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

This post was written by Eileen Appelbaum and Rosemary Batt, co-authors of "Private Equity at Work: When Wall Street Manages Main Street." The presentation accompanying this post is available here as a PowerPoint.

Performance of Private Equity Investments of the California Public Employees Retirement System: What are the Issues?

On November 16, the staff and board of CalPERS, the California Public Employees Retirement System, held a review of its investments in public policy. This presentation reviews the major issues the pension fund should consider.

We begin by noting three main points.

First, investments in private equity are riskier and more illiquid than investments in public equities (the stock market). Higher risk can only be justified if the investments result in higher returns than are possible with less risky investments. That is, investments in private equity should have higher returns than stocks — they should beat the market and yield a premium over passive investments in a stock market index by a large enough amount to be worth taking on the extra risk.

Second, private equity (PE) funds performed pretty well in the decade from 1995 to 2005, with the median fund launched in each of those years beating the Russell 3000, a stock market fund made up of companies similar in size to those in private equity portfolios. However, the median fund in every vintage launched in the years after 2005 has failed to beat the market. Investors in half the funds launched after 2005 would have done better investing in an index fund that mimicked the Russell 3000.

Third, CalPERS PE investments haven’t beaten its stock market benchmark in year-to-date, 3-year, 5-year, and 10-year windows. It does beat the stock market index in the 20-year time frame, but this is largely due to the stronger performance of PE funds a decade ago.

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During the 2007–2009 recession, inflation fell significantly. After a brief uptick in prices in late 2011 and early 2012, inflation again subsided. According to all three of the major price indices, inflation remains below the Federal Reserve’s target inflation rate of 2.0 percent, as shown in the figure below[i]:

Annual Inflation Rates, Three Most Common Price Indices

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The following reports on labor market policy were recently released:

Center for American Progress
Wisconsin, Unions, and the Middle Class
Brendan Duke, Alex Rowell

Economic Policy Institute
Looking Beyond the Topline Employment Number: Public-Sector Jobs Remain Depressed
Elise Gould

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

Institute for Women’s Policy Research

Strong Job Growth in October Lowers Unemployment rate to 5 Percent: Women Gain 158,000 Jobs and Men Gain 113,000 Jobs

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The latest jobs report from the Bureau of Labor Statistics shows that the unemployment rate fell to 5.0 percent last month. This is the same rate as from the beginning of the recession in December 2007, and is also the CBO’s estimate of the long-term natural rate of unemployment.

There’s good reason to think that the unemployment rate is overstating the strength of today’s economy. This is because people only count as unemployed if they have actively searched for work within the past four weeks. If workers become discouraged over their job prospects and stop looking for work, the unemployment rate falls. A better measure of the labor market wouldn’t show the economy gaining strength due to the fact that workers were becoming depressed with their job prospects.

One way of correcting for this problem is to ask what the unemployment rate would be if people hadn’t given up the search for work. Normally, we’d expect people to not be working if they are older and retired or young and in school. However, there’s little reason to think that people aged 25 to 54 should have suddenly stopped searching for work for any reason other than discouragement over job prospects.

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Financial reform in the wake of the severe financial crisis of 2009 has been a significant step in improving financial stability and reducing the likelihood of similar meltdowns in the future. The economy still has not fully recovered; yet misguided efforts to water down recent reforms are already underway. Congressman Jeb Hensarling has proposed an amendment to the Highway Trust Fund bill that would do precisely this. Passage of the amendment would roll back reforms designed to protect the financial system in a context — the highway bill — that does not allow full debate in Congress and fails to provide an opportunity for citizens to make their views heard.

The Dodd-Frank financial reform act has proven its effectiveness in improving transparency and rooting out bad, possibly fraudulent, behavior by financial actors. The provisions of Dodd-Frank that subject larger private equity funds to regulatory oversight have been particularly important in this regard. Private equity fund advisors are lightly regulated in comparison with publicly-traded firms and advisors to mutual and other funds that trade shares of stock. Yet SEC examinations of PE fund advisors have found a shocking number of violations of the advisor-investor relationship, in which the funds were essentially picking the pockets of their investors.

One of the provisions of the Hensarling amendment would have the effect of excluding some of the larger PE funds from SEC oversight. It would allow private equity funds to exclude Small Business Investment Companies (SBICs) from the assets under management when determining whether the fund must register with the SEC. It would thus allow some PE funds that are currently required to register to escape regulatory oversight. In view of recent findings in SEC examinations of private equity fund advisors, this seems like an especially misguided roll back of financial reform.

Attaching amendments to unregulated legislation that weaken the financial system and undermine investor protections sets a dangerous precedent and undermines the democratic process.

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The following reports on labor market policy were recently released:

Center for American Progress
Economic Snapshot: October 2015
Christian E. Weller

Women and Families’ Economic Security in Iowa
Sarah Jane Glynn, Brendan Duke

Economic Policy Institute
Recovery of Hispanic Unemployment Rate Expands to Four More States in Third Quarter of 2015
Valerie Wilson

Wages for Top Earners Soared in 2014: Fly Top 0.1 Percent, Fly
Lawrence Mishel, Will Kimball

Child Care Workers Aren’t Paid Enough to Make Ends Meet
Elise Gould

Institute for Women’s Policy Research
Access to Paid Sick Time in Minneapolis, Minnesota
Jessica Milli

Urban Institute
Training TANF Recipients for Careers in Healthcare: The Experience of the Health Profession Opportunity Grants (HPOG) Program
Alyssa Fountain, Alan Werner, Maureen Sarna, Elizabeth Giardino, Gretchen Locke, Pamela Loprest

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This morning the Bureau of Labor Statistics released its newest jobs figures for the month of October. In the household survey, the unemployment rate fell to 5.0 percent, the lowest rate in over seven years. Perhaps more importantly, the unemployment rate today is now the same as it was at the beginning of the recession in December 2007.

Undoubtedly, this will be cheered as a positive development for the economy, and other things equal, a low unemployment rate is preferable to a high unemployment rate. But, unemployment is only part of the story of a weak labor market. There are other categories of non-employed workers which can be described as follows:

  • Discouraged Workers: Persons who have searched for a job within the past year but not the past four weeks and gave up their search because they were discouraged over their job prospects.

  • Marginally Attached Workers: Persons who have searched for a job within the past year but not the past four weeks. (Discouraged workers are a subset of marginally attached workers.)

  • Persons not in the labor force who would like a job: Persons who haven’t searched for a job within the past four weeks but report to the Bureau of Labor Statistics that they want to be employed.

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Earlier this year, CEPR released a report titled From Recession to Collapse: The Bush Administration and the Over-Valued Dollar. The report shows that the strong value of the dollar during the Clinton-Bush years led to large trade deficits which decreased demand in the economy and resulted in lost jobs.

The economics on this point is pretty simple. A stronger dollar makes imports from other countries cheaper and makes U.S. exports more expensive. So when the dollar strengthens, American producers end up selling less merchandise, leading to job losses in sectors specializing in tradable goods.

However, some media outlets seem to view a strong dollar as a positive. Reporting on the dollar sometimes takes for granted that the term “strong” has a positive meaning and that the term “weak” conversely has a negative meaning.

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The Labor Department reported the economy added 271,000 jobs in October. With slight upward revisions to the prior two months data, this brought the three month average to 187,000. This job growth was sufficient to push the unemployment rate down slightly to 5.0 percent. While the employment to population ratio edged up slightly to 59.3 percent, it is still below the 59.4 percent high for the recovery. The labor force participation rate is actually down 0.4 percentage points from its year-ago level.

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We at CEPR have been asked, “How is the Center for Economic and Policy Research different from the other progressive economic policy think tanks?” and, perhaps more importantly, “Why should anyone fund CEPR when it would be easier to consolidate giving and support one or two larger groups?”

We didn’t need to think long about how to answer these questions. We have consistently been out front of other think tanks and have staked out positions that others in the progressive community came to follow. This has happened on most of the major issues on which CEPR has worked, including promoting financial transactions taxes, protecting Social Security against cuts (as opposed to limiting the size of cuts), pointing out that the Trans-Pacific Partnership and other pending trade deals are more about protecting patents than promoting trade, looking at how private equity is often a tax avoidance scheme that hammers workers, holding the Federal Reserve accountable, showing that paid leave programs don’t hurt business and how “neoliberal” economic policies led to a decades-long economic growth failure in Latin America.  We accomplished all this — and much, much more — on a budget that is a fraction of that of the major progressive think tanks.

Being smaller than the others allows us to move quickly, which is in large part why we were able to be out front on these and other issues. Our reputation for accuracy is also an invaluable asset. That Dean Baker was one of the only economists to clearly warn of the housing bubble (in 2002) and the disaster that would follow its collapse gives CEPR a degree of credibility that few others can match in debates on macroeconomic policy.

While we may be small, we have an outsized presence in the media. An analysis that calculated the number of media hits per budget dollar for major think tanks showed CEPR again coming out on top in 2012 (we have consistently ranked number one). And our social media reach far surpasses that of other groups. Combined, CEPR’s various twitter accounts have over 50,000 followers, tens of thousands more than our “rivals.” This is important, as more and more people look to social media for a quick digest of the days’ news.

We’re proud of these and other accomplishments. But guess what? Being first doesn’t always get you the prize. There are some institutional funders out there who see CEPR’s small size as a liability rather than an asset. There are others who might support our policy positions, but give to other groups they perceive to be “safer” (i.e., they don’t rock the boat as much as we do). And others just give to the biggest name in the game. Just as income is not closely related to contributions to the economy, foundation giving does not necessarily correspond to performance. That’s not a complaint; it’s just the reality of the funding world. And it’s why we really need you, our individual donors — now more than ever. 

As The Guardian once said, CEPR is the David of the think tank world. We don’t want to be taken over or swallowed up by the Goliaths.  So please help us, especially this coming year. CEPR’s donations often fall off in an election year. Please give what you can, so that we can be assured to be around to hold all of those newly elected officials’ feet to the fire come 2017.

Thanks for your support,

Mark, Dean and CEPR staff

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In October 2009, the unemployment rate peaked at 10.0 percent. That same month, unemployment was 9.2 percent for white Americans and 15.8 percent for black Americans. While unemployment then began falling for whites, the black unemployment rate rose for another five months before it started declining. As of September 2015 the black unemployment rate was 9.2 percent, the same as the white unemployment rate from the peak of the recession.

Much reporting has focused on the fact that unemployment is higher for blacks than for whites. While this is an important point, it actually understates the level of racial inequality in the labor market for a number of reasons. One often overlooked point is that the experience of black unemployment is different than the experience of white unemployment.

This study shows the extent to which racial inequalities persist even amongst the unemployed. By a variety of measures unemployment is likely to be an even worse experience for black Americans than for whites.

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The RushCard is a prepaid debit card marketed to unbanked and underbanked populations — people not usually served by traditional banks and card issuers because they are categorized as high-risk and tend to be poorer. Started in 2003 by Russell Simmons, originally a hip-hop executive, the RushCard has faced criticism since its beginning mainly for charging excessively high fees. Criticism has mounted in recent weeks, as RushCard users reported that they were locked out of their accounts and could not use their cards for transactions, although the cards still allowed users to add money to them. This meant that people, some of whom had their paychecks directly deposited to their RushCards, were unable to access any money on their cards. People living paycheck-to-paycheck were unable to pay for rent or child care, buy food, or pick up medicine.

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The following reports on labor market policy were recently released:

Economic Policy Institute
Disney H-1B Scandal in Spotlight Again: Meet the American Workers Whose Jobs and Careers Were Destroyed by the H-1B Program
Ron Hira

Center for Economic and Policy Research
Rising Disability Payments: Are Cuts to Workers’ Compensation Part of the Story?
Nick Buffie, Dean Baker

National Employment Law Project
Minimum Wage Basics: Employment and Business Effects of Minimum Wage Increases

Unemployment Insurance Policy Advocate’s Toolkit
Rick McHugh, Rebecca Dixon, Claire McKenna, George Wentworth

NYC ‘Fair Chance’ Hiring Law Takes Effect Today

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Last week CEPR released a report titled Rising Disability Payments: Are Cuts to Workers’ Compensation Part of the Story? The report examined the extent to which cuts in state-level workers’ compensation programs have led to increased expenditures for the Social Security Disability Insurance (SSDI) program. The findings showed that up to a fifth of the increase in SSDI awards between 2001 and 2011 could be attributed to cuts in workers’ compensation programs.

Another obvious source of rising SSDI costs is the increase in Social Security’s full retirement age. The Social Security program maintains two distinct insurance systems: Old-Age and Survivors Insurance (OASI) for retired workers and their families, and Disability Insurance (DI) for workers who become disabled and can no longer work. Once someone on DI hits “full retirement age,” or the age at which retirees can begin receiving full OASI benefits, he is immediately transferred from the DI rolls to the OASI rolls.

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The economy grew at a 1.5 percent annual rate in the third quarter, a sharp slowing from the 3.9 percent rate reported for the second quarter. The falloff was largely due to slower inventory growth. Inventories subtracted 1.44 percentage points from the growth rate in the quarter after adding 0.02 percentage points in the second quarter. Final demand for the quarter grew a 3.0 percent annual rate. For the first three quarters of the year GDP has risen at a 2.0 percent annual rate.

There were few surprises in the report. Consumption grew at a 3.2 percent rate, driven by a 6.5 percent growth rate in durable good consumption. Non-residential investment grew at a weak 2.1 percent rate. All components of investment were weak, but structures declined at a 4.0 percent rate after rising 6.2 percent in the second quarter. Housing grew at a modest 6.1 percent rate, down from an average of 9.8 percent in the prior three quarters. Exports and imports grew at almost the same rate, having little net effect on growth. Government expenditures grew at a 1.7 percent annual rate, adding 0.3 percentage points to growth.

There continues to be no evidence of inflationary pressures in any sector. The core PCE grew at just a 1.2 percent rate in the quarter. The basic story continues to be one of modest growth with very little inflation.

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In January 2001, the nonfarm quits rate — the percentage of the nonfarm workforce deciding to leave their jobs in a given month — stood at 2.6 percent. During the recession, the quits rate fell to 1.3 percent; since then, it has mostly but not fully recovered to its pre-recession peak, which itself was lower than the rates seen in the early 2000s:

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The Social Security Disability Insurance (SSDI) program is expected to completely deplete its trust fund by late 2016. If the program’s funding isn’t increased, benefit cuts of about 20 percent will automatically go into place.

In the past, Congress has reallocated revenues between Social Security’s Disability Insurance fund and its Old Age and Survivors Insurance (OASI) fund when one program was facing financial difficulties. Reallocating funding from the OASI fund to the DI fund would not significantly impact the solvency of the OASI fund: while the OASI trust fund has a projected reserve depletion date of 2035, the combined Old Age and Survivors Insurance and Disability Insurance (OASDI) trust fund has an expected depletion date of 2034. This means that keeping the DI trust fund solvent for another 18 years would decrease the solvency of the OASI fund from 20 years to 19 years.

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Does competition from immigrants lower the pay of less-educated native born workers? On its face, the obvious answer would be yes — competition lowers prices, and the price of labor is not special. However, the macroeconomy is not quite that simple. For one, immigration brings with it demand for labor as well as supply. For another, native workers and immigrants may compete for different jobs.

A new brief by Maria E. Enchautegui of the Urban Institute (via National Journal, via Noah Smith) suggests that the latter holds. To support this contention, Enchautegui presents several occupations in which immigrants or native workers are overrepresented. According to the brief, natives represent 56 percent of the workforce that lack high-school diplomas, yet (for example) native workers hold 86 percent of the jobs as counter attendants while immigrants hold 87 percent of the jobs as personal appearance workers. This is interesting, but the piece doesn’t tell us the share of employment accounted for by these occupations.

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Health researchers have noted an oddity in the relationship between healthcare spending and life expectancy: while greater spending is generally associated with greater life expectancy, average life expectancy in the U.S. isn’t even close to what we’d predict given its level of healthcare spending. As can be seen in Figure 1, which depicts life expectancy and healthcare spending for all OECD countries and countries counted as “advanced economies” by the IMF, the U.S. is a clear outlier when it comes to healthcare spending and life expectancy (the U.S. is highlighted in red):

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The Federal Reserve’s Federal Open Market Committee will meet on October 27 and 28, and one of the discussion topics will be whether to raise the federal funds interest rate, the short-term rate banks pay on overnight loans. This rate has been close to zero since the beginning of the Great Recession to promote economic expansion. When the rate is higher, the economy slows, because the rates for things like car loans and mortgages will generally rise as well. The Fed would want to raise interest rates if it wants to slow the economy to prevent inflation, but the cost is that in a slower economy fewer people have jobs and workers have less bargaining power to demand higher wages.

Low inflation and an incomplete recovery are strong arguments for keeping the interest rate near zero in the hope of supporting more rapid growth. With stronger growth we will see more and better jobs. In a tighter labor market, more workers will enter the labor force, involuntary part-time employment will shift to full-time employment, and workers will have the opportunity to move to higher-paying jobs.

Another reason the Fed should keep interest rates low is that the benefits of lower unemployment will disproportionately go to groups that are marginalized and disadvantaged. One way to look at this is to look at how drops in white unemployment affect black unemployment.

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