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Article Artículo

Corporate Debt Scares

As we mark the 10th anniversary of the peak of the financial crisis, news outlets continue to feature pieces how another one, possibly worse, is just around the corner. This mostly shows that the folks who control these outlets learned absolutely nothing from the last crisis. As I have pointed out endlessly, the story was the collapse of the housing bubble that had been driving the economy. The financial crisis was an entertaining sideshow.

There is one story in the coming crisis picture that features prominently — the corporate debt burden, as discussed here. (This Bloomberg piece is actually well-reasoned.) The basic story is a simple one: corporate debt has risen rapidly in the recovery. This is true both in absolute terms, but even in relation to corporate profits.

The question is whether this is anything that should worry us. My answer is "no."

The key point is that we should be looking at debt service burdens, not debt, relative to after-tax corporate profits. This ratio was was 23.1 percent in 2017, before Congress approved a big corporate tax cut. By comparison, the ratio stood at more than 25 percent in the boom years of the late 1990s, not a time when people generally expressed much concern over corporate debt levels.

It is true that the burden can rise if interest rates continue to go up, but this would be a very gradual process. The vast majority of corporate debt is long-term. In fact, many companies took on large amounts of debt precisely because it was so cheap, in some cases issuing billions of dollars worth of 30-year or even 50-year bonds. These companies will not be affected by a rise in interest rates any time soon.

But clearly, there are some companies that did get in over their heads with debt. There are two points to be made here.

CEPR / October 12, 2018

Article Artículo

United States

Workers

Labor Market Policy Research Reports, October 2018

CEPR regularly publishes a curated collection of original research from academic institutions and nonprofits on the state of the US labor market. The compilation is part of our ongoing effort to promote informed debate on the most important economic and social issues that affect people's lives.

The Brookings Institution

Seasonally and Weather-Adjusting the Monthly Jobs Numbers
An economist reexamines this month’s Bureau of Labor Statistics (BLS) employment report using three alternative projection methods to account for seasonal weather patterns.

CEPR and Hayley Brown / October 10, 2018

Article Artículo

Trump Tax Cuts: A Little Good Old-Fashioned Crowding Out

(Note: This piece first appeared as a post on my Patreon page.)

The textbook story of what happens if the government runs a budget deficit when the economy is near its potential is that interest rates rise. Higher interest rates then reduce demand in interest-sensitive sectors like residential construction, investment, and car purchases.

Higher rates also lead to a higher-valued dollar. This makes US goods and services less competitive internationally, which means a larger trade deficit. That also reduces demand. The result is that much or all of the demand created by the deficit is offset by the reduction in demand from this crowding out effect.

Of course, the textbooks often underemphasize the intervening step. The Federal Reserve Board could act to prevent this sort of crowding out by committing to keep interest rates low. The risk of doing this is that if the economy is really near its potential, then the excess demand will quickly lead to higher inflation.

It would have been desirable in my view if the Fed had taken this risk and kept interest rates at lower levels, to see how low we could get the unemployment rate. This is especially important since the additional employment would disproportionately benefit the most disadvantaged workers, blacks, Hispanics, people with less education, and people with a criminal record.

CEPR / October 06, 2018

Article Artículo

Economic Growth

United States

The View from the Rear View Mirror: A 'Ten Years After' Critique

CEPR’s senior economist Dean Baker argues in The Housing Bubble and the Great Recession: Ten Years Later that the Lehman event marks the peak of a recession caused by the collapse of the housing bubble. The media’s attention on the failure of Lehman Brothers as the driver of the recession to the exclusion of the bursting housing bubble reveals the class conflict apparent in how the Great Recession was, and still is, reported.

While the fear generated by politicians and media was able to get enough support for saving the financial industry, the country was left to deal with the painful fallout from a collapsed housing bubble. Millions lost their homes and jobs. Even a decade later, by some measures, most notably prime-age employment rates, the labor market has still not recovered.

October 05, 2018