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

In the 1970s, economist Arthur Okun coined the term “misery index.” The misery index was meant to calculate the amount of economic misery by adding the unemployment rate to the annual inflation rate. This treats a one percentage-point rise in the unemployment rate as being no worse than a one percentage rise in the inflation rate.

In a sense, the Federal Reserve actually adheres to a version of Okun’s misery index when setting monetary policy. As part of its dual mandate, the Fed pursues the twin goals of “maximum employment” and “stable prices.” While the mandate allows room for ambiguity, many Fed officials seem to assign greater importance to inflation than unemployment.

However, as Binyamin Appelbaum reported three years ago in The New York Times, consumer surveys from both the U.S. and Europe indicate that unemployment creates about four times as much misery as inflation. This result has been attested to in a host of academic studies (see pages 1–3).

A properly constructed misery index would therefore place four times as much weight on a one percentage point rise in the unemployment rate as on a one percentage point rise in the inflation rate. In terms of promoting well-being, an economy with low unemployment will usually beat an economy with low inflation.

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This is the sixth 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.

Unlike Esther GeorgeLoretta MesterEric RosengrenJames Bullard, and William Dudley first five members of the FOMC to be profiled by CEPR  Patrick Harker does not have an extensive background at the Federal ReserveHaving been officially appointed to head the Philadelphia Federal Reserve on July 1, 2015, Harker has been in office less than a year.[1] Moreover, as the President of the Philadelphia Fed, Harker will not serve as a voting member of the FOMC for the first time until 2017.[2] (The head of the Philadelphia Fed is given a vote once every three years.[2]) This means that Harker has no voting record and has only a short history of public statements on monetary policy.

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Last month the International U.S. Trade Commission (ITC) came out with its assessment of the Trans-Pacific Partnership (TPP). It projected that in 2032, when the economy will have experienced most of the effects of the deal, income will be 0.23 percent higher than in a baseline without the TPP. This translates to an increase in the annual growth rate of 0.014 percentage point.

That is not the sort of thing that would likely get most people too excited. It means that with the TPP in place we will basically be as rich on January 1, 2032 as we would be in the middle of February of 2032 without the TPP. Still this is better than nothing, so why not take the gains the ITC is projecting?

The answer to that question is that the ITC projections are hardly a sure deal. Its past track record, like that of most modelers of trade agreements, has been pretty dismal. The actual patterns in trade have born essentially no relationship to the projected patterns.

This may be due to the possibility that the impact of factors not included in the models swamped the projected impact of the changes being modeled. That’s an argument that can save the validity of the models used by the ITC and other economists, but doesn’t change the fact that these models have not been useful guides to the future course of trade and economic growth.

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CEPR recently released a blog post titled “Maximum Potential Employment and the Jobs Gap.” The post asked two simple questions:

  • 1. How high could the employment rate go given the current age composition of the population?

  • 2. How large is the gap between this potential employment rate and the actual employment rate?

The post concluded that although the gap between actual and potential employment has declined since the end of the recession, it is nonetheless larger than it was before the recession.

The “maximum potential employment rate” used in the post was calculated by asking what the overall employment rate would be if each age group were to achieve its highest calendar-year employment rate at the same time. It is notable that the current jobs gap is due purely to low employment rates among younger workers. With the exceptions of the 45–49 and 70+ age groups, there is a consistent rule to be had in terms of job loss: employment has declined more significantly for younger workers than for older workers.

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Legislators in the United States have been reluctant to tax the highest income tax-payers at higher rates. “Millionaire taxes,” through the addition of higher marginal income tax rates on income over $1 million, exist only in one state, California. Connecticut taxes married couples with combined incomes over $1 million at a higher rate as well. At the federal level, the top income tax bracket starts at $415,051 for individuals and at $466,950 for couples. Despite growing income inequality and calls for the rich to pay more, there has been little to no political will to increase tax rates on incomes over $1 million.

One rationale often used to explain this reluctance is the belief that higher tax rates on the rich would lead to an exodus of high-income tax payers. When President François Hollande proposed a 75% tax rate on incomes over 1 million euros, commentators around the world predicted mass out migration of high income French citizens. The mass emigration failed to occur during the two year duration of the higher rate, but the higher tax bracket was quietly allowed to expire at the end of 2014.

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That’s right, CEPR Co-director Mark Weisbrot is now blogging at CEPR.net!

His new blog on economic and political trends in a multi-polar world debuted this past month. “The World in Transition: Economics and Politics” has featured several posts already, including this one on the Democratic primary, this one on political judiciary in Argentina, and this analysis of the IMF’s estimates of potential GDP and Nouriel Roubini’s forecasts for the global economy. Mark also wrote posts on Brazil, including this one on leaked conversations that reveal major players colluded to carry out the coup, and this one on the coup and Washington’s “rollback” of the left in Latin America.

Want more? Mark needs your support to continue

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The data in the Job Openings and Labor Turnover Survey (JOLTS) provide evidence of continuing weakness in the labor market in spite of the relatively low unemployment rate.

Through the first three months of 2016, the unemployment rate averaged 4.95 percent. While this is a reasonably low unemployment rate, by many other measures the labor market is far from recovering from the recession. One of these measures is the quits rate.

When workers feel that there are few job opportunities, they are less likely to quit their jobs, because they see few better opportunities. Through the first three months of the year, the quits rate has averaged just 2.04 percent, an unusually low rate.

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The Labor Department reported that the economy created just 38,000 new jobs in May, the weakest job growth since September of 2010, when it lost 52,000 jobs. In addition, the jobs numbers for the prior two months were revised down by 59,000, bringing the average for the last three months to just 116,000.

The household survey showed a drop of 0.3 percentage points in the unemployment rate, but this is not especially good news. The decline was almost entirely due to people leaving the labor force. The employment-to-population ratio [EPOP] was unchanged at 59.7 percent, 0.2 percentage points below the the peak for the recovery. In addition, the number of people involuntarily working part-time jumped by 468,000.

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According to many economists, the economy is at or near its full employment level of output; see, for example, the San Francisco Federal Reserve President’s recent comments. Those of us who dispute this contention point to data points like the unusually high share of the workforce that is working part-time involuntarily or the unusually low quit rates. The current levels for these and other commonly used measures of labor market tightness are not consistent with full employment.

But the most important reason that we are reluctant to accept that the economy is at full employment is that a much smaller share of prime-age workers (ages 25–54) are employed today than at the business cycle peaks in 2007 and 2000. For men, the employment to population (EPOP) ratio is down by more than 3.0 percentage points from the 2007 peaks and by more than 4.5 percentage points from the 2000 peaks. For women, the drop is 2.0 percentage points against the 2007 peak and more than 4.0 percentage points against the 2000 peak.  

Those proclaiming full employment dismiss these numbers and attribute them to longer term, non-cyclical, trends. The problem is that the data don’t fit prior trends. Before 2000, the EPOP ratio for prime-age men was on a very gradual downward trend. It dropped 0.9 percentage points from the business cycle peak in 1989 to 2000, 11 years later, a rate of less than 0.1 percentage points per year. For women, there was a continual upward trend through 2000; the EPOP ratio gained over 3.0 percentage points since 1989, or roughly 0.3 percentage points per year.

But the recession in 2001 pushed down the EPOP ratio for both men and women, and neither has ever recovered. The Great Recession in 2007–2009 was another severe hit on top of that.  

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The 2008 recession caused job losses across the board, but it was especially hard for young Americans. The annual employment rate for 2024 year-olds declined 8.1 percentage points between 2007 and 2010; for 2529 year-olds, employment fell 6.0 percentage points through 2011. As of 2015, employment was still down 4.6 percentage points for the former group and 3.1 percentage points for the latter.

By contrast, employment among seniors did not fall during the recession it actually increased. Between 2006 and 2015, there was not a single year in which employment fell for Americans age 65 and over. Employment in this age group is up 2.7 percentage points since 2007 and is up 3.2 percentage points since 2006.

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In 2007, the employment rate – the percentage of all Americans 16 and older who have a job – averaged 63.0 percent. The rate fell as low as 58.2 percent during the recession, and has since recovered to just 59.7 percent.

There are significant questions about how much of the drop reflects weakness in the economy as opposed to just an aging population. Between 2007 and 2015, the share of the population aged 25 to 54 – the ages when we expect people to be employed – fell from 54 to 50 percent. Over the same period, the share of the population 55 and older increased 5 percentage points from 30 to 35 percent.

However, it’s also the case that employment has fallen within most age groups. The employment rate of the 25-54 population dropped 5.2 percentage points during the recession and has risen just 3.0 percentage points since then. The employment rate for 55-64 year-olds is close to where it was before the recession, while the employment rate of Americans 65 and older is actually up.

We are not left with an “either-or” proposition. The employment rate has fallen due to cyclical weakness and the aging of the population. So it’s worth asking: how much higher could the employment rate be given the demographic composition of the population?

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

Last Monday, CEPR released a FedWatch piece on William Dudley’s views on monetary policy. Dudley is the head of the New York Federal Reserve (one of the Fed’s 12 regional banks) and the Vice-Chairman of the FOMC. The New York Fed is different from the other regional banks because, along with fulfilling normal regional bank functions, it also serves as a regulator of the Wall Street banks.

As part of CEPR’s ongoing FedWatch series looking at the views of FOMC members, we are releasing an extra “bonus” post examining Dudley’s views on the financial sector.

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The United States International Trade Commission (USITC) recently came out with projections on the economic effects of the Trans-Pacific Partnership (TPP) trade deal. The USITC’s report is the third major study on the TPP from the past two years. The USITC is legally required to provide this report.

The USITC report shows that the TPP would have relatively little impact on the volume of trade. This is consistent with the projections from a study by the United States Department of Agriculture (USDA) (which only examined the impact on agriculture), but is far out of line with the projections by the Peterson Institute for International Economics, the producer of the third major study.

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This is the fourth 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 January 2009, New York Federal Reserve Bank President William Dudley has been considered one of the Fed’s more dovish members. With some exceptions, Dudley has generally been a supporter of stimulus measures such as quantitative easing (QE) and low interest rates.

In a November 2010 New York Times article titled Under Attack, Fed Officials Defend Buying of Bonds, Dudley argued that QE was lowering long-term interest rates and raising employment.[1] He also said that high inflation was a non-existent problem and that policymakers should be worried instead about deflation.[1] In a speech the previous month, Dudley stated that “low and falling inflation is a problem for several reasons,” most notably because low inflation makes it hard for borrowers to pay off their debts and because low inflation in the short-term leads to declining expectations for future inflation.[2] The latter factor, he argued, can actually push down present inflation.[2] In discussing a possible drop in inflation expectations, Dudley made it clear that he viewed joblessness as a far more significant problem than inflation:

“Such a tightening would clearly be highly undesirable at a moment when unemployment is too high, inflation is too low and the economy has only moderate forward momentum.”[2]

Dudley also went on to state that “inflation being ‘too low’ (just like inflation being ‘too high’) is an impediment to achieving the full employment objective of the [Fed's] dual mandate.”[2] He furthermore argued that if the Fed were to target a given rate of inflation (it was not targeting 2 percent inflation at the time of Dudley’s speech), it should allow the economy to go over the target inflation rate for a given period of time in order to offset the time spent below the target rate.[2] Dudley continued making these same arguments in 2011, stating that the Fed shouldn’t withdraw monetary stimulus, as such a move would hinder the Fed’s dual mandate of full employment and price stability.[3] He reiterated that inflation was running problematically low and said that the labor market was well short of full employment; he also stated that in order to return to full employment in 2012, the economy would have to add 300,000 jobs per month.[3]

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The Federal Reserve Board, along with most economists, has been closely tracking the rate of increase in the average hourly wage reported by the Bureau of Labor Statistics in its monthly employment report. This series has shown a modest uptick in growth over the last two years. While the current pace (2.5 percent over the last year) is only slightly above the Fed’s 2.0 percent inflation target, it actually overstates the extent to which workers are benefiting from the recovery.

While wage growth has accelerated modestly from its pace earlier in the recovery, the rate of growth in benefits, most importantly healthcare, has slowed. As a result, there has been almost no change in the rate of growth in total compensation.

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This is the fourth 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 April 2008, St. Louis Federal Reserve Bank President James Bullard has generally been considered of the more hawkish members of the FOMC. However, his speeches, interviews, and lone dissenting FOMC vote since 2013 show that he is quite moderate. If there is a central theme to Bullard’s views on monetary policy, it’s that he favors inflation targeting. But unlike many who view the Fed’s 2 percent target as a ceiling – that is, inflation is not supposed to surpass 2 percent – Bullard clearly views it as a legitimate target, such that 1 percent inflation is just as problematic as 3 percent inflation. This means that when Bullard anticipated less-than-two-percent inflation, he generally favored monetary stimulus; when he anticipated over-two-percent inflation, he favored tightening.

In 2010, Bullard warned that the U.S. might be on the verge of a Japan-like deflationary spiral, and came out in favor of quantitative easing as a remedy.[1,2] His support for quantitative easing was full-throated – Bullard stated that quantitative easing (QE)offers the best tool to avoid such an outcome (pg. 339).[1] The New York Times noted that only three out of ten FOMC members at the time had expressed such strong worries about deflation:

“Of 10 current members on the committee, two are openly concerned about inflationary risks; three, now including Mr. Bullard, are somewhat worried about deflation; and five centrists, including Mr. Bernanke, have not expressed a firm leaning either way.

Mr. Bullard, in a conference call with reporters on Thursday, said that if any new ‘negative shocks’ roiled the economy, the Fed should alter its position that interest rates would remain exceptionally low for ‘an extended period,’ or resume buying long-term Treasury securities to stimulate the economy.”[2]

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As ThePressProject reported in March, a memo in Hillary Clinton’s declassified emails reveals that the German government had been preparing for the possibility of the anti-austerity Syriza party being elected in Greece as early as May 2012. The memo, viewable through WikiLeaks’ Clinton email archive, illustrates the concern with which German Finance Minister Wolfgang Schäuble viewed the prospect of a Greek exit from the eurozone (a “Grexit”) ahead of the June 2012 legislative election. Questioning Syriza’s commitment to the euro, Schäuble laid out two contingency plans to manage the scenario, neither of which would be favorable for Germany.

According to the memo, Schäuble and “other financial officials in Berlin, London, and Brussels” increasingly viewed the elections as a “plebiscite on whether or not Greece wants to remain in the Euro-zone” despite Syriza’s insistence on keeping Greece in the eurozone if elected. Schäuble, seeking to avoid a Grexit at all costs, proposed that Greek voters should “bear the consequences of their actions” if they ever elected a Syriza-led government. This was because Germany’s two options in the event of a Grexit would consist of either a “European Redemption Pact,” which the Merkel administration had long vehemently opposed, or a drastic shrinkage of the eurozone to expel every member with a budget deficit.

The first option would entail taking all debts owed by eurozone members that exceeded 60 percent of GDP and transferring them into a redemption fund financed by joint bonds issued by the currency union as a whole. As former Greek Finance Minister Yanis Varoufakis points out, the plan would almost certainly have been rejected by Italy and Spain, who would have been forced to carry out austerity on the same scale as Greece for at least 20 years in order to meet target budget surpluses. Schäuble, viewing the proposal as the lesser of two evils, had warmed slightly to it and was attempting to persuade Merkel to consider it.

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This Friday morning, the Bureau of Labor Statistics will release the latest jobs figures for the month of April. The unemployment rate and the number of jobs created will likely be the major focuses of most reporting.

But there is an important and less noticed problem in today’s economy. Specifically, the weakness of the current labor market has less to do with high unemployment and more to do with high underemployment.

Part of this underemployment can be attributed to the rise of involuntary part-time employment. In 2007, involuntary part-time employment constituted about 3 percent of total employment. It spiked during the recession and reached a peak of 6.7 percent in March 2010. While involuntary part-time employment has come down significantly since then, it still represented over 4 percent of total employment last month — a rate that is over one-third higher than the pre-recession average.

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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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