Blog postings by CEPR staff and updates on the latest briefings and activities at the Center for Economic and Policy Research.

This is the third in a series of profiles of the members of the Federal Reserve Board’s Open Market Committee [FOMC]. The profiles will focus on their writings, public statements, and voting records as members of the FOMC.

Since assuming office in 2007, Boston Federal Reserve Bank President Eric Rosengren has been considered one of the Fed’s more dovish members. Although he has recently lent tepid support to the idea of raising rates, Rosengren’s stances on quantitative easing (QE), the federal funds interest rate, the Fed’s dual mandate, and the 2 percent inflation target show that he has normally advocatedfor monetary stimulus.

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GDP grew at just a 0.5 percent annual rate in the first quarter. This weak quarter, combined with the 1.4 percent growth rate in the 4th quarter, gave the weakest two quarter performance since the 3rd and 4th quarters of 2012 when the economy grew at just a 0.3 percent annual rate.

Growth was held down by both a sharp drop in non-residential investment and a further rise in the trade deficit. Equipment investment fell at an 8.6 percent annual rate, while construction investment dropped at a 10.7 percent annual rate. The latter is not a surprise, given the overbuilding in many areas of the country. The rise in the trade deficit was due to a 2.6 percent drop in exports, as imports were nearly flat for the quarter. Trade subtracted 0.34 percentage points from growth for the quarter.

Consumption continued to grow at a modest 1.9 percent annual rate, adding 1.27 percentage points to growth. Housing grew at a 14.8 percent annual rate, adding 0.49 percentage points to growth.

On the whole this is a weak report. The headline 0.5 percent figure probably overstates the weakness somewhat, but it is not a good sign when two consecutive quarters have an average growth rate of less than 1.0 percent.

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Between 2007 and 2009, real GDP and real GDP per capita fell 3.1 and 4.8 percent, respectively. Since then, the economy has been growing at about a 2.1 percent annual rate, and income per person is now about $1,500 higher than it was before the recession. However this income has not been evenly distributed, with a disproportionate share of income growth going to the top 1 percent of the income distribution.  

This is relevant to tax policy because it tells us that there are real benefits to be had from taxing the rich — precisely for the reason that their incomes have gone up so much. This can be seen in the tax filings data posted to the World Wealth and Income Database. In 1978 — right when the income share of the 1 percent began rising — the top 1 percent of income earners made less than 9 percent of national income. In 1978, taxing the top 1 percent at an effective tax rate of 50 percent would’ve generated revenue equivalent to almost 4.5 percent of GDP, assuming no behavioral effects. By contrast, in 2014 the top 1 percent of income earners made 21.2 percent of national income. (At least part of this growth is due to higher incomes in finance.) Given this much larger share of national income, taxing the top 1 percent at a 50 percent tax rate would’ve generated 10.6 percent of GDP, assuming no behavioral effects. Therefore, there actually is a substantial amount of revenue to be gained from taxing the rich, mostly because the rich control such a large share of all taxable income.

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This is the second in a series of profiles of the members of the Federal Reserve Board’s Open Market Committee [FOMC]. The profiles will focus on their writings, public statements, and voting records as members of the FOMC.

Since her appointment as President of the Cleveland Federal Reserve (Fed) Bank in June 2014, Loretta Mester has been considered one of the Fed’s more hawkish members. Due to the voting structure of the FOMC, Mester has only been able to cast votes during the second half of 2014 and the early meetings of 2016. However, her public statements indicate that Mester has been more anxious than her colleagues to raise interest rates.

Mester’s most dovish moment came in 2014, when she supported the Fed’s decision to not raise the Federal Funds interest rate. In a September 2014 interview with the Cleveland Plain Dealer, Mester stated[1]:

“At this point, now, there is still more progress we need to make (before we raise rates)...I do believe it's appropriate to keep interest rates at the zero to 0.25 percent range.”

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Private equity (PE) operated without oversight until the Dodd-Frank Financial Reform Act gave the Securities and Exchange Commission (SEC) authority to examine PE fund advisors. Regular audits, which began in 2012, turned up widespread and serious abuses. PE firms collect fees from the companies that PE funds buy with investors’ money – so-called portfolio companies. The SEC found that PE firms made unauthorized charges and failed to share fees collected from the portfolio companies with their investors as required in the investment agreements. Recently, two major PE firms – Blackstone and KKR –settled enforcement actions with the SEC for $39 million and $30 million respectively over failure to disclose fees collected from portfolio companies to PE fund investors.

Despite these revelations, PE investors remain in the dark about how much private equity firms collect from their portfolio companies. They are not privy to the contracts between PE firms and portfolio companies, and fees are paid directly to the PE firm without passing through the PE fund. The result is that pension funds and other PE investors cannot determine whether portfolio company fees are reasonable or excessive, and whether they have received their fair share.

The private equity business model operates at multiple levels. The private equity firm raises capital from pension funds and other investors for its private equity funds. These funds then acquire companies for fund portfolios. All too often, PE firms fail to provide a clear accounting of fees collected at these levels – management fees paid by PE fund investors, monitoring fees paid by portfolio companies as well as PE firm expenses allocated to PE funds and portfolio companies.

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One of the primary explanations we’ve heard for today’s low employment rate is that workers don’t have the right skills to land jobs in today’s economy. This line of thinking is often employed by people who argue that monetary and fiscal stimulus are unnecessary since the problem can’t really be lack of demand.

There are a host of reasons to suspect that this explanation is wrong. One such reason is the decline in prime-age (25 to 54) employment for both men and women since 2000.

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buffie vacancies 2016 04 11 fig1

The figure above compares the average 2015 rental vacancy rate with the percent increase in owner’s equivalent rent for 30 metropolitan areas. Although the relationship is imperfect, there is a clear trend to the data: higher vacancy rates are associated with lower inflation. The concept here is relatively simple: when a large number of rentals are vacantrentiers must set prices relatively low in order to compete for potential renters.

This becomes clear when you look at specific metropolitan areas. The three areas with the highest vacancy rates also happened to have the three lowest inflation rates. Two areas in Ohio  Akron and Cincinnati  had 12.1 and 10.2 percent vacancy rates, respectively. Increases in rents were just 1.5 and 1.1 percent in those two areas, compared to the sample median of 3.4 percent. St. Louis, Missouri had a 9.7 percent vacancy rate  3 percentage points above the median vacancy rate of 6.7 percent  and saw just a 2.0 percent increase in rental prices.

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Over the past three decades, the top 1 percent’s share of national income has more than doubled. In 1978, the richest 1 percent of income earners made less than 9 percent of total income; by 2014, their share was over 21 percent.

The growth of the financial sector has been one of the primary drivers of this increase. During the 1940s to 1970s, finance typically accounted for about 3 to 4 percent of GDP; by 2005 and 2006, just before the financial crisis, finance claimed 7.6 percent of GDP. While the industry’s share of national income fell during the recession, it is back above 7 percent today.

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Professor Andrew Levin (Dartmouth College), the former special advisor to Fed Chair Ben Bernanke and then-Vice Chair Janet Yellen, released a proposal for reform of the Federal Reserve Board’s governing structure in a press call sponsored by the Fed Up Campaign. The proposal has a number of important features, but the main point to make the Fed more accountable to democratically elected officials and to reduce the power of the banking industry in monetary policy.

Under its current structure, the banks largely control the twelve Federal Reserve district banks. This matters because the presidents of these banks are part of the Federal Reserve Board’s Open Market Committee (FOMC) which determines monetary policy. At any point in time five of twelve district bank presidents will be voting members of the FOMC, but all twelve take part in the discussion. The voting presidents will typically be outnumbered by the seven Federal Reserve Board governors, who appointed by the president and approved by the Senate, although there have been just five sitting governors for the last two years, as the Senate has refused to consider President Obama’s nominees.

There is no obvious reason that the banking industry should have special input into the country’s monetary policy. This would be comparable to reserving seats on the Federal Communications Commission’s board for the cable television industry. While there is no way to prevent an industry group from trying to influence a government regulatory body, in all other cases they at least must do so from the outside. It is only the Fed where we allow the most directly affected industry group to actually have a direct voice in the policies determined by its regulatory agency.

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

• CEPR’s international program joined the rest of the world in condemning the assassination of Honduran environmentalist and indigenous rights activist Berta Cáceres, who was murdered on March 3rd. CEPR issued this press release soon after the news of her killing had been announced, calling for an independent, international investigation to bring the perpetrators to justice. CEPR was also mentioned in this article in The Nation by Greg Grandin titled “The Clinton-Backed Honduran Regime Is Picking Off Indigenous Leaders.” Grandin writes of Hillary Clinton’s role in the Honduran coup: “Later, as Clinton’s emails were released, others, such as Robert Naiman, Mark Weisbrot and Alex Main, revealed the central role she played in undercutting Manuel Zelaya, the deposed president, and undercutting the opposition movement demanding his restoration. In so doing, Clinton allied with the worst sectors of Honduran society.” CEPR’s Honduras work was also cited in this post on NPR’s Latino USA, and this post on the Fairness and Accuracy in Reporting blog.

CEPR Co-Director Mark Weisbrot discussed Clinton’s role in the coup in this video by the Campaign for America’s Future, and CEPR International Intern Ming Chun Tang summarized Mark’s points in this post for CEPR’s Americas Blog.

CEPR International Communications Director Dan Beeton wrote this post for the Verso Books blog on Berta Cáceres’ legacy, while CEPR Senior Associate for International Policy Alexander Main accompanied members of Cáceres’ family to meetings on Capitol Hill and with various officials, including OAS Secretary General Luis Almagro and U.S. State Department staff.  CEPR co-sponsored a congressional briefing on March 23rd hosted by Representative Hank Johnson (D-Ga.) featuring Cáceres’ daughter, Laura Zúñiga Cáceres and Gaspar Sánchez, Member of the General Coordination of the organization Berta co-founded (COPINH) and its Coordinator for LGBTQ Rights. CEPR International Program Assistant Becca Watts wrote this post on the briefing for the Americas Blog, which includes video of the briefing.

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The following reports on labor market policy were recently released:

Political Economy Research Institute

Assessing the Jobs-Environment Relationship with Matched Data from US EEOC and US EPA
Michael Ash, James K. Boyce

Urban Institute

Context on the Six Work Support Strategies States: Supplement to WSS Evaluation Publications
Heather Hahn, Monica H. Rohacek, Julia B. Isaacs

Improving Business Processes for Delivery Work Supports for Low-Income Families: Findings from the Work Support Strategies Evaluation
Heather Hahn, Ria Amin, David Kassabian, Maeve E. Gearing

States’ Use of Technology to Improve Delivery of Benefits: Findings from the Work Support Strategies Evaluation
Pamela J. Loprest, Maeve E. Gearing, David Kassabian

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In March of last year, CEPR released a series of five measures tracking the rate of recovery from the 2008 recession. The series was created in order to show that the labor market is much weaker than the unemployment rate implies.

The five measures have been updated every month at CEPR’s Graphic Economics page after each new jobs report. However, we have modified the series in two ways for the latest jobs figures. These modifications are described below.

Using 2007 Annual Data as Our Starting Point

In CEPR’s “Real Rate of Recovery” series, we determine both the degree to which the economy weakened during the recession and also the extent of recovery since then. In our original series, we used December 2007 — officially the first month of the recession, according to NBER — as our starting point for the pre-recession state of the economy. However, it appears that the economy began weakening even before December 2007. For example, the prime-age employment rate averaged 79.9 percent during 2007 as a whole, but had fallen to 79.7 percent by December. The unemployment rate itself exhibits this tendency, as it jumped from 4.7 to 5.0 percent between November and December.

December 2007 is a flawed starting point, as the economy had already begun shedding jobs by then. Therefore, we have updated our series by taking the average annual data for 2007 as our starting point. This changes our calculations somewhat, as it means that the economy worsened more significantly between 2007 and the recession’s trough than we had originally estimated.

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buffie austerity 2016 04 01 fig1

The graph above displays the change in the prime-age employment rate for twenty countries between 2007 and 2015. Included in the graph are the United States, the remaining G-7 countries, various other advanced economies, and Mexico. (Mexico and Canada provide a useful point of comparison with the United States since they are part of the same regional economy.) 

The prime-age employment rate is a far better gauge of the labor market than the unemployment rate. As such, the graph above is useful in determining the level of employment lost in each country as a result of the 2008 recession.

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The economy added 215,000 jobs in March, with the unemployment rate rounding up to 5.0 percent from February's 4.9 percent. However, the modest increase in unemployment was largely good news, since it was the result of another 396,000 people entering the labor force.

There has been a large increase in the labor force over the last six months, especially among prime-age workers (ages 25-54). Since September, the labor force participation rate for prime-age workers has increased by 0.6 percentage points. This seems to support the view that the people who left the labor market during the downturn will come back if they see jobs available. However even with this rise, the employment-to-population ratio for prime-age workers is still down by more than two full percentage points from its pre-recession peak.

Another positive item in the household survey was a large jump in the percentage of unemployment due to voluntary quits. This sign of confidence in the labor market rose to 10.5 percent, the highest level in the recovery, although it's still more than a percentage point below the pre-recession peaks and almost four percentage points below the levels reached in 2000.

While the rate of employment growth in the establishment survey was in line with expectations, average weekly hours remained at 34.4, down from 34.6 in January. As a result, the index of aggregate hours worked is down by 0.2 percent from the January level. This could be a sign of slower job growth in future months.

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The following reports on labor market policy were recently released:

Economic Policy Institute

Wages Grew More for Low-Wage Workers in States that Raised their Minimum Wage in 2015
Elise Gould

Center on Budget and Policy Priorities

Policy Basics: How Many Weeks of Unemployment Compensation are Available?
Center on Budget and Policy Priorities

Institute for Women’s Policy Research

Women Gain 167,000 Jobs Out of 242,000 Jobs Added in February
Institute for Women’s Policy Research

The Gender Wage Gap: 2015 Earnings Differences by Race and Ethnicity
Ariane Hegewisch, Asha DuMonthier

National Employment Law Project

A “Training Wage” for Teens or New Hires would Hurt New York’s Workers and Undermine Responsible Employers
National Employment Law Project

Employers in the On-Demand Economy: Why Treating Workers as Employees is Good for Business
National Employment Law Project

Urban Institute

The Big States and Unemployement Insurance Financing
Wayne Vroman

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The following reports on labor market policy were recently released:

Center for American Progress

Partnered but Poor
Shawn Fremstad

Economic Policy Institute

New Legislation Could Help End Wage Theft Epidemic
Ross Eisenbrey

Political Economy Research Institute

A $15 Federal Minimum Wage: Who Would Benefit?
Jeannette Wicks-Lim

Urban Insitute

Understanding Local Workforce Systems
Lauren Eyster, Christin Durham, Michelle Van Noy, Neil Damron

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Earlier this morning, the Bureau of Labor Statistics (BLS) released the January 2016 results from the Job Openings and Labor Turnover Survey (JOLTS). In its summary of the newest JOLTS data, the BLS notes: “Job openings remain at historically high levels, rising to 5.5 million (+260,000) in January.” In fact, the 5.5 million openings is the third-highest level since the inception of JOLTS in December 2000.

A greater number of job openings means that more employers are looking to hire. And if employers are competing to hire workers, they will have to bid up wages to attract workers to their firms. So other things equal, a higher number of vacancies should benefit workers by pushing up wages.

However, what remains salient from a wage-setting perspective is not the number of job openings per se but rather the ratio of job openings to unemployed workers. If more job openings force employers to compete for workers and bid wages up, unemployment has the opposite effect: it forces prospective workers to compete for jobs and thus pushes wages down. Think of it this way: unemployed workers are desperate for jobs and will work at even very low wages, because any wage is an improvement over unemployment. When unemployment is high, employers need not bid up wages to attract workers to their firms, since the unemployed are desperate to work anyways.

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The Federal Reserve Board’s Open Market Committee (FOMC) voted not to raise interest rates at today’s meeting, but their statement indicates that they are still very much looking toward further rate hikes this year. It is difficult to see reason for this urgency.

The justification for raising rates is to prevent inflation from getting out of control, but inflation has been running well below the Fed’s 2.0 percent target for years. Furthermore, since the 2.0 percent target is an average inflation rate, the Fed should be prepared to tolerate several years in which the inflation rate is somewhat above 2.0 percent. In fact, since wages badly lagged productivity growth during the recession, the Fed should be prepared to allow for a period in which real wage growth slightly outpaces productivity growth in order to restore the pre-recession split between labor and capital. If preemptive steps are taken by the Fed in the near future that prevent workers from regaining their share of national income, that implies the use of the Fed’s power to make permanent the shift from wages to profits that took place in the recession.    

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Recent CPI data could give the impression that overall inflation is being held down by falling energy prices. While energy prices have fallen by 12.5 percent over the last year, the core inflation rate, which excludes food and energy prices, has risen by 2.3 percent. (The Federal Reserve Board actually targets the core Personal Consumption Expenditure Deflator, which has increased by 1.7 percent over the last year.)

However, it turns out that much of the inflation in the core index is driven by the shelter component as rents have been rising at more than a 3.0 percent annual rate. Excluding the shelter component, the core index is rising at just a 1.5 percent rate. While there has been some increase in this non-shelter core index in recent months, that was also true in 2001, when the economy and labor market were still quite weak by any measure.

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It’s presidential primary season!  That time every four years when the media focuses on all of the important policy issues facing our county with thorough, unbiased, factual analysis of all of the candidates’ proposals…

OK, we know that’s wishful thinking, especially this campaign season when the debate is about the size of the candidates’ “hands” rather than the size of workers’ paychecks. But on those occasions when the talk does turn to economic policy, CEPR is there - providing research and analysis that is truly fact-based and non-partisan.  

And we need your help to continue to inject some economic sanity into the news spin cycle this year.

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