May 6, 2016

May 2016

May 6, 2016 (Jobs Byte)

Trying to make sense of Donald Trump's comments can be a risky business, but it is actually possible that he got it right and the NYT's Neil Irwin got it wrong on dealing with the national debt. Irwin had a NYT Upshot piece in which he discussed Trump's comments on monetary policy. Trump essentially endorsed the low interest rate policy being pursued by Janet Yellen and indicated that he would seek to appoint a Fed chair who would continue to follow this policy. (FWIW, we have yet to hear anything from Secretary Clinton on what sort of people she might appoint to the Fed.)

Irwin goes through Trump's logic on low interest rates and agrees that it is essentially right. But then he turns to Trump's comments on buying back debt at a discount:

"But Mr. Trump also suggested something that would represent a radical shift in United States policy if we take him seriously. 'I’ve borrowed knowing that you can pay back with discounts,' he said. He added, 'Now we’re in a different situation with the country, but I would borrow knowing that if the economy crashed, you could make a deal.'"

If Trump is suggesting that we will get bondholders to take a haircut on debt because the government would otherwise go bankrupt (something Trump has repeatedly done with businesses he owns) then Irwin is right. This would be a radical departure and is frankly almost inconceivable (we could just print the money).

But there is a way this can make sense. If interest rates rise, the situation Trump described, the market value of long-term debt falls. For example, a 30-year bond issued in 2015 at an interest rate of less than 3.0 percent, might sell for less than 70 percent of its nominal value if the long-term interest rate crosses 6 or 7 percent, which it certainly could.

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.

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.

May 2016, Josh Bivens and Dean Baker

President Obama continued the administration’s boasting about how the Trans-Pacific Partnership (TPP) will eliminate Vietnam’s tariff on exports of U.S. whale meat. You may have missed it, but this tariff, along with Malaysia’s tariff on U.S. exports of shark fins, and Japan’s tariff on our ivory exports, are among the 18,000 tariffs that President Obama said would be eliminated by the TPP in a Washington Post column today.

This 18,000 tariff figure was intended to sound very impressive, but according to Public Citizen the United States doesn’t export at all in more than half of the categories and in almost all the ones in which it does export the tariffs are already low. One important exception is tobacco. Several of the countries in the TPP have high tariffs on U.S. tobacco exports, so the TPP will be making cigarettes cheaper for kids in Vietnam, Malaysia, and elsewhere.

President Obama framed the TPP as an anti-China measure, warning readers:

“As we speak, China is negotiating a trade deal that would carve up some of the fastest-growing markets in the world at our expense, putting American jobs, businesses and goods at risk.”

Actually, this is not the way the economy works. If China reduces trade barriers with other countries in Asia, allowing the region to grow more rapidly, then it should also make the United States more prosperous. The region would be a bigger source of demand for U.S. exports and a more efficient provider of goods and services to the United States. That was exactly the logic of the Marshall Plan that helped to rebuild West Europe after World War II. Greater economic integration in the region, even if engineered in part by China, is something that the United States should applaud, not fear.

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.

Mark Weisbrot
Últimas Noticias, 1 de mayo, 2016

Dean Baker
Truthout, May 2, 2016

Washington Post editorial writer Charles Lane appeared to be throwing in the towel on the Post's dream of cutting Social Security and Medicare in a column headlined, "Entitlement Reform, RIP." The piece recounts a sad story whereby the bulk of currently scheduled federal spending is already committed to entitlement programs like Social Security, Medicare, and Medicaid:

"Seventy-five percent of planned federal spending between now and the end of the next two presidential terms is mandatory: Social Security, Medicare and other entitlement programs, plus interest on the national debt, according to Congressional Budget Office forecasts. That money is going out the door no matter who’s president."

The piece complains that this indicates a lack of democracy, since it means that spending will have been committed by past decisions. Of course a problem with this story is that voters seem to overwhelmingly support this spending, as Lane complains:

"Moreover, if the primary results demonstrate anything so far, it is that voters of both parties oppose trimming entitlements, especially the two giants, Social Security and Medicare, that benefit the elderly."

So, we are suffering from a lack of democracy because voters are getting what they want? Only in the Washington Post.