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Economix Blog: Casey B. Mulligan: Who Gets Unemployment Benefits

November 10, 2011 by Leave a Comment

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Casey B. Mulligan is an economics professor at the University of Chicago.

It’s commonly assumed that unemployed people not receiving unemployment benefits have been unlucky enough to go without a job for so long that their benefits have run out. But often more important are limited work histories and a low propensity to take benefits that are available.

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Historically, many unemployed people have not collected unemployment payments because of ineligibility, lack of awareness or simple unwillingness to collect benefits. But some of those patterns changed during the recent recession.

The chart below shows the number of unemployment compensation beneficiaries per unemployed person, for people 16 to 24, people 25 and over and all people 16 and over. This ratio can be less than one for all of the reasons mentioned and because some unemployed people may exhaust their benefits sometime during the calendar year.

Not surprisingly, more than three-quarters of young unemployed people do not receive unemployment compensation, in large part because they are much less likely to have the employment history that is required for eligibility. Young people are disproportionately represented among the unemployed, and their limited work histories are the primary reason why a large fraction of the unemployed does not receive benefits.

More striking is the increase to 85 percent from 50 percent among people 25 and over. Before the recession began, about a quarter of unemployed people that age had been unemployed for more than 26 weeks, when unemployment benefits were typically exhausted.

The remaining quarter of the unemployed did not receive benefits for a variety of other reasons: they may not have been interested in or aware of benefits, or they may have been ineligible because they quit their jobs (rather than lost them).

By 2010, unemployment was lasting much longer, but the time for receiving benefits had increased even more. Ninety-two weeks was a typical unemployment benefit period in 2010 (in some states it was 78 weeks, in others 99 weeks), yet only 12 percent of the unemployed 25 and over were unemployed that long.

That means as many as 88 percent of the people that age who were unemployed could have received benefits. That 85 percent received benefits tells us how rare it was for eligible people to forgo benefits during the recession.

The recipiency rate change from 2007 to 2010 is thus a combination of a decreased likelihood of exhausting benefits and an increased propensity to receive benefits early in the unemployment spell. These two factors change so much that even though the average weekly number of unemployed people 25 and over increased by more than six million from 2007 to 2009, the average weekly number of those people not receiving unemployment insurance actually fell by 700,000. (For the purposes of this calculation, I assume that, consistent with the law, nobody received unemployment benefits for a week that she or he was employed.)

This absolute decline in nonparticipating unemployed suggests that people are more willing (equivalently, less unwilling) to collect unemployment benefits than they were before the recession began.

Unemployment insurance is known for its ability to expand eligibility as a recession gets going, whether through the “extended benefits” that take effect at given jobless rates or through legislative action beyond that. But an adjustment almost as important has occurred in the labor force itself: during the recession, people increased their propensity to take advantage of available benefits.

Article source: http://feeds.nytimes.com/click.phdo?i=76b87f77ece6b11a6c6b5afff9dcb07b

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Economix Blog: Nancy Folbre: The Recession in Pink and Blue

October 24, 2011 by Leave a Comment

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Nancy Folbre is an economics professor at the University of Massachusetts, Amherst.

Measured in terms of absolute job loss, men bore the brunt of the Great Recession, hence the term “mancession.” On the other hand, men have fared better than women in regaining jobs during the slight rebound sometimes called the recovery.

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Interesting comparison, but gender differences in economic hardship reach beyond employment statistics.

Many people – even those who live alone – share a portion of their earnings or devote unpaid hours of work to family members, including children and others who are dependent as result of age, sickness, disability or unemployment. Measures of economic hardship should take responsibility for dependents into account.

Women tend to be more vulnerable in this respect than men, primarily because they are more likely to take both financial and direct responsibility for the care of children.

In 2010, according to Census data, about 23 percent of children under the age of 18 lived with mothers but not fathers, about 3 percent with fathers but not mothers and 4 percent with neither parent. In 2007 (the latest year for which data are available), slightly more than half of all custodial parents had formal child support agreements or awards, and less than half of those received the full amount they were due.

Even mothers receiving support from fathers tend to take more responsibility for meeting family needs, intensifying the experience of economic insecurity.

A recent report issued by the Institute for Women’s Policy Research assessed some of the most stressful consequences of a high unemployment rate, based on a nationwide telephone survey conducted last fall in conjunction with the Rockefeller Survey of Economic Security.

The report emphasizes the effects of unemployment on families rather than individuals. More than one-third of respondents reported that they or someone else in their household experienced unemployment during the previous two years. The percentage reached almost one-half for black and Hispanic respondents, and more than half for single mothers.

Unemployment made daily life more difficult for almost everyone touched by it. Still, the gender differences are striking, even among married couples.

Married mothers reported that they were more likely to cut back on household spending than married fathers (80 percent, compared with 66 percent). There was also a noticeable, though not statistically significant, difference between the percentages of married mothers and fathers who reported problems paying their rent or mortgage (31 percent, compared with 26 percent).

Health care anxieties were intense: married mothers were more likely than married fathers to report that they had trouble getting or paying for medical care for themselves or family (34 percent, compared with 17 percent) and that they were worried about the possibility that their employer would cut back health care coverage or increase its costs (43 percent, compared with 34 percent).

Whether single or married, mothers are more directly affected than fathers by cutbacks in public child care provisions resulting from state budget shortfalls and the withdrawal of federal stimulus funds. A new report from the National Women’s Law Center estimates that families in 37 states are worse off under one or more key child care policies in 2011 than they were in 2010.

This emerging pattern of economic insecurity could affect the size and shape of the gender gap in voter preferences. Red may be the Republican color, but over all, pink tilts Democratic.

According to exit polls, unmarried women have typically given more support to Democratic candidates than have married women.

In hard times, however, this “marriage gap” may diminish.

Article source: http://feeds.nytimes.com/click.phdo?i=00d626eabc1b408fac92bc1598836248

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Economix Blog: Casey B. Mulligan: Are Employers Requiring People to Work Longer Hours?

October 19, 2011 by Leave a Comment

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Casey B. Mulligan is an economics professor at the University of Chicago.

Employees are working fewer hours, on average, since 2007, dedicated studies of time use show.

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As employers have sharply cut back employment since 2007, at least one survey asserted that existing employees have to work a lot more in order to maintain what was produced by the formerly larger work force.

The Census Bureau’s monthly household surveys do not suggest that such a pattern is widespread, because they measure that average weekly hours worked per employed person have fallen to 37.8 in 2009 from 39.0 in 2007. Another survey also measures hours worked, with a similar result. So it seems that the number of people employed and the hours they work have fallen, creating a huge drop in the economy’s total work hours.

But sometimes surveys can be misleading about hours worked, because people tend to report round numbers like “40 hours” or “35 hours” even when actual hours worked are not a round number (more than 40 percent of employed people in the monthly household survey reported that they worked 40 hours in the reference week, compared with a mere 0.4 percent who reported 39 hours of work). It is logically possible that a number of employed people were working more hours in recent years, but continued to report the round number of 40.

Since 2003, the Census Bureau has supplemented its population survey with the American Time Use Survey, dedicated to measuring time use. Participants in that survey are asked to account for all their waking hours in a specific day, listing various activities, including eating, watching television, working, traveling, caring for children and so on.

The diary study therefore has no bias toward finding that masses of people work exactly eight hours every day for exactly five days a week. It would be interesting to know if the recent recession looks different when the economy’s work hours are measured from the diaries, rather than from the population surveys as the product of employees and hours per employee.

The chart below displays the results. Eight calendar years are sampled, from 2003 to 2010. The blue line is based on the household survey and is an index (normalized to 100 in the year 2007) of the average number of hours worked by adults. It shows about a 2 percent increase in hours worked from 2003 to 2006. Hours worked were about the same in 2007 as in 2006. For each of the three years after 2007, work hours were significantly below the previous year.

The red line is also an index of hours worked per person — but based on the time diary methodology (here I look at the sum of hours spent at work and in “income-generating activities”). The time diary actually suggests there was a mild recession in 2004, because hours worked per person were lower that year than in the surrounding years. Also unlike the household survey, the time diary suggests that work hours in 2007 were abnormally high by comparison with all previous years.

The time diary closely agrees with the household survey measures for the years 2008-10, confirming that hours worked dropped sharply after 2007. Although a few employers may require their workers to work longer hours, the typical pattern since 2007 is fewer hours per employee, and fewer employees.

Article source: http://feeds.nytimes.com/click.phdo?i=f9cbe1dd74223f3197b5253215a9f650

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Economix Blog: Simon Johnson: Can Tax Cuts Pay for Themselves?

October 13, 2011 by Leave a Comment

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Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

Can tax cuts “pay for themselves,” inducing so much additional economic growth that government revenue actually increases, rather than decreases? The evidence clearly says no.

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Nevertheless, a version of this idea, under the guise of “dynamic scoring,” has apparently surfaced in the supercommittee charged with deficit reduction — the joint Congressional committee with 12 members. Dynamic scoring sounds technical or perhaps even scientific, but here the argument means simply that any pro-growth effect of tax cuts should be stressed when assessing potential policy changes (e.g., reforming the tax code). For anyone seriously concerned with fiscal responsibility, this is a dangerous notion.

Economists disagree about almost everything, of course, and the effect of tax cuts is no exception. One reasonable way to assess the evidence is to begin with the highest plausible effects, then see what happens if some of the more extreme assumptions are relaxed (this is a nice way of saying that we don’t believe everything the authors are trying to tell us).

I would start with a study by Gregory Mankiw, former chairman of George W. Bush’s Council of Economic Advisers – and therefore presumably on the tax-cutting side of American politics – and Matthew Weinzierl (published in The Journal of Public Economics in 2006 and, unfortunately, available only to subscribers) that shows the economic growth caused by a tax cut can offset, at best, a portion of the revenues lost by that tax cut.

Specifically, Professors. Mankiw and Weinzierl calculated that 32.4 percent of the “static” or direct revenue loss of a capital-gains tax cut and 14.7 percent of the static revenue loss of a labor tax cut could be offset in present-value terms by additional growth, ignoring short-term Keynesian effects (i.e., any immediate stimulus provided to the economy).

Now 32.4 percent is a lot, but it is far less than 100 percent. And a critical assumption for Professors Mankiw and Weinzierl is that government spending falls to keep the budget in balance. In their framework that’s a good thing — as they are effectively assuming away the consequences of any productive effects of government spending (e.g., what if less spending on schools means less education and this hurts “human capital” and therefore productivity down the road?).

Sticking for a moment with just with their view of the world, if instead the tax cuts are financed by additional debt, as was our collective experience during the 2000s, the ultimate effect of those cuts can be to lower economic growth in the long term, depending on whether the larger debt eventually leads to lower government transfers, lower government consumption, higher taxes on capital or higher taxes on labor. (Eric M. Leeper and Shu-Chun Susan Yang discuss this in “Dynamic Scoring: Alternative Financing Schemes,” also in The Journal of Public Economics, in 2008.)

More broadly, in 2005, the Congressional Budget Office, then headed by a Republican appointee, Douglas Holtz-Eakin, estimated that the economic effects of a 10 percent cut in income taxes would offset from 1 to 22 percent of the revenue loss in the first five years; in the following five years, the economic effects might offset up to 32 percent of the revenue loss, but might also add 5 percent to the revenue loss.

This is an entirely reasonable assessment — the budget office exists to provide balanced analysis for the budget process. The bottom line is that betting that tax cuts will pay for themselves is a high-risk strategy and not a good idea at our current levels of government debt relative to gross domestic product. We do not have a large margin for error. (Disclosure: I’m on the Panel of Economic Advisers for the the budget office, but I didn’t have anything to do with that study.)

Of course, economic studies do not necessarily have a direct effect on political discourse. For example, President George W. Bush asserted in 2007, “It is also a fact that our tax cuts have fueled robust economic growth and record revenues.” But this is nothing more than an assertion. Growth during the 2001-7 expansion was only 2.7 percent compared, for example, with 3.7 percent during the 1990s expansion (when tax rates were higher).

And much of the growth during the Bush period turned out to be illusory; it was based on our corporate and national accounting system, which measures profits (an important part of G.D.P.) but not on a risk-adjusted basis. When the risks materialized in the financial crisis of 2008-9, we lost so much output that G.D.P. per capita in real terms today is only at about the level of 2005.

To assess growth properly, you should look “over the cycle,” meaning roughly 10 years for the modern American economy. It is hard to argue that the last decade was any kind of growth success. Of course, other things happened during the 2000s, including further financial sector deregulation not directly related to the tax cuts.

That’s why we have the economic analysis, particularly by the budget office, to disentangle what tax cuts can really do. If the supercommittee buys into dynamic scoring for tax cuts, at best this would be wishful thinking. At worst, it would represent yet another round of fiscal irresponsibility at the top of American politics.

And if people are seriously considering altering the rules under which the the budget office operates, they should stop and think again. Changing the score-keeping guidelines at this stage would amount to undermining the credibility of the office, one of the few remaining impartial and well-informed observers of the nation’s economy.

Perhaps this strategy might yield some short-term political gains, but the damage to our creditworthiness would be immense, and the consequences would be felt sooner rather than later.

The nightmare downward spiral and fiscal implosion in the euro zone began with a few countries cheating on their numbers — first to get into the currency union and then to avoid various forms of official criticism. We do not want to start down the same path.

Article source: http://feeds.nytimes.com/click.phdo?i=24b4a5031c4d5bd317ed3cf6ec032c86

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Economix Blog: Peter Boone and Simon Johnson: The 4-Trillion-Euro Fantasy

October 6, 2011 by Leave a Comment

Peter Boone is chairman of the charity Effective Intervention and a research associate at the Center for Economic Performance at the London School of Economics. He is also a principal in Salute Capital Management Ltd. Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

Some officials and former officials are taking the view that a large fund of financial support for troubled euro-zone nations could be decisive in stabilizing the situation. The headline numbers discussed are 2 trillion to 4 trillion euros — a large amount of money, given that the gross domestic product of Germany is 2.5 trillion euros and that of the entire euro zone around 9 trillion euros.

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This approach has some practical difficulties. The European Financial Stability Facility as currently devised has only around 240 billion euros available (and this will fall should more countries lose their AAA credit ratings). The International Monetary Fund, the only ready money at the global level, would be more than stretched to go “all in” at 300 billion euros.

Never mind, say the optimists — we’ll get some “equity” from the stability fund and then leverage up by borrowing from the European Central Bank.

Such an approach, if it could get political approval, would buy time, in the sense that it would hold down interest rates on Italian government debt relative to their current trajectory. But leaving aside the question of whether the European Central Bank — and the Germans — would ever agree to provide this kind of leverage and ignoring legitimate concerns about the potential inflationary impact of such measures, could a 4 trillion-euro package, for example, stabilize the situation?

Think through the best-case scenario, in which the big package is put in place and, at least initially, believed to be credible. Proponents of this approach argue that the “market would be awed into submission”; business as usual would prevail, meaning that Italy and other potentially troubled sovereigns could resume borrowing at low interest rates; and the 4 trillion-euro fund would not actually need to be used.

This seems implausible. If the big government money shows up, and this pushes down yields on Italian government debt, what will the private-sector holders of that debt do? Some of them will sell, taking advantage of what they worry may be only a temporary respite and, for those who bought near the bottom, locking in a capital gain (as interest rates fall, bond prices rise).

So the European/International Monetary Fund bailout fund would acquire a significant amount of Italian, Portuguese, Spanish and other debt (including perhaps that of Greece and Ireland). If the credit used from this fund, with its central bank backing, reaches — let’s say — 1 trillion euros, how will the Germans feel about the situation?

Their worries will only be heightened by continuing budget deficits, made worse by recessions, throughout the periphery. Someone will need to finance those deficits, and the stabilization fund is likely to be the financier.

On current form, the Italians will have promised moderate austerity but delivered little. Stories about corruption in Italian public life — perhaps exaggerated but with more than a grain of truth — will become pervasive and continue to grate on northern European taxpayers.

In fall 1997, the International Monetary Fund — with the backing of the United States and Europe — provided what was then regarded as a substantial package of support to the Suharto government in Indonesia. But the government refused to close banks as agreed — and after one of President Suharto’s sons finally lost one failed bank, he immediately popped up with another banking license. Articles about Indonesian corruption and the ruling family were on front pages of major newspapers in the United States.

Donor fatigue set in. In January 1998, when the Indonesian government announced a budget that had slightly less austerity than planned, it was roundly castigated by the international community, setting off further sharp depreciation in Indonesia’s rupiah. This worsened the debt problems of Indonesia’s corporate sector, which had borrowed heavily and at short maturities in dollars.

Panic erupted, social unrest became increasingly manifest, and the real economy declined further.

Italy is not Indonesia, and Silvio Berlusconi is not President Suharto — who ended up leaving office. But the comparison still has value. Will the countries backing the enhanced and highly leveraged European Financial Stability Facility be willing to face substantial credit losses, i.e., actual and continuing transfers from their taxpayers to Italians and others?

Lech Walesa famously remarked that it was easier to make fish soup from fish than to do the reverse. So it is with fiscal crises — once fear prevails and markets start to think hard about the stress scenario, it is hard to solve the problem simply with reassuring words or financial support that never needs to be used.

Crisis veterans like to say, quoting former President Ernesto Zedillo of Mexico, that when markets overreact, policy needs to overreact in the stabilizing direction. But what really matters is not overreacting; it is making sure you do enough.

In Europe, the first thing peripheral governments need to do is stop accumulating debt, and quickly. Italian fiscal plans to balance the budget in 2012 look implausible, as they assume unrealistic growth. The planned Greek debt restructuring and increased taxes will not turn that economy around, nor prevent Greece from accumulating further debt. Despite all the reported austerity, the Irish government is still running a budget deficit near 12 percent of gross national product in 2011, while nominal G.N.P. actually declined in the first half of 2011.

Europe’s periphery also needs to recognize that it signed up to a currency union, and that requires a new approach to adjustment. Instead of having huge devaluations like those suffered in Mexico under Mr. Zedillo, in Indonesia under Mr. Suharto or in Poland under Mr. Walesa, Europe’s troubled nations need to raise competitiveness by reducing local costs.

That must primarily come through wage reductions and more competitive tax systems. In Ireland a pact with the major unions is preventing further wage reductions, while in Greece the government is strangling corporations with taxes in order to avoid deeper wage and spending cuts. The proposed Portuguese “fiscal devaluation” — meaning lower payroll taxes to reduce labor costs and an increase in the value-added tax to replace the revenue — looks like a weak attempt to avoid talking about the need to cut public spending and wages much more sharply in real, purchasing-power terms.

Putting in place a huge financial package is not enough. Policies have to adjust across the troubled euro-zone countries so that nations stop accumulating debt, and the periphery moves rapidly from being among the least competitive nations in the euro area to the most competitive — and this includes lower real wages, even if debts are restructured appropriately.

The European leadership is a long way from even recognizing this reality, let alone talking about it in public.

Article source: http://feeds.nytimes.com/click.phdo?i=8ccdd9c996bb7b87d8961b3ac24b3a7b

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Economix Blog: Nancy Folbre: Class War Games

October 3, 2011 by Leave a Comment

Nancy Folbre is an economics professor at the University of Massachusetts Amherst.

The term “class warfare,” banished for many years to the far left of our political discourse, has gradually moved toward its center. President Obama, pushing for higher taxes on millionaires, now seems happy to describe himself as a warrior for the middle class.

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The term also has new valence in the economics profession. Once deployed primarily by those influenced by the Marxian tradition, the concept of class war fits neatly into the new field of conflict analysis, which often applies the tools of game theory.

In many games, as well as wars, teams compete for prizes. Competition can include efforts to influence the rules of the game, or to simply snatch the prize and run.

Collective conflict is hardly a new idea — James Madison invoked it in the Federalist Papers, defining factions as citizens “united and actuated by some common impulse of passion, or of interest, adversed to the rights of other citizens, or to the permanent and aggregate interests of the community.” He went on to describe the primary source of factions as the “various and unequal distribution of property.”

Yet for most of the late 20th century, economists focused their attention on forms of competition that took place within a very specific institutional context: voluntary exchange in markets. Questions about how individuals obtained the resources they took to market received relatively little attention.

Milton and Rose Friedman’s classic book, “Free to Choose,” captured the spirit of this approach. John Roemer’s much less accessible but also classic “Free to Lose,” a modern revision of classical Marxian theory, deftly illustrated its limitations.

But it was Jack Hirshleifer of the University of California, Los Angeles, an economist with no affinity for Karl Marx, who virtually created a field of conflict analysis with a collection of essays poetically titled “The Dark Side of the Force.”

In these essays, he emphasized that the pursuit of self-interest often motivates individuals to join strong groups in order to prey on weak groups. Indeed, he argued that individuals opt for voluntary exchange only if it offers them greater gains than coercive expropriation.

Economists who have built on Professor Hirshleifer’s approach include Herschel Grossman, who taught at Brown University, and Michelle Garfinkel and Sergios Skaperdas of the University of California, Irvine, authors of “The Political Economy of Conflict and Appropriation.”

Modern conflict analysis remains largely preoccupied with abstract models of the emergence of social institutions. But social scientists can draw on its conceptual toolkit to explore the relationships among unexpected political alignments, economic stagnation and partisan stalemate.

Political loyalty is likely to be determined by strategic calculations of future benefits rather than objective characteristics, like income or wealth. Such strategic calculations rely on imperfect information, including guesses about other people’s choices. Uncertainty about the economic future can contribute to political inertia and a tendency to rely on allegiances that worked well in the past.

Even small changes in our vocabulary can change perceptions. Ironically, Republican efforts to denounce tax increases for millionaires helped bring the term “class warfare” back into vogue; Warren Buffett, one of the country’s most successful capitalists, has wryly warned that his class is winning (even as he supports proposals to change the tax code).

Many Americans today aren’t really sure what class they belong to, but they are increasingly interested in figuring this out. The class war game is on.

Article source: http://feeds.nytimes.com/click.phdo?i=ca0fdefc14bedd3c4a83d7061ca9b5b3

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Economix Blog: Casey B. Mulligan: The Logic of Cutting Payroll Taxes

September 22, 2011 by Leave a Comment

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Casey B. Mulligan is an economics professor at the University of Chicago.

Payroll taxes are by no means the only thing that stops people from working, but one of President Obama’s payroll tax cut proposals could nonetheless create a million or more jobs.

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Last week I estimated that the president’s proposal to cut the employer portion of the payroll tax by 3.1 percentage points could raise employment by more than a million, and maybe as much as three million.

You might (as some readers wrote to me) think that a payroll tax cut is not, by itself, a good reason for employers to hire, and on that basis conclude that my estimate is way off.

I agree that jobs are not created by payroll tax cuts alone, and my estimate reflects that fact. About 131 million adults are working now, and 109 million adults are not working. If I’m right that the payroll tax cut would raise employment by one million to three million, that means that 106 million to 108 million adults would still not be working despite the payroll tax cut.

The chart below illustrates the results for the case that the payroll tax cut raises employment by exactly two million.

In other words, my estimate is that at least 97 percent of people not working would still not be working regardless of the payroll tax cut. That’s because, as you might deduce, payroll taxes are only one factor among many that determine how many people are employed. Nevertheless, raising employment by one million to three million would be an accomplishment for the president, and one that would be visible in the national statistics.

By the same logic, if someone were to propose raising the payroll tax by 3.1 percentage points, I would expect employment to be reduced by one million to three million. Again, the payroll tax is only one of many factors affecting hiring decisions, which is why my estimate of a payroll tax increase implies that more than 97 percent of workers would continue to work despite the increase.

Indeed, we all know people who would continue to work even if the payroll tax were raised by 30 percentage points, let alone three. We also know people who would not work even if taxes were eliminated completely.

But the fact that more than 100 million people are not employed, and more than 100 million people are employed, suggests that there could well be a million people (or two million, or three million) who are near the fence. For that small fraction of the population, there are almost as many things pushing toward making them employed as making them unemployed; a payroll tax cut could tip the balance.

For hundreds of millions of others, the balance is tilted too far for a payroll tax cut to make a difference. But while economists can debate the exact numbers, few of us can conclude that a small tax cut has no effect. Rather, a small tax cut should be expected to have a small effect — and at this point one worth seeking.

Article source: http://feeds.nytimes.com/click.phdo?i=a1bb3ef8f31b3799b20d54afce88a488

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Economix Blog: Simon Johnson: You Get What You Pay For

September 8, 2011 by Leave a Comment

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Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

Standard Poor’s downgrade of United States government debt last month has been much debated, but not enough attention has been devoted to the fact, reported last week by Bloomberg News, that it continues to rate securities based on subprime mortgages as AAA.

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In short, S.P. is suggesting that these mortgages are more creditworthy than the United States government — a striking proposition. Leave aside for a moment that S.P. made a big mistake in its analysis of the federal budget (as explained by James Kwak in our blog). Just focus on all the things that can go wrong with subprime mortgages: housing prices can fall, people can lose jobs, the economy may fall into recession and so on.

Now weigh those risks against the possibility that the United States government will default. As we learned this summer, that is not a zero-probability event — but it would take either an act of Congress, in the sense of passing legislation, or a determination by members of Congress that they could not act. S.P. finds this more likely to happen than some subprime mortgages’ going bad.

Now S.P. might be right, of course. Or its assessment might be influenced by the fact that it is paid by the issuer of those mortgage-backed securities — which presumably wants a higher rating. The rating agency’s employees may want to do an accurate assessment; management can reasonably expect to make higher profits if its ratings please the paying customers.

Perhaps we should just disregard what S.P. and its competitors say. But this is not so easy, because many investors are guided by rules — either self-imposed or created by regulators — that tie investment decisions, and thus these investors’ holdings, to ratings. Ratings changes undeniably can move markets.

How can we take seriously a rating agency that is compensated by the issuers of securities? This system has long outlived its usefulness and should be discontinued.

In a similar vein, let me ask why we should take seriously economic analysis offered up by a financial-sector lobbying group on behalf of its members — if, for example, it says that regulation of its members will slow economic growth? Surely, we should check the numbers in the analysis carefully and be skeptical of the policy recommendations.

A timely example comes from the Institute of International Finance, which calls itself “the Global Association of Financial Institutions” and whose board members are all from big banks. (Indeed, the institute is more than a mere lobbying group; in the recent Greek debt negotiations, it was in charge of coordinating the terms proposed by private-sector banks for their involvement in the debt restructuring.)

So what do we make of its policy recommendations? In a report released this week, “The Cumulative Impact on the Global Economy of Changes in the Financial Regulatory Framework,” for example, the institute asserts that additional capital requirements for its members could result in “3.2 percent lower output by 2015 in these economies than would otherwise be the case” (see Paragraph 5 of its news release accompanying the report).

In recent conversations with some policy makers from the Group of 7 nations, I was told that the institute’s previous, interim report on this same topic was largely without value (some said completely without value).

I hope these policy makers and others react the same way in this instance, because the institute refuses to acknowledge the vast cost imposed on society by the combination of big banks, high leverage and low capital that it endorsed through 2008 and that it defends today, with only minor modifications. (James Kwak and I wrote directly about these issues in “13 Bankers” — and we’re now hard at work on the sequel.)

The institute’s report is nothing more than lobbying masquerading as economic analysis. And just as S.P. is paid for its ratings by the issuers, the institute is paid to represent the views of big banks. We would be wise to suspect that in both cases, the paying customer would prefer a particular outcome — irrespective of what the evidence says.

Article source: http://feeds.nytimes.com/click.phdo?i=e23a94d67a923c9ebc37143b9e527b8a

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Economix: What’s a Crisis and What Isn’t

July 1, 2011 by Leave a Comment

Today's Economist

Laura D’Andrea Tyson is a professor at the Haas School of Business at the University of California, Berkeley, and served as chairwoman of the Council of Economic Advisers under President Clinton.

Long term, the United States faces a fiscal challenge that must be tackled –- but it is not an immediate fiscal emergency. In the labor market, though, there is an immediate crisis, the worst since the Great Depression.

According to the latest estimates from the Congressional Budget Office, if current fiscal policies are maintained, federal debt held by the public could rise to an unprecedented 187 percent of gross domestic product in 2035 from 62 percent of gross domestic product at the end of 2010.

This is neither a desirable nor a sustainable outcome. Long before we got there, the United States would lose the confidence of investors, igniting a spike in interest rates, a collapse of the dollar, a global financial crisis and a devastating recession.

But with substantial excess capacity in the economy, there is no evidence that the federal deficit is driving up interest rates and crowding out private spending. What’s slowing the pace of recovery is not too much government borrowing but too little private spending.

Nor are there symptoms of an imminent sovereign debt crisis facing the American government over the next few years. Rather, worries about slower growth in the United States, along with a flight to safe assets and a reduction in risk appetite by global investors, have kept the federal government’s borrowing rates near historic lows.

And that’s despite threats by irresponsible members of Congress to initiate a default on the government’s debt by failing to pass an increase in the debt limit.

In the labor market, the situation is dire. Almost 14 million people –- 9.1 percent of the labor force –- were unemployed in May. About 45 percent of those had been unemployed for 27 weeks or more, according to the Bureau of Labor Statistics. Another 8.5 million part-time workers wanted but could not find full-time jobs; an additional 2.2 million dropped out of the labor force because they could not find work.

During the last five years, the percentage of the population working has fallen to 58 percent from 63 percent, reducing the number of Americans with jobs by 10 million.

The economic and human costs associated with the jobs crisis are staggering. An extended period of unemployment means lower earnings: workers who return after long-term unemployment earn 20 percent less over the next 15 to 20 years than a worker who was continuously employed.

The longer workers are unemployed the more likely they are to lose their skills and drop out of the labor force. And the longer workers are unemployed, the more likely they are to lose their homes, their health and their marriages –- and the more likely their children will grow up in poverty –- with adverse implications for their health, education, and future incomes.

The primary cause of the jobs crisis is a lack of demand, the same problem that bedeviled the economy in the 1930s. Consumers, long the primary engine of economic growth in the United States, are in the midst of an unprecedented retrenchment.

High debt levels, falling housing prices, a lack of employment opportunities and wage stagnation are forcing people to curb their spending, pay down their debt and increase their saving. In the 13 quarters since the beginning of 2008, the annual growth of real consumption, which still accounts for about 70 percent of gross domestic product in the United States, averaged just 0.5 percent. Not since the end of World War II has consumption been this weak for this long.

Speaker John A. Boehner and the Republican majority in the House say the way to address the immediate jobs crisis and the long-term fiscal challenge is to make deep cuts in federal spending. Indeed, a recent study by the Republicans on the Joint Economic Committee concluded that “quick, decisive government spending reductions” can promote growth and jobs in the short term.

But the overwhelming evidence suggests the opposite: when the economy has excess capacity, high unemployment and weak private demand, cuts in government spending reduce growth and eliminate jobs.

On this point, there is widespread agreement among experts. Ben Bernanke, chairman of the Federal Reserve, recently warned that sudden fiscal contraction might put the still fragile recovery at risk. The June report from the C.B.O. contains a similar warning. Even William Gross of Pimco, a vocal critic of the long-term fiscal position of the government, cautions that a move toward fiscal balance, if implemented too quickly, could “stultify economic growth.”

As Simon Johnson noted in his recent Economix post, fiscal contractions are expansionary only under special conditions. None of these apply to the United States today.

So what should policy makers do? They should pair fiscal measures aimed at job creation now with a credible plan to reduce the deficit gradually –- and pass both at once, as a package. Approving a deficit-reduction plan but deferring its starting date until the economy is near full employment will cut the odds that immediate contraction will tip the faltering economy back into recession.

Indeed, passage of such a package could bolster growth by easing investor concerns about future deficits, reducing long-term interest rates and strengthening consumer and business confidence.

There is strong bipartisan support among budget negotiators in Washington for an enforceable debt target as an essential component of a credible deficit-reduction plan. Breaching the target would lead to automatic changes in spending and revenues. I believe we should pair an unemployment-rate target with a debt target. The unemployment-rate target would postpone significant spending cuts or revenue increases to achieve the debt target until the economy is closer to full employment.

Most economists believe that full employment for the American economy implies a structural unemployment rate of 5 to 6 percent. The unemployment-rate target should be set within that range. Current forecasts by the C.B.O., the Office of Management and Budget, the Hamilton Project and most private-sector economists predict that this target will not be achieved until 2015 or later. That’s when serious actions to narrow the long-run fiscal gap would begin to take effect.

Can we afford to defer such actions until the economy is much closer to full employment? Yes.

As the economy recovers and temporary fiscal stimulus measures are phased out, the deficit as a share of gross domestic product is expected to decline markedly during the next few years. Extending some measures enacted at the end of 2010 –- the payroll tax cut for employees, the capital investment expensing deduction and long-term unemployment benefits –- would add little to the long-run fiscal gap and would boost the flagging recovery.

Given the magnitude of the jobs crisis, we should go further by cutting payroll taxes for employers on new hires, including all hires by new firms. David Leonhardt, a columnist at The New York Times; Michael Greenstone, an economics professor at the Massachusetts Institute of Technology; and Robert H. Frank, an economics professor at Cornell, have recently proposed this approach. Mr. Frank estimated that eliminating the employer payroll tax on new hires could result in more than five million new jobs. A cut in payroll taxes should be maintained until the unemployment rate target is reached.

As long as there is considerable slack in the economy and inflation remains low, the government should be able to finance targeted fiscal measures for job creation at reasonable interest rates, provided such measures are paired with a credible and enforceable deficit reduction plan. And provided that gamesmanship and blackmailing tactics over the debt limit do not undermine the creditworthiness of the United States on global markets.

Painful choices about how to close the long-run fiscal gap –- primarily the result of imprudent fiscal decisions before the Great Recession, escalating health-care costs and an aging population –- must be shaped now and enacted promptly over many years once the economy has recovered.

But in the next few years, the priorities of fiscal policy should be growth and jobs.

Article source: http://feeds.nytimes.com/click.phdo?i=0d25f09fd6b38708b103c4ab5c4e9fe9

Filed Under: Economy News Tagged With: , ,

Economix: Keynesians Miss the Point, for Now

May 4, 2011 by Leave a Comment

Today's Economist

Casey B. Mulligan is an economics professor at the University of Chicago.

Our labor market has long-term problems that are not addressed by Keynesian economic theory. New Keynesian economics is built on the assumption that employers charge too much for the products that their employees make and are too slow to cut their prices when demand falls. With prices too high, customers are discouraged from buying, especially during recessions, and there is not enough demand to maintain employment.

When the financial crisis hit in 2008, the New Keynesian “sticky price” story had some plausibility because economic conditions were, in fact, deflationary (although I have my doubts about other aspects of their theory). That is, the demand for safe assets surged in 2008, which means that those assets had to become expensive or, equivalently, goods had to get cheaper in order to clear the market.

Normally the Federal Reserve could expand the money supply to satisfy the extra demand for safe assets, so consumer prices wouldn’t have to fall to maintain employment. But the financial crisis was severe enough that the Fed’s best efforts would not be enough.

At the time, New Keynesian fears seem to have been realized: consumer prices had to fall to maintain employment, but too few employers were willing or able to make the price cuts quickly enough. The result was going to be a severe recession that could be partly cured, in the short term, by fiscal stimulus or, in the longer term, as more companies had the time needed to cut their prices.

The red line in the chart below shows the consumer price index that, according to New Keynesian theory, was needed to maintain employment. I have rescaled the index to be based in December 2007, when the recession began: a value of 96 means consumer prices were 4 percent below what they were in December 2007.

In theory, the index of consumer prices had to fall eight percentage points below its peak (of almost 104) in the summer of 2008 to maintain employment. (I measure all consumer prices here, not merely the “core” price index that excludes fuel and many other items, because the excluded items provide jobs, too.)

The blue line shows actual consumer prices. We readily see the “downward pressure” on consumer prices at the end of 2008, because, in fact, prices stopped rising and actually fell a couple of percent.

But New Keynesians say that with the drop needed to maintain employment, the blue line needed to fall as much as the red, and a drop that large would take more time. In the meantime, employment would be low and employers would enjoy cheap labor for a while, as so many unemployed people were desperate to work.

But the availability of cheap labor would eventually give employers room to cut their prices – in theory the blue and red series would converge and employment would eventually return to previous levels.

Early on, I thought the New Keynesian theory was wrong because I didn’t see that employers perceived labor to be cheap. Federal law had increased minimum wages three times in and around the recession. A number of other public policies made labor more expensive. My fellow blogger Nancy Folbre has written that American labor looks increasingly expensive compared with potential workers abroad.

The price chart above shows little or no tendency for the blue series to converge with the red one, because, contrary to the theory, high unemployment rates have not caused employers to perceive labor as cheap.

The low employment rates we have today are too persistent to be blamed on price adjustment lags (I have similar reservations about another business-cycle theory: “job search” theory says that jobs are there to be found, but that unemployed people have not been lucky enough to look in the right places).

Our labor-market problems may not disappear by themselves and are not addressed by New Keynesian theory.

Article source: http://feeds.nytimes.com/click.phdo?i=31f0a48d37f6d2ad9cdf223120387e6b

Filed Under: Economy News Tagged With: , ,
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