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Article Artículo

Economic Growth

Workers

The U-3 Unemployment Rate: Overstating the Strength of the Labor Market in 46 of 50 States

Last week, CEPR released a report titled The Anomaly of U-3: Why the Unemployment Rate is Overstating the Strength of Today’s Labor Market. The report shows that the U-3 unemployment rate, also called the official unemployment rate, is out of line with eleven alternative measures of labor market slack.

Five of these measures — the U-1, U-2, U-4, U-5, and U-6 unemployment rates — are calculated at the state level. These five alternative measures allow us to examine the strength of each state’s job market. By all but one measure, the U-3 unemployment rate is overstating the strength of the economy in a clear majority of states. This can be seen in Table 1 below, which summarizes the results from Tables 2-7.

CEPR and Nicolas Buffie / December 11, 2015

Article Artículo

Globalization and Trade

Politicians Don't Also Say What They Think # 56,780: The TPP

Why is it so hard for reporters to simply tell us what people say instead of what they think? I'm sure many of these reporters are very insightful, but the reality is they do not know what people think, it is just their speculation.

Therefore, when a Washington Post article on the prospects in Congress for the Trans-Pacific Partnership (TPP) told readers:

"Obama has said the pact is central to his economic agenda, but it is also viewed inside the administration as an important foreign policy initiative to balance the growing economic clout of China."

The Washington Post does not know that the administration actually views the TPP as an important foreign policy initiative, it knows that people in the administration make this claim. While the claim may actually reflect their thinking, it is also possible that they would seek to sell a deal with few obvious economic benefits for most people in the United States on foreign policy grounds. Politicians sometimes do things like that.

There are a number of other comments in the piece that are not quite right. At one point it refers to proponents of the TPP as "trade supporters." This is not accurate. Trade supporters might well oppose the deal because of the increased protectionism in the form of stronger copyright and patent protections. These will raise the price of drugs and other affected products by several thousand percent above the free market price.

Trade supporters may also be unhappy with the TPP since it does nothing to address currency management by parties to the deal. Through currency management countries can prevent the currency market from adjusting, thereby maintaining large trade surpluses that would otherwise not be possible. Using intervention to keep down the value of a currency, as is currently done by many countries, has the same effect as imposing a tariff on all imports and having subsidies for all exports. The Obama administration chose not to pursue this issue in the TPP.

For these reasons, many supporters of trade may oppose the TPP. It would have been more accurate to describe the people referred to in the piece as "trade deal" or TPP supporters.

Dean Baker / December 11, 2015

Article Artículo

Haiti

Latin America and the Caribbean

World

On Human Rights Day, Haitians Have A Message for the UN

The following is written by Beatrice Lindstrom, Staff Attorney at the Institute for Justice and Democracy in Haiti, and has been cross-posted from Medium.

“It is with great sadness that I write you this letter to remind you that human rights are something that all people must respect no matter how powerful you are.”

So reads the opening line of a letter from Viengeméne Ulisse, one of over 2,000 cholera victims who have handwritten letters to the UN Security Council to demand that the world body take action and provide justice and reparations for the suffering they have experienced due to cholera introduced by UN peacekeepers in 2010.

Viengeméne lives in Thomazeau, Haiti. In May of 2011, he suddenly fell ill with cholera and was hospitalized for eight days. “I learned that it was MINUSTAH that brought this disease to my country. In this sense, I ask the president of the United Nations and all of its allies to compensate us and bring justice and reparations,” he writes.

UN peacekeepers brought cholera to Haiti in 2010 by discharging untreated human waste into Haiti’s largest river. Haiti now has the world’s worst cholera epidemic?—?over 9,000 people have died and over 760,000 have sought hospital care.

The victims are delivering their letters in connection with Human Rights Day. The UN celebrates Human Rights Day every December 10th, the anniversary of the signing of the Universal Declaration of Human Rights. Using slogans like “rights for all,” it is an opportunity for the UN draw attention to the universality and equality that underpin the modern human rights system.

But to Haitians who have been employing every advocacy tool in the book to enforce their rights against the UN itself?—?including holding press conferences, demonstrating, filing lawsuits, and now, writing letters?—? these UN campaigns ring hollow.

“How does the UN have the moral standing to promote respect for human rights and dignity in Haiti when it is violating cholera victims’ rights?” asks Mario Joseph, Managing Attorney of the Bureau des Avocats Internationaux, who has been championing the victims fight for justice for over four years.

Jake Johnston / December 10, 2015

Article Artículo

Economic Growth

Workers

FedWatch: Employment Down in All 12 Federal Reserve Districts

In late 2007, the Federal Reserve (“Fed”) began pushing down interest rates in hopes of boosting the economy and providing job opportunities for American workers. The downside to lower interest rates is the risk of higher inflation; at the time, the Fed correctly believed that inflation wasn’t a problem, given that all measures of inflation were near their stated targets and falling.

The Fed made a hard push to boost employment by lowering the Federal Funds Rate — the rate at which banks can lend to each other overnight — from 5.25 percent in early 2007 all the way to 0.16 percent in December 2008. The Fed has kept the Federal Funds Rate near zero for the last seven years.

When the Fed meets on December 15–16, it will consider raising rates despite the fact that the labor market by at least one key measure is only about halfway recovered from the 2007–2009 recession. Moreover, inflation is hardly a problem in today’s economy. By all measures inflation is low, and projections of future inflation indicate that the Federal Reserve is likely to remain below its target rate of 2.0 percent.

So when the Fed votes on whether or not to raise interest rates next week, it will be choosing between reducing the risk of a potential future problem (inflation) and a very real present one (low employment). There is substantial disagreement amongst members of the Fed about which problem is more important.

CEPR and Nicolas Buffie / December 10, 2015

Article Artículo

Matt O'Brien Takes Obama to Task on Fed Appointees

Matt O'Brien used his column this morning to take Obama to task for failing to fill vacant postions on the Fed's board of governors. I agree with O'Brien with one major exception.

O'Brien refers to the Taper Tantrum in the summer of 2013, when mortgage and other long-term interest rates soared after Chair Ben Bernanke indicated the Fed would soon begin to taper its quantitative easing program. He sees the market reaction as partly a result of the composition of the Fed's board of governors, which included two Obama appointees not fully committed to growth promoting policies. He argues that the tantrum unnecessarily slowed the housing market and growth.

I would disagree with the first part of this story. As we know, economists have a hard time seeing housing bubbles, but we were starting to see the beginnings of one at the time of the tantrum. House prices were rising very rapidly, especially in the bottom third of the market. According to the Case-Schiller tiered price index, in the period from April of 2012 to August of 2013 house prices in the Phoenix market had risen at a 32.6 percent annual rate. In the Las Vegas market they had risen at 44.0 percent rate and in the Atlanta market at a 47.5 percent annual rate.

These markets were badly depressed as a result of the crash, so large increases were a good thing, but on the other hand, it's not hard to see that a market rising at a 47.5 percent annual rate will soon be in bubble territory. And, we were seeing evidence of bubble behavior. People were giving up their day jobs and buying up homes to fix-up and resell. In many cases this involved maxing out on their credit cards or whatever other type of credit they could use. 

Dean Baker / December 10, 2015

Article Artículo

CalPERS and Private Equity: A Second Opinion

Guest Blog

by Eileen Appelbaum and Rosemary Batt

Co-authors of Private Equity at Work: When Wall Street Manages Main Street

The usually perceptive Deal Professor, Steven Davidoff Solomon has swallowed CalPERS’ staff’s spin on the more than $3.4 billion the California public employees’ pension fund has paid to private equity firms in performance fees (so-called carried interest) hook, line, and sinker. In Private Equity Fees Are Sky-High, Yes, but Look at Those Returns, Davidoff Solomon accepts uncritically CalPERS report of its return on its risky PE investments — a report that the industry publication, Private Equity International in its November 27 Friday Letter, labeled a private equity public relations coup. Those high fees are worth it in Davidoff Solomon’s view because of CalPERS stellar private equity returns. If only!

Davidoff Solomon failed to note that CalPERS’ staff did not provide information in this report on the risk-adjusted return to its risky private equity investments. The staff provided misleading information because its risk-adjusted PE returns were awful: CalPERS investments in private equity have underperformed its risk-adjusted benchmark over the last 10 years and in 3-year and 5-year sub-periods. The staff no doubt expected to pull the wool over the eyes of public sector workers and taxpayers in California, but has surely succeeded beyond its wildest dreams with this endorsement in The New York Times by someone who should know better. Indeed, over the last 10 years, the pension fund’s PE investments underperformed it stock market benchmark by about 300 basis points. In layman’s language, this means CalPERS would have had exactly the same return over this period if it had invested in the stock market index it uses in its benchmark. Actually, CalPERS would have had a much higher return from investing in this stock market index because it could have invested the $3.4 billion of its members’ retirement savings that it paid PE firms in performance fees. It’s amazing that these ginormous performance bonuses were paid to PE firms for delivering results that did not beat the stock market over 10 years and certainly did not provide a return high enough to compensate the pension fund for the greater risk and lack of liquidity present in PE investments.

Dean Baker / December 09, 2015

Article Artículo

Strange Cases for Fed Rate Hikes: The Poor Savers Story

By Dean Baker and David Rosnick

Over the last seven years there has been a steady drumbeat of complaints from people who are upset by the Fed’s zero interest rate policy. We first heard that it was going to lead to hyperinflation. Then we were told that low interest rates would fuel asset bubbles. More recently a rate hike has become a matter of the Fed’s credibility.

One of the most persistent complaints is that the zero interest rate policy is unfair to small savers. The argument is that we have all these elderly people who depend on the income from their savings who are being destroyed by getting near zero interest on their CDs and money market accounts.

There are two problems with this story. The first one is a logical problem. Interest rates are low because the economy is extremely weak. In the simple textbook story (very simple), the interest rate is supposed to equate the supply and demand for savings. Ever since the recession began we have had an enormous excess supply of savings. This means that the interest rate should be lower than it actually is. However, interest rates don’t fall further because they will not go below zero, or at least not much below zero. People are not willing to pay banks to borrow their money.

Given the market outcome pushing interest rates to zero, those who want the 2–3 percent short-term interest rates of pre-recession years effectively want the government to pay them interest rates that are above the market clearing rate. That’s fine as a demand from a self-interested group — I’d like the government to pay me twice what my house is worth — but it’s not one that deserves much credence in policy debates. Most of us probably think it’s more important to use the Fed’s monetary policy to get people employed than to subsidize the interest received by savers.

The other problem is that the story of small saver suffering because of low interest rates doesn’t fit the data. There just are not very many people with substantial amount of savings in CDs, money market, saving accounts, or other short-term assets who don’t also have large amounts of money in stocks and bonds. Anyone who has large sums in stocks and bonds has done very well in the last five years, as both markets have soared, so if they aren’t earning much interest on their savings accounts it is difficult to feel too sorry for them.

Dean Baker / December 07, 2015

Article Artículo

The Revolving Door with the Banks and "Reform" of Fannie and Freddie

Gretchen Morgensen has an excellent piece in the NYT reporting on the revolving door between Wall Street banks and the Obama administration and the lobbying effort to dismantle Fannie Mae and Freddie Mac. These banks hope to be able to take over the business of the two mortgage giants with a system under which the government would guarantee 90 percent of the value of the mortgage backed securities they issued. While the piece does a very good job detailing the financial connections of the individuals behind this push, there are several important points which make the case against "reform" even stronger than presented in the piece.

To start, the piece tells readers:

"For all the problems associated with Fannie and Freddie, some housing experts say, allowing the nation’s largest banks to assume greater control of the mortgage market would most likely increase costs for borrowers."

Actually, just about all housing experts agree that the privatized system would raise costs. Wall Street types get paid more than government employees and shareholders expect a profit. Therefore, we can be pretty safe in assuming a privatized system will have higher costs. The range of estimates in a Washington Post article from last year was that it would increase mortgage interest rates by between 0.5–2.0 percentage points. (I put myself near the bottom of that range.) If the roughly $6 trillion in mortgage debt on Fannie and Freddie's books were all switched to this privatized system, the additional cost would be $30 billion a year, assuming the bottom end of this range. That is more than the federal government spends on the TANF program each year.

Dean Baker / December 07, 2015