent of GDP.
MIT economist Esther Duflo is the most recent recipient of the John Bates Clark Medal, arguably the economics profession's most selective award (harder to get than the Economics Nobel). She received the award for her work at MIT's Abdul Latif Jameel Poverty Action Lab, which has pioneered the use of randomized field experiments to test specific social policies, such as distributing bednets to prevent the spread of malaria or providing small financial incentives to parents to encourage them to vaccinate their children.
What is particularly appealing about Duflo's work is that it uses the strongly empirical approach that has made "Freakonomics" so popular. But she does not just wonder whether sumo wrestlers cheat or prostitutes are patriotic. She manages to ask questions that can vastly improve, even save, millions of lives in poor countries around the world.
If you have 16 minutes and 47 seconds, Duflo does a superb job summarizing some of her work in this recent video in the TED series.
Randomized field trials aren't the answer to every important question in economics. They have almost nothing to say about how we got into or how we can get out of the current world recession, for example. But, it sure is nice to see an economist ask and convincingly answer questions that really matter.
The National Institutes of Health (NIH) spend more than $30 billion on medical research every year. Some research is done in-house, but most is contracted out to universities and research organizations. But the NIH is not always getting its money’s worth when it contracts out.The selection process for awarding grants is inconsistent, and rigorous review of study design and statistical methods is missing. As a result the quality of NIH-supported research is shockingly poor, at least for some diseases.
After becoming sick with Lyme disease in 2003, I read up on the medical literature on treatment of Lyme disease. Lyme disease is a bacterial infection caused by a tick bite. It is treated with antibiotics, but unfortunately many patients fail the recommended treatment of 2-4 weeks of antibiotics. Currently, there is a fierce debate among medical professionals about the optimal treatment. The debate is fuel by the lack of good research. The NIH has in the past funded four medical trials that looked at additional antibiotic therapy in Lyme patients who failed previous treatment. All four trials had serious design flaws that biased them against finding a treatment effect.
Further confirmation of the grave deterioration of the human rights situation in Honduras can be found in a detailed report on freedom of speech released on May 3rd by the Tegucigalpa-based organization Committee for Free Speech, or C-Libre. Though it has received scant attention in the media, the report (which can be accessed here in Spanish) offers an alarming and scathing account of the attacks endured by Honduran media outlets and journalists critical of the June 28 coup.
Update (February 15, 2011): Work-sharing is becoming more common across the OECD. The general pattern still appears to hold, those countries have pushed it most aggressively have seen the smallest increases in unemployment. The graph below has been updated.
The April jobs numbers showed the unemployment rate rising back to 9.9 percent. While the main reason was that more people were looking for jobs (rather than more people losing jobs), on the current path, the unemployment rate will not fall to normal levels any time soon.
There are two ways to fix this situation. The first one is to expand the size of the economy. This could be done by running larger budget deficits, through more expansionary monetary policy at the Fed, or by pushing the dollar down to increase our net exports. In principle, all three of these can be effective routes to boosting the economy and expanding employment, however as practical matter, none of these paths look very plausible politically any time soon.
If we can't reduce unemployment by increasing demand, then we can try the second route to full employment: share the work. The basic concept is simple, if we can't get generate more jobs, then we can share the jobs we have by everyone working fewer hours. This is "workshare" system is already in place in several other wealthy countries, most notably the Netherlands and Germany.
In Germany, the standard practice is that employers reduce work time by 20 percent. The government then makes up 60 percent of the lost wage or 12 percent of the total age. It requires the employer to make up another 20 percent of the lost wages or 4 percent of the total wage. The worker then absorbs a paycut of 4 percent in exchange for working 20 percent fewer hours. This might mean a 4-day week instead of a 5-day week. In these circumstances, the reduction in transportation costs and other work-related expenses can easily exceed the lost pay.
Even though its loss in GDP has been larger than the decline in the United States, the Netherlands has seen almost no rise in unemployment in this downturn. Germany has actually seen its unemployment rate go down. On average, the rise in the unemployment rate has been less than 1 percentage point for the 8 countries that the International Labor Organization reports as having some form of worksharing program in place. By contrast, for the other wealthy countries, the average increase has been close to 3 percentage points.
The Geneva-based South Centre has recently published a bulletin with updates about the status of the World Trade Organization (WTO) expansion negotiations, known as the “Doha Round.” You can click here for the entire – extremely useful – collection. At this point, the poorest developing countries are asking for an “early harvest” on the promised development benefits of the Round, and middle-income developing countries are demanding more balance within the negotiations on agriculture and industrial tariffs, as well as between the two issues.
Launched in 2001, governments worldwide have repeatedly rejected various iterations of the proposed expansion, which would further slash tariffs and other employment and industrial protections. What sane government is going to agree to job-killing tariff cuts during a global recession? Countries of the global South are also being asked to slash agricultural tariffs (to let in more subsidized agribusiness imports) while the minimal protections they’re demanding for farmers’ livelihoods and food security are being opposed – mostly by the United States. (This contradicts Obama’s commitment to global food security, by the way.) See here for more background on agriculture and food security issues.