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

The International Monetary Fund (IMF) announced yesterday that it would take approval by its 187 country members for the Fund to officially recognize a new government in Libya. "When there is a clear, broad-based, international recognition of a new government in Libya, it is at that point the fund could or would move towards recognition," Reuters reported IMF spokesman David Hawley as saying.

This should be a welcome change from the IMF’s reaction to the 2002 coup d’etat in Venezuela, when the Fund quickly announced that it was "ready to assist the new administration in whatever manner they find suitable" after the overthrow of the democratically elected government.

To summarize what happened, President Hugo Chávez, who had been elected in a 1998 election observed and certified by international observers from the EU, Organization of American States and others, was ousted in the early hours of April 12, 2002, in a coup and later flown to the island of Orchila. The coup regime, headed by businessman Pedro Carmona, and backed by much of the Venezuelan elite, would soon dissolve the constitution, the congress and the Supreme Court.

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Now, I know I am often critical of the Heritage Foundation and I have heard suggestions that maybe I ought stop paying them any mind. But when I came across this review of the Congressional Budget Office's update to the Budget and Economic Outlook, I found I could not possibly let them slide.

Complaining about the "remarkably positive economic forecast," J.D. Foster wrote:

"CBO also has another very curious forecast, this for inflation as measured by the Consumer Price Index. The CBO is projecting a very modest 1.3 percent inflation for 2011. Yet on an annualized basis, inflation has run at an average of 4.3 percent over the last eight months. Except for an easing in May and June, on an annualized basis, inflation has exceeded 4.9 percent every month since December 2010.

"Again, the CBO forecast is also substantially out of line with the Blue Chip consensus forecast, which at 3.2 percent is about two-and-a-half times higher. Inflation may taper off, but for the CBO forecast to hold, prices would have to decline through the balance at an annualized rate of almost 2 percent. This would be a stunning—indeed, frightening—prospect in light of current economic weakness."

I had not yet read the CBO report, so I found this charge quite stunning. Fortunately for CBO, and most unfortunately for Foster, the charge is unfounded. The Congressional Budget Office had in January projected 1.3 percent growth in the CPI. At the time, the Blue Chip Consensus (p.51) was only 1.8 percent, so CBO was optimistic at the time, but not grossly so. Then energy prices rebounded and the Blue Chip Consensus revised its inflation forecast upward by 1.4 percentage points to 3.2 percent. Of course, CBO also revised its forecast (p.58) from 1.3 percent to 2.8 percent—a 1.5 percentage point hike.

Thus, only 0.4 percentage points separate CBO from the Blue Chip Consensus. In erring, Foster grossly exaggerated the difference.

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Over half of male college graduates (59 percent) and almost half of female college graduates (47 percent) believe that “the higher education system” is “only fair” or “poor” in “providing value for the money spent by students and their families,” according to a new poll (pdf) released by the Pew Research Center last week.

Pew survey of college grads

Source: Pew Research Center.

Given how adamant economists are that college is an overwhelmingly good investment, it is surprising to see so many college graduates, especially men, who believe college was not good value for money, even after they have successfully completed the degree.

This post originally appeared on John Schmitt's blog, No Apparent Motive.

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Unless European officials can find a viable solution soon, the continent's sovereign debt crisis threatens to derail the increasingly fragile world economic recovery. The conventional wisdom blames Greece, Portugal, Spain and Ireland — the poorer “peripheral" countries at the center of the crisis — for “living beyond their means.” In an important new paper, however, Vicente Navarro, professor of public policy at Johns Hopkins University, offers a compelling alternative explanation for the mess.

Navarro observes that for much of the postwar period all four of these countries were largely ruled by right-wing regimes, including military dictatorships in the case of Greece, Portugal and Spain. In Navarro’s view, today’s sovereign debt crisis has its roots in this authoritarian history, which produced weak welfare states relative to the rest of Europe, and, even more importantly, left all four countries with woefully underdeveloped tax systems that are the real source of the squeeze on sovereign debt.

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Several new labor market research reports were released this week:

Center on Budget and Policy Priorities

Policy Basics: How Many Weeks of Unemployment Compensation Are Available?


The Cost of Regulatory Delay
Ben Peck

Economic Policy Institute

Deconstructing Crain and Crain: Estimated cost of OSHA regulations is way off base
Ross Eisenbrey, Isaac Shapiro

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After falling 0.2 percent in June, the Consumer Price Index rose 0.5 percent in July, according to the latest Bureau of Labor Statistics reports on the consumer price, US import/export price and producer price indexes. Over the last three months, headline inflation has run at a 1.8 percent annualized rate, compared with 6.2 percent from January to April. Leaving out food and energy, consumer prices rose 0.2 percent last month and have grown at a 3.1 percent annualized rate since April.

Energy prices rebounded again, driving up the overall rate of inflation. However, there is not much to be made of this volatility.  Energy prices rose 2.8 percent in July, but have fallen at a 10.4 percent annualized rate over the last three months.

For more, check out our latest Prices Byte.

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According to a video posted over at the Heritage Foundation, CEO Andy Puzder of CKE Restaurants testified, "with franchisees in the United States we employ about 70,000 people." [13:50] What's truly fascinating about this is that "the ACA [Affordable Care Act] will increase our health care costs approximately $18 million per year ... That's a 150 percent increase from the $12 million we spent on health care last year." [17:06]

Apparently, CKE spent on health care less than $15 per employee per month last year. Either the health care benefit was amazingly skimpy, or very few CKE employees received it. Regardless, if everyone at CKE were part-time minimum-wage workers, that would imply total wages of more than half a billion dollars annually. Including health care costs, an extra $18 million would imply a raise of less than 3.5 percent. The minimum wage, by contrast, has fallen in real terms by 5.5 percent since it was last raised in July 2009.

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It is important to remember that most of the people in Washington debates on economic policy do not know much economics. They tend not to be very good at arithmetic either. That is why they were blindsided by the collapse of the $8 trillion housing bubble that wrecked the economy.

As we get endless pontification about the crushing debt burden it is worth touching base with reality on occasion. In that spirit, CEPR brings you the latest data and projections on the ratio of the federal government's interest payments to GDP, courtesy of the Congressional Budget Office (CBO).

Click for Larger Image


Source: Congressional Budget Office.

As the chart shows the interest to GDP ratio is currently at a crushing 1.3 percent, near the post World War II low. However this figure overstates the burden somewhat. Last year the Federal Reserve Board refunded almost $80 billion to the Treasury. This was interest earned on government bonds and other assets it now holds. That leaves a net interest burden of 0.8 percent of GDP, by far the lowest of the post World War II era.

Of course the burden is projected to rise in future years. The baseline projections shows the burden rising to 3.3 percent of GDP by 2021, the end of the forecast period. This baseline is probably overly optimistic in some respects, since it assumes that the Bush tax cuts are allowed to expire and some other items in current law that will probably not happen.

If we adjust the the baseline for these factors, the debt to GDP ratio is projected to be just over 90 percent by 2021, approximately 20 percent higher than in the baseline. If we raise the interest payments by the same percent, then we get a ratio of interest to GDP of 4.0 percent, still not exactly crushing.

It is also worth noting that if the Fed continued to hold $3 trillion or so in assets, and rebated the interest earned on this money to the Treasury, then it would reduce the net burden of the debt by close to 1.0 percent of GDP. This would mean that even in 2021, if we just left everything to run its course, we would still not face as large an interest burden from the debt as the early 90s.

Okay, this arithmetic interlude is over. You can rejoin the Washington elite and start panicking over the debt again.

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According to today’s New York Times, the President’s economic and political advisors are squabbling over the economy. One side favors only advocating economic policies that have a chance to pass in Congress (“[t]hese include free trade agreements and improved patent protections for inventors”). The other side wants the president to tap into public anger over the economy, by putting forward "bigger ideas" (such as “tax incentives for businesses that hire new workers”) even if they have little hope of passing in Congress. In short,  the internal debate pits the hopeless against the changeless.

With 25 million unemployed and underemployed workers, one side of the internal debate at the White House is pushing bad policies (corporate free-trade agreements and increased patent protections) that will have no short-term impact on jobs, even if advocates of these policies were correct about their longer-term payoff (and they are not). Not to mention that “free trade” agreements are deeply unpopular with the Democratic party base and with swing voters in states like Ohio and Michigan.

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While the recession officially ended in June 2009, the economy continued to shed jobs for another nine months. Job creation in the 18 months since the job market hit bottom in February 2010 has been painfully slow. The jobs report for July shows that the U.S. has recovered less than 2 million of the 8.7 million jobs lost between December 2007 and February 2010. This is bad news for all workers – men as well as women, but the situation for women is especially stark. Men have recovered nearly 3 in 10 jobs lost, while women have regained less than 1 in 10. Cuts in public services at every level of government, with the sharpest cuts coming in education, social services, police and fire at the local level, have taken their toll. Public sector employment has declined by 440,000 in the past 18 months, and two-thirds of the job losses have fallen on women. But this is not the whole story.

Women have not fared well in the private sector. Even as employment in manufacturing and construction has begun to tick up, women have continued to lose jobs in these sectors. Women, who lost nearly 900,000 jobs in these sectors while the labor market was contracting, have lost another 50,000 manufacturing and construction jobs. In private service producing industries, where women made up more than half the workforce prior to the recession and where most of the employment gains in the past 18 months have occurred, a disproportionate share of the jobs has gone to men. Private education and health services is the only sector of the economy that experienced steady employment growth through the recession and recovery. The workforce in this sector is overwhelmingly female – at the start of the recession, men held less than a quarter of the jobs. Yet, in the last 18 months, 40 percent of new jobs have gone to men.

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That's what the Washington Post told readers in a front page story. According to the Post, the Obama administration is leaning toward a system that would provide a direct subsidy to securitization by offering a government guarantee to mortgage backed securities.

It would be difficult to find an economic rationale for this policy other than subsidizing the financial industry. The government can and does directly subsidize the purchase of homes through the mortgage interest deduction. This can be made more generous and better targeted toward low and moderate income families by capping it and converting it into a tax credit (e.g. all homeowners can deduct 15 percent of the interest paid on mortgages of $300,000 or less from their taxes).

There is no obvious reason to have an additional subsidy through the system of mortgage finance. Analysis by Mark Zandi showed that the subsidy provided by a government guarantee would largely translate into higher home prices. This would leave monthly mortgage payments virtually unaffected. The diversion of capital from elsewhere in the economy would mean slower economic growth and would kill jobs for auto workers, steel workers and other workers in the manufacturing sector.

For these reasons, if President Obama was really against big government and job killing measures, he would oppose this new scheme to subsidize mortgage securitization. On the other hand, if the goal is to ensure high profits and big salaries for top executives in the financial sector, then a government subsidy for mortgage securitization is good policy.

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The Center for Economic and Policy Research, Center for American Progress, Economic Policy Institute, Employment Policy Research Network, and National Employment Law Project released the following LMPR Reports. 

Center for Economic and Policy Research

Diversity and Change: Asian American and Pacific Islander Workers
Hye Jin Rho, John Schmitt, Nicole Woo, Lucia Lin and Kent Wong

Center for American Progress

Reforming Public School Systems Through Sustained Union-Management Collaboration
Saul A. Rubinstein, John E. McCarthy

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The Federal Housing Financing Administration (FHFA) announced plans today that it is developing plans to sell off some of its foreclosed homes as rental properties. The idea is that this would help to reduce the glut of homes for sale in many markets. It also could help supply good quality rental housing in some areas where it is in short supply.

This is a good idea, although it is remarkable it just occurred to the FHFA now. Some of us have been pushing rental alternatives for 4 years now. In fact, it would be best if the rental arrangement was offered to the original homeowner. That way the homeowner is not out on the street and the government or the rental company is not in the position of having to hunt down a rental.

Progress is slow in Washington, but it is good to see at least baby steps. It is too bad that millions of people had to lose their homes before we could get even this far and that millions more will needlessly lose their homes in the years ahead because of the lack of clear thinking in Washington.

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Many of my friends have been asking me what they should make of today’s stock market plunge. I tell them to enjoy the ride. The reason is simple, stock prices are low relative to corporate earnings right now. One would be much better advised to buy and hold stock today than in the 90s when price to earnings ratios went through the roof or even in the last decade. This one is simple arithmetic – the stuff most of us learned in third grade -- but few economists seem to understand.

After-tax corporate profits were $1.398.1 billion in 2010 (National Income and Product Accounts Table 1.12, Line 15). By contrast, they were just $554.1 in 2000, less than half as much. But, at the end of 2000, after the bubble was already one third deflated, buying up all the shares in the stock market would have cost you $15,388.5 billion (Federal Reserve Board, Flow of Funds Table L. 213, line 23). By contrast, the market value of domestic corporations at the end of 2010 was only slightly higher at $17,188.7 billion. With the S&P at 1258 at the end of 2010, the market was than 10 percent higher than it is today.

Taking this together, a dollar of profits cost about 40 percent as much on the stock market today as it did at the end of 2000. If we compare it to the peak of the bubble, a dollar of profits costs about 30 percent as much.

Of course the issue is what happens going forward. This is both the good and bad news. The good news for the stock market is that workers’ bargaining power remains very weak because of the high unemployment rate. It is difficult to envision workers getting wage increases much in excess of inflation and certainly not in excess of productivity growth. That means that the profit share of income is likely to remain constant or even rise in the near-term future.

If the profit share remains constant (it is now at a record high), then investors will be getting more than 9 cents in profits for every dollar invested today. That seems like a pretty good deal. If the stock price went nowhere and firms paid out 60 percent in dividends or share buybacks (roughly the historic average), that implies a return of 5.4 percent.

This is not bad when interest rates are near zero, but of course share prices are likely to rise over any long period at least in step with the rate of growth of profits. If the economy has a very weak 2 percent real growth rate, with 2 percent inflation, and profits keep pace, then then the return on stock will be 9.4 percent annually if stock prices grow in step with profit. There does not seem a lot of downside risk in this picture.

Of course the bad news is the flip side of this story. It would be nice to see workers getting back some of the ground that they lost to corporate profits over the last two decades. However, that doesn’t seem to be in the cards. This is bad news for bulk of the population that relies on their wages for the vast majority of their income, but it is good news for people who have lots of money invested in the stock market. So, why aren’t they happy?

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It seems that Israeli economy is suffering from the same problem as the United States, the United Kingdom, and the euro zone. It is being steered by people who don't have much understanding of economics.

Israel actually has been experiencing pretty solid growth for most of the last two decades and its economy had largely recovered from the downturn. However, its government has become obsessed with the idea of reducing Israel's debt, which stands at a relatively modest 70 percent of GDP, according to the IMF.

This might be reasonable if everything else was going well in Israel, but it isn't. In the last three decades Israel has been rushing to the top in terms of inequality among wealthy countries. It is now neck and neck with the United States for the top slot, but it is on track to pass us soon. This means that the vast majority of the gains from growth have gone to those at the top, with most of the population having little to show. To make matters worse, Israel relies much more on regressive taxes like value added taxes and much less on progressive income taxes than the average for other wealth countries. (The OECD data refer to pre-1967 Israel for those wondering.) 

The government is now faced with protests involving a quarter of a million people who are demanding that it focus attention on meeting the needs of ordinary workers, most importantly for housing. This would be the equivalent of more than 10 million people protesting in the United States. 

This is another case where the people are trying to teach the economists who are running the economy. Let's hope they can learn.

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Last week, the Bureau of Economic Analysis reported that in the second quarter of 2011 total GDP (annualized production of all goods and services in the economy) totaled $15 trillion. The Congressional Budget Office, however, estimates that our economic potential is nearly $900 billion higher. That is, national income is some 5.6 percent lower than it might otherwise be—to the tune of $73.5 billion per month— simply because we are on the whole working less.

Now, this is not in and of itself a bad thing. As rich as our country is these days, we are free to make the social choice to work less and turn our attention to other matters. We could use a shorter workday, a shorter workweek, and more vacation days. This would mean less income as a country, but more time to enjoy it.

Unfortunately, we have not made the social choice to trade income for leisure—rather, we have chosen to give a few million workers a whole lot of “time off” in the form of massive unemployment. For the unemployed, this is an exceptionally painful choice. It doesn’t have to be this way. For example, we could widely expand work-sharing programs throughout the country.

So long as this is our choice, however-- that some arbitrary millions must be “on leave” and without wages—then it is our responsibility to make it up to them. That means as a start we must provide generous unemployment benefits and fulfill our promise of retirement security. Obviously, this price of not sharing will be an indefinite burden on those who work.

Perhaps we don’t like that, either.  The next option would be...


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This week's roundup of labor-market policy reports includes findings from the Center on Budget and Policy Priorities, National Employment Law Project and Roosevelt Institute.

Center on Budget and Policy Priorities

Policy Basics: How Many Weeks of Unemployment Compensation Are Available?

National Employment Law Project

Unraveling the Unemployment Insurance Lifeline: Responding to Insolvency, States Enact Cuts in 2011
Claire McKenna and George Wentworth

The Roosevelt Institute

Women Laid Off, Workers Sped Up: Support Staff Hold a Clue to the Gendered Recovery

Bryce Covert and Michael Konczal

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Matt Taibbi reports that the push for a tax holiday for profits parked in offshore tax havens is alive and well. According to Taibbi, lobbying has been intense for a bill sponsored by Texas Republican Kevin Brady (and co-sponsored by Utah Democrat Jim Matheson) called the Freedom to Invest Act. As with the “one-time” tax holiday in 2004, companies that offshored their profits would be rewarded with an effective corporate tax rate of 5.25 percent on the profits they repatriate.

As I wrote in June, hundreds of companies that license intellectual property – especially IT and pharmaceutical companies – can dramatically reduce their taxes and significantly increase earnings and share price through nefarious, but legal, ploys to park profits in offshore subsidiaries. Google, for example, uses the "Double-Irish-and-Dutch-Sandwich" to transfer the rights to intellectual property developed in the US – with early research funded by US taxpayers – to a subsidiary in low-tax Bermuda. Companies continue to owe taxes to the U.S. government on these overseas earnings - technically, the taxes have only been deferred. But the taxes don't come due until the profits are brought back to the U.S. - that is, repatriated. And companies do want to repatriate a good part of the roughly $1.43 trillion in profits they hold overseas.

The 2004 tax holiday – advertised as a one-time tax break – encouraged U.S. companies to increase the offshoring of profits earned on technologies developed in the U.S. in the hopes of just such another "one-time" break. This bad behavior should not be rewarded. The corporations would like us to think that bringing these profits home will lead to job creation. A better formula for good jobs at home is removing tax incentives to offshore these activities in the first place.

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The economy created 117,000 jobs in July, knocking the unemployment rate back down to 9.1 percent, according to the latest Bureau of Labor Statistics employment report. While this may sound like good news, the decrease in unemployment was entirely attributable to people leaving the labor force, with the employment-to-population ratio falling slightly to 58.1 percent. Also in the latest report, the Labor Department revised growth in prior months up to an average of 72,000 jobs a month in the last three months, which is still below the level needed to keep pace with the growth of the labor force.

Overall the latest report presents a bleak picture of the labor market. There is no sector showing especially strong growth right now, and with the government shedding 30,000 jobs a month, we will be fortunate if the unemployment rate doesn’t rise over the rest of the year.

For more information, check out our latest Jobs Byte.

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It’s panic time on Wall Street, with the market dropping 4 percent on Thursday and almost 8 percent over the last week. Apparently they were not too impressed by the deal on the debt.

Of course the most obvious explanation for the plunge is the prospect of a collapse of the euro. The debt problems hitting Ireland and Greece have spread to two of the four euro zone giants, Italy and Spain. The prudes at the European Central Bank are going have to relearn economics very quickly. Their cult of 2 percent inflation is bringing down the house. They have come to the point where they have to choose between abandoning the cult or ending the euro.  Naturally the prospect of the dissolution of one of the world two main currencies is going to unnerve the markets.

The other big factor depressing stock markets is a set of weak economic reports that indicate the U.S. economy is barely growing. The most important of these reports was the second quarter GDP numbers that showed the economy growing at just a 1.3 percent rate. This was coupled with a sharp revision to first quarter data that showed growth of just 0.3 percent. This growth is far too slow to keep pace with the growth of labor force, meaning that the unemployment rate could continue to rise.

The big debt ceiling agreement promised to depress this growth even further. The proposed cuts to government spending effectively amounts to taking away water in the middle of a jobs drought. Good job Washington!

Those still believing in the virtues of government austerity also got a big kick in the face last week. The UK had its third consecutive quarter of near zero growth – the apparent fruits of the austerity path put in place by the new Conservative government.

It’s worth putting in a couple of calming notes. First, the stock market is not the economy. As Paul Samuelson famously quipped, the market has predicted 9 of the last 5 recessions. The people who invest in the market are the same geniuses who thought Countrywide and had great business models. There is no reason to think that the markets are any wiser today than they were when they thought everything was just great in 2007.

Second, the double-dip recession folks seem to have forgotten how we usually get recessions. The standard recession is associated with a collapse in house and car sales. The good news is that both sectors are still so badly depressed that they don’t have too far down to go. In other words, it is unlikely that we will see the negative growth associated with a recession.

On the other hand, many quarters of very slow positive growth is really no better. This is most likely what the economy faces barring some serious change in policy in Washington. So the double-dippers might be too pessimistic, but not by much.

This post originally appeared in The Nation.

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One result of the the revisions to GDP published by the Commerce Department yesterday is that the data now show a much steeper drop in GDP in the post-Lehman panic. At first glance, the new data would appear to make the stimulus look more effective. The chart below shows quarterly growth rates beginning with the 4th quarter of 2008 and the Congressional Budget Office's predicted effect of the stimulus (the average of the high and low numbers).

Click to Enlarge


Source: Bureau of Economic Analysis and Congressional Budget Office.

This is not a perfect fit, but no one expects the stimulus to be the only factor moving the economy. In any case, the pattern of growth does seem to fit the predicted impact of the stimulus. When we saw big boost to growth in 2009, the growth rate went from a large negative to a moderate positive. When the impact of the stimulus turned negative in 2010, growth began to slow. If the pattern continues, we should see more weak growth in the second half of the year.

There have been far more careful analyses of the impact of the stimulus, but this general picture sure supports the case that it had a real effect in turning the economy around. The problem is that it was not large enough or long enough. 

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