Professor Andrew Levin (Dartmouth College), the former special advisor to Fed Chair Ben Bernanke and then-Vice Chair Janet Yellen, released a proposal for reform of the Federal Reserve Board’s governing structure in a press call sponsored by the Fed Up Campaign. The proposal has a number of important features, but the main point to make the Fed more accountable to democratically elected officials and to reduce the power of the banking industry in monetary policy.

Under its current structure, the banks largely control the twelve Federal Reserve district banks. This matters because the presidents of these banks are part of the Federal Reserve Board’s Open Market Committee (FOMC) which determines monetary policy. At any point in time five of twelve district bank presidents will be voting members of the FOMC, but all twelve take part in the discussion. The voting presidents will typically be outnumbered by the seven Federal Reserve Board governors, who appointed by the president and approved by the Senate, although there have been just five sitting governors for the last two years, as the Senate has refused to consider President Obama’s nominees.

There is no obvious reason that the banking industry should have special input into the country’s monetary policy. This would be comparable to reserving seats on the Federal Communications Commission’s board for the cable television industry. While there is no way to prevent an industry group from trying to influence a government regulatory body, in all other cases they at least must do so from the outside. It is only the Fed where we allow the most directly affected industry group to actually have a direct voice in the policies determined by its regulatory agency.

Dean Baker
InsideSources, April 8, 2016

From Iceland’s Prime Minister Sigmundur Davíð Gunnlaugsson to FIFA ethics lawyer Juan Pedro Damiani, the Panama Papers have already claimed their first few casualties despite having only been public knowledge for five days. In Peru, the revelations add yet another twist to an already tumultuous presidential election scheduled for this Sunday that has seen two candidates disqualified from running. Four of the remaining candidates now find themselves implicated in the same global financial scandal, including frontrunner Keiko Fujimori and her rival Pedro Pablo Kuczynski, who is tied with Verónika Mendoza for second place.

The Peruvian elections were first thrown into turmoil on March 4, a month before the leak, when the country’s electoral board disqualified both Julio Guzmán and César Acuña from the elections. Guzmán, an economist from the liberal party Todos por el Perú (All for Peru), had been regarded as Fujimori’s main challenger at the time, polling between 16 and 18 percent compared to Fujimori’s roughly 30 percent. Acuña, on the other hand, was a marginal candidate with single-digit support. The electoral board voted to exclude Guzmán on a technicality, as his party had completed their paperwork incorrectly, as well as Acuña for illegally purchasing support. But the board then courted more controversy three weeks later, when it allowed Fujimori to continue running despite similar accusations of vote-buying against her.

With Guzmán out of the running, the race for second place is now a dead heat between former Prime Minister Kuczynski and left-wing lawmaker Mendoza, whose support has surged dramatically in recent weeks partly by picking up vast numbers of undecided voters, who still make up an estimated 40 percent of the electorate. Kuczynski is widely supported by the elites, with an agenda focused on promoting private investment by lowering taxes and cutting bureaucratic red tape, while Mendoza has opposed these policies in favor of increasing public spending to promote growth and to diversify the Peruvian economy away from its dependence on mining and other extractive industries. One of the two candidates is likely to face Fujimori in a runoff election in June.

The recent murder of environmental and indigenous rights activist Berta Cáceres has brought attention to the extreme danger faced by human rights defenders in Honduras. Less than two weeks after Berta’s murder, Nelson García, another activist with the Civic Council of Popular and Indigenous Organizations of Honduras (COPINH), was murdered following the eviction of Lenca communities from their land by state security forces. In the past few years, COPINH members have been killed by state forces, as in the case of Tomás García in 2013, and have faced intimidation, harassment and continual criminalization by the government (including the arrest in 2013 of Berta Cáceres along with two other COPINH leaders on trumped-up charges).

Within a context of increasing persecution and intimidation against Honduran social activists, COPINH’s experience is not unique. Activists across Honduras — whether they are from environmental, labor, indigenous or LGBT rights organizations — have faced intense repression and violence. These acts of violence almost never result in prosecutions, and rather than protect activists, Honduran security forces are frequently suspected of criminal complicity in the attacks.  

The problem of deflation just refuses to go away. I don't mean the problem of weak economies with very low inflation rates, I mean the media's obsession with the idea that something really bad happens if the rate of price change crosses zero and turns negative.

We got another example of this strange concern in the NYT this morning. The piece noted the European Central Bank's (ECB) concern:

"Still, the central bank acknowledged its deep concern about the risk that the eurozone’s economic doldrums, characterized by a worrisomely low rate of inflation, could devolve into outright deflation, a vicious circle of falling prices and demand that can undercut corporate profits and cause unemployment to soar. ...

"Deflation sets in when falling prices prompt people to delay purchases because they expect prices to fall even further. Consumer spending and investment collapse, companies dismiss workers, and spending falls even further as people lose their jobs and incomes. Central bankers fear deflation because once it sets in, it is notoriously difficult to reverse."

To see the silliness of this line of argument, consider first what falling prices literally mean. Suppose that the price of shoes is declining at a 0.5 percent annual rate. How long will you put off a purchase of a $100 pair, knowing that it you wait a year it will save you 50 cents?

Let me start this one by saying that I think Trump’s threats of a 45 percent tariff on Chinese imports are a bad idea. We should take steps to lower the value of the dollar against the yuan, but the public threat of large tariffs is probably not the best way to go. The route is obviously through negotiations where we would have to give up things, like protections for Microsoft’s copyrights and Pfizer’s patents.

But that aside, the fact that a particular policy is unwise should not be a license for the media to say absurd things to discredit it. The NYT seems to take this path in an Upshot piece by Michael Schuman that purports to tell readers, “how a tariff on Chinese imports would ripple through American life.”

The piece tells readers:

“But if there were a 45 percent tariff on Chinese goods, at least part of that would probably be passed onto consumers in the form of higher prices. Americans would end up buying fewer Chinese things, and fewer things from anywhere else. ...

“For this reason and others, quite a lot of the money spent on Chinese goods actually ends up in the wallets of Americans. A study by the Federal Reserve Bank of San Francisco figured that 55 cents of every $1 spent by an American shopper on a “Made in China” product goes to the Americans selling, transporting and marketing that product. Suppressing Chinese imports would harm shopkeepers and truck drivers.

“In fact, making Chinese-made goods more expensive would ripple through American shopping malls. An extra $20 for, say, children’s clothing from China is $20 not spent on a new baseball glove for a child, or a birthday gift for a grandmother. A tariff on China would dent the sales of all kinds of products, even those made in the United States.”

Note what is being argued here. Higher prices on imports from China will lead to less consumption in the U.S. economy. That means an increase in the savings rate. (This is definitional. If you don’t consume you save.)

Many economists have been troubled by the low savings rate in the United States. I have never seen any models that try to explain low savings as the result of cheap imports from China and other countries, but apparently this is what Mr. Schuman and the NYT would have us believe. I look forward to article writing up this theory linking savings rates to import prices.

If it’s not clear, this argument is silly. People will likely spend the same with the tariffs as they did without the tariffs. They will buy fewer goods imported from China, end of story. No need for the truck drivers to fear mass layoffs.

Dean Baker
Truthout, April 5, 2016

The Washington press corps has gone into one of its great feeding frenzies over Bernie Sanders' interview with New York Daily News. Sanders avoided specific answers to many of the questions posed, which the D.C. gang are convinced shows a lack of the knowledge necessary to be president.

Among the frenzied were the Washington Post's Chris Cillizza, The Atlantic's David Graham, and Vanity Fair's Tina Nguyen, and CNN's Dylan Byers telling about it all. Having read the transcript of the interview I would say that I certainly would have liked to see more specificity in Sanders' answers, but I'm an economist. And some of the complaints are just silly.

When asked how he would break up the big banks Sanders said he would leave that up to the banks. That's exactly the right answer. The government doesn't know the most efficient way to break up JP Morgan, JP Morgan does. If the point is to downsize the banks, the way to do it is to give them a size cap and let them figure out the best way to reconfigure themselves to get under it.

The same applies to Sanders not knowing the specific statute for prosecuting banks for their actions in the housing bubble. Knowingly passing off fraudulent mortgages in a mortgage backed security is fraud. Could the Justice Department prove this case against high level bank executives? Who knows, but they obviously didn't try. 

And the fact that Sanders didn't know the specific statute, who cares? How many people know the specific statute for someone who puts a bullet in someone's head? That's murder, and if a candidate for office doesn't know the exact title and specific's of her state murder statute, it hardly seems like a big issue.

Roger Cohen gave us yet another example of touching hand-wringing from elite types about the plight of the working class in rich countries. The gist of the piece is that in Europe and the U.S. we have seen growing support for candidates outside of the mainstream on both the left and the right. Cohen acknowledges that there is a real basis for their rejection of the mainstream: they have seen decades of stagnating wages. However, Cohen tells us the plus side of this story, we have seen huge improvements in living standards among the poor in the developing world.

In Cohen's story, the economic difficulties of these relatively privileged workers is justified by the enormous gains they allowed those who are truly poor. The only problem is that these workers are now looking to these extreme candidates. Cohen effectively calls for a more generous welfare state to head off this turn to extremism, saying that we may have to restrain "liberty" (he means the market) in order to protect it.

This is a touching and self-serving story. The idea is that elite types like Cohen were winners in the global economy. That's just the way it is. Cohen is smart and hard working, that's why he and his friends did well. Their doing well also went along with the globalization process that produced enormous gains for the world's poor. But now he recognizes the problems of the working class in rich countries, so he says he and his rich friends need to toss them some crumbs so they don't become fascists.

We all should be glad that folks like Cohen support a stronger welfare state, but let's consider his story. The basic argument is that poor countries have only been able to develop because their workers were able to displace the workers in rich countries. This lead to unemployment and lower wages in rich countries.

Let's imagine that mainstream economics wasn't a make-it-up-as-you-go-along discipline. The standard story in economics is that capital is supposed to flow from rich countries to poor countries. The idea is that capital is plentiful in rich countries and therefore gets a low rate of return. It is scarce in poor countries and therefore gets a high rate of return.

The NYT article on the March jobs report featured several economists describing the current state of the economy in glowing terms. Scott Clemons, chief investment strategist at Brown Brothers Harriman, described the current economic situation as being a “near Goldlocks scenario.” He said the jobs and wage gains in March were healthy, but not so strong as to prompt the Federal Reserve Board to raise interest rates to slow growth.

Michelle Meyer, deputy head of United States economics at Bank of America Merrill Lynch, described the economic situation as “a best-case scenario.” Michael Gapen, chief United States economist at Barclays, also was very positive about the economy. This view seemed to be reflected in the first two paragraphs in the article which were also overwhelmingly positive about the current state of the economy.

(In fairness, the piece included several comments noting how far the economy has yet to go to recover to pre-recession levels. Also, in addition to the optimism from the bank economists, it included a comment from Claire McKenna, a senior policy analyst with the National Employment Law Project.)

While there is little doubt that the economy is doing much better in recent months than it had been earlier in the recovery and that workers are seeing some gains, it is important to ask about the implicit base of comparison in these comments.

The average hourly wage increased at a 2.3 percent rate over the last year. Its annualized rate of increase over the last three months compared with the prior three months is also 2.3 percent, which indicates no acceleration. Since inflation over the last year was only 1.0 percent, this translates into a 1.3 percent increase in real wages over this period. While this is a decent rate of increase, it is only roughly equal to the trend rate of productivity growth. In other words, this is the rate of wage growth that workers should be able to assume in a normal year.

However, there are two reasons to consider this rate inadequate. First, workers lost an enormous amount of ground in the downturn. The average real hourly wage did not pass its 2008 peak until November of 2014. (Workers had also seen almost no wage growth in the prior business cycle, so they had lots of ground to make up even in 2008.)