This graphic below traces almost twenty years (January 1995 to February 2014) of gains and losses in US manufacturing, finance, and public employment. Job growth (or loss) is indexed, with three choices for a base point: the start of the series (January 1995), the end of the boom of the late 1990s (January 2000), and the onset of the last recession (December 2007). On each graph, the national numbers are represented by the red line and job trajectories in the states (mouse over the graph, or filter the state list, to identify particular states.

Michael Lewis' new book, Flash Boys, is leading to large amounts of discussion both on and off the business pages. The basic story is that a new breed of traders can use sophisticated algorithms and super fast computers to effectively front-run trades. This allows them to make large amounts of money by essentially skimming off the margins. By selling ahead of a big trade, they will push down the price that trader receives for their stock by a fraction of a percent. Similarly, by buying ahead of a big trade, they will also raise the price paid for that trade by a fraction of a percent. Since these trades are essentially a sure bet (they know that a big sell order or a big buy order is coming), the profits can be enormous.

This book is seeming to prompt outrage, although it is not clear exactly why. The basic story of high frequency trading is not new. It has been reported in most major news outlets over the last few years. It would be nice if we could move beyond the outrage to a serious discussion of the policy issues and ideally some simple and reasonable policy to address the issue. (Yes, simple should be front and center. If it's complicated we will be employing people in pointless exercises -- perhaps a good job program, but bad from the standpoint of effective policy.)

The issue here is that people are earning large amounts of money by using sophisticated computers to beat the market. This is effectively a form of insider trading. Pure insider trading, for example trading based on the CEO giving advance knowledge of better than expected profits, is illegal. The reason is that it rewards people for doing nothing productive at the expense of honest investors.

On the other hand, there are people who make large amounts of money by doing good research to get ahead of the market. For example, many analysts may carefully study weather patterns to get an estimate of the size of the wheat crop and then either buy or sell wheat based on what they have learned about the about this year's crop relative to the generally held view. In principle, we can view the rewards for this activity as being warranted since they are effectively providing information to the market with the their trades. If they recognize an abundant wheat crop will lead to lower prices, their sales of wheat will cause the price to fall before it would otherwise, thereby allowing the markets to adjust more quickly. The gains to the economy may not in all cases be equal to the private gains to these traders, but at least they are providing some service.

By contrast, the front-running high speed trader, like the inside trader, is providing no information to the market. They are causing the price of stocks to adjust milliseconds more quickly than would otherwise be the case. It is implausible that this can provide any benefit to the economy. This is simply siphoning off money at the expense of other actors in the market.

Dean Baker
Truthout, March 31, 2014

Dean Baker
The Guardian, March 31, 2014

Economics is a great profession for people who are not very good at their work. Messing up all the time does not affect at all your ability to maintain a high-paying job and get people to take your views seriously. 

Hence we have Robert Samuelson warning us that we might have to just accept that we will be faced with continuing slow growth and high unemployment. First off, it is important to sort out two different issues which Samuelson mushes together.

The first one is the extent to which we should expect the unemployment rate to fall as the economy returns to full employment or something like it. The second issue is the rate of productivity growth that the economy can sustain going forward. These are very different issues that are at most tangentially related.

The first one is about a level of output and employment. We saw a plunge in demand when the housing bubble burst. Those of us familiar with intro economics were not surprised by the downturn nor the weak recovery, since there is no source of private sector demand to replace the demand that had been generated by the bubble. We saw more than a trillion dollars of annual demand disappear when the construction driven by the bubble disappeared along with the consumption driven by $8 trillion in housing bubble generated equity that vanished with the crash.

The public sector could replace the demand, but people like Robert Samuelson and his buddies in the Washington elite like low budget deficits more than they care about seeing people have jobs. In short, there is no mystery about the economy not returning back to potential GDP and continuing high unemployment. It is exactly what the textbook economics would predict.

I sometimes complain about U.S. media coverage of Venezuela, which is mostly one-sided and sometimes terribly inaccurate. But compared to most of the Latin American media, U.S. reporting is practically “fair and balanced.” Check out this amazing front pag

[Note: this blog post has been updated with the BLS data from March, updated post here]

At the beginning of 2014, thirteen states increased their minimum wage. Of these thirteen states, four passed legislation raising the minimum wage (Connecticut, New Jersey, New York, and Rhode Island). In the other nine, the minimum wage automatically increased in line with inflation at the beginning of the year (Arizona, Colorado, Florida, Missouri, Montana, Ohio, Oregon, Vermont, and Washington State).

Earlier this week, Goldman Sachs conducted a simple evaluation of the impact of these minimum-wage increases on state employment levels. Goldman Sachs compared the employment change between December and January in the 13 states where the minimum wage increased with the employment change in the remainder of the states, where the minimum wage remained constant. They concluded that “January's state-level payrolls data failed to show a negative impact of state-level hikes (in the minimum wage). Relative to recent averages, the group of states that had hikes at the start of 2014 in fact performed better than states without hikes. While this is only one month's data, it suggests that the negative impact of a higher federal minimum wage--if any--would likely be small relative to normal volatility.”

Bolivia will most likely join Brazil and Argentina (Bolivia’s largest trading partners) by becoming the sixth member of the MERCOSUR group. Since 2006, Bolivian trade with MERCOSUR has grown by 17 percent. A recent study published by Desarrollo de Negocios Internacionales found that over the last 10 years Bolivia has experienced the second highest export growth rate in South America. This is remarkable considering that on average landlocked developing countries (LLDC) trade 30 percent less [PDF] than coastal countries [1]. As a result, for most landlocked countries transportation infrastructure plays a crucial part in facilitating intraregional trade. Since 2005, industrialization has become a key aspect of Bolivian President Evo Morales’ economic policy, particularly in the area of transportation, which in 2013, accounted for 30 percent of total [PDF] public investment [2]. The chart below shows levels of public investment in transportation as a percentage of total GDP since 2005:

Source: International Monetary Fund and Ministerio de Economía y Finanzas Pública Estado Plurinacional de Bolivia

Dan Beeton et Georgianne Nienaber
Dissent Magazine, 24 de fèvrier, 2014
Haïti Liberté, 27 mars 2014

En anglais