February 22, 2016

That is the theme of an article in the NYT yesterday with the headline, “China’s foreign exchange reserves dwindling rapidly.” The gist of the piece is that there has been a large outflow of capital from China in the last year, which has caused them to lose as much as $800 billion from their foreign reserves. According to the piece, China is down to its last $3.2 trillion.

If the idea of a country with $3.2 trillion in foreign reserves worrying about empty coffers sounds silly, it should. China has many economic problems (who doesn’t), but a shortage of foreign reserves is not among them.

First, just to get oriented, let’s keep in mind why China has been losing its reserves. As the piece notes, it has been trying to keep its currency from falling. Note that for years, the United States and other countries have wanted China to raise the value of its currency. The argument was that it had accumulated vast amounts of reserves to keep the value of its currency low in order to maintain large trade surpluses.

Now the story is that if China decided not act — it did not use its reserves to buy up the currency being sold by people trying to get some of their money out of the country — the Chinese currency would fall against the dollar and other currencies. Would this be a problem for China?

A lower valued yuan would mean higher prices for the goods China imports and lower priced Chinese goods everywhere else in the world. While China recently saw a modest uptick in prices in January, the conventional wisdom is that the country is far more concerned about deflation than inflation. From this perspective, it’s hard to see how a rise in import prices is a problem.

The other side of the equation is that China’s goods and services would suddenly be much cheaper for people in other countries. This would lead to more exports. Since the rise in import prices will reduce imports, the net effect of a decline in the yuan would be a rise in China’s trade surplus. That would be bad news for the United States and other countries, but it is certainly not a problem for China.

In other words, there is no obvious economic reason that China could not just let its currency fall in value. It would make other countries unhappy, but China’s government presumably cares more about its own economy than the economies of its trading partners.

Dean Baker
The Huffington Post, February 19, 2016

Last month the Congressional Budget Office (CBO) released its Budget and Economic Outlook report for 2016 to 2026. While various aspects of the report have gotten major play in the media, one important yet overlooked detail is what CBO says about wage inequality. Specifically, CBO expects to see a “continued increase in the share of wages earned by higher-income taxpayers” (pg. 88). It indicates that another 4 percentage points of wage income will be redistributed from the bulk of the workforce to the roughly 7 percent of workers who earn more than the cap on wages subject to the Social Security tax (currently $118,500):

“The share of covered earnings above the taxable maximum amount is projected to rise to more than 20 percent in 2026, 4 percentage points more than the share in 2015...” (pg. 94)

This ceiling on the amount of wages subject to taxation rises in line with average wage growth every year. If inequality goes up and high-wage workers’ earnings rise faster than average, a greater share of overall wages are exempt from taxation. Due to rising inequality, the share of wages going untaxed has nearly doubled from one-tenth to nearly one-fifth over the past thirty years.

Catherine Rampell joined the chorus of critics of the Gerald Friedman analysis of the economic impact of Bernie Sanders’ platform. For folks who missed it, Friedman is an economics professor at the University of Massachusetts who produced a 53 page paper that projects the budgetary and economic impact of Sanders’ proposals. (Friedman’s relation to the Sanders campaign is not clear.)

Many economists do not find the projections credible. Among other things, Friedman projects average annual productivity growth of 3.6 percent. This compares to a Golden Age average of 3.0 percent and a post-crash average of just over 1.0 percent. It also projects that the share of the population that is employed will reach new highs. This is in spite of the fact that the population will be considerably older at the end of Friedman’s projection period than at its previous peak and that Sanders also has a number of proposals that will make it easier for people not to work.

Rampell and other Friedman critics have rightly noted these elements of his program. Sanders proposes to increase Social Security benefits and have universal Medicare. This will make it easier for many people to retire earlier than might currently be the case. Sanders also proposes to make college free. This would likely reduce the percentage of college students who work, as well as increase the number of people who go to college.

These policies are both likely to lead to sharp reductions in labor force participation at both the older and younger ends of the age distribution. This highlights a point that many of us have made in comparisons of employment rates in European welfare states and the United States. The United States does better than countries like France (although worse than Germany and Denmark) when we look at employment rates for the population as a whole, but it looks pretty much the same if we focus on prime age workers (ages 25-54).

The difference is that France and other European countries have more generous pensions and universal health care coverage, which make it easier for older workers to retire. And college is either free or low cost (often with subsidies for students) so that it is not necessary for college students to work. As Rampell and others have acknowledged, these are not necessarily bad policies, but they do mean less work and less growth.

Between 2007 and 2015, there was a substantial decrease in the civilian labor force participation rate from 66 percent to 62.7 percent. Journalists and economists have debated how much of this decline can be attributed to a weak economy as opposed to an aging population.

The civilian labor force participation rate (LFPR) measures the percentage of the civilian non-institutional population (those who are 16 and above and not part of an institution, e.g. a mental institution, prison, etc.) who are in the labor force. The labor force consists of everyone who is either employed or unemployed (meaning they have searched for work sometime over the past four weeks). The LFPR may fall as a result of bad economy, as people give up looking for work due to a weak labor market, but it also changes due to demographics. If the population is aging, a greater percentage of the population may hit retirement age and willingly retire. Conversely, if the population is becoming younger, a greater percentage of the population may enroll in high school or college.

Social Security, the program that provides retirement, disability, and survivor benefits to millions of Americans just gave a valentine to those making $1,000,000 a year. Many people do not realize that the taxes that fund Social Security only apply to th

Dean Baker
Truthout, February 16, 2016

Dean Baker
Al Jazeera America, February 16, 2016

Alexander MainThe New York Times en Español, 16 de febrero, 2016

The following has been cross-posted from the Haiti Elections Blog. The agreement itself can be found at the original source. 

Update: Jocelerme Privert has been elected provisional president by the National Assembly.

President Michel Martelly managed to reach a political accord with the heads of Haiti’s parliament on the creation of a transitional government, averting a potentially dangerous political vacuum. In keeping with the deal, Martelly stepped down on February 7, meeting a major demand of his opponents. But the accord also gives a great deal of power to a contested Parliament and fixes a time frame for the transition that would appear to rule out any real investigation of fraud in the previous rounds of elections. With pro-Martelly members of Haiti’s disbanded military (FAdH) on the march, the spectre of another, more violent round of political unrest hangs over the agreement. Given the accord’s many ambiguities and contradictions, Haiti’s electoral crisis has yet to be solved.

The deal’s text, entitled “Political Accord for institutional continuity upon the end of the term of office of the President of the Republic and in the absence of a President-elect and for the continuation of the 2015 electoral process,” was finalized at 1am on Friday night, after 28 meetings between various actors. President Martelly, Senate President Jocelerme Privert and Chamber of Deputies President Chancy Cholzer signed at the National Palace on Saturday, February 6. The solution found by the Executive and the lawmakers was “inspired by constitutional dispositions” rather than directly derived from the Haitian Constitution, because the Constitution did not clearly indicate what was supposed to happen when a president’s term ended without an elected successor in place.

The political accord confirmed Martelly’s departure on the constitutionally mandated end of his term on February 7 and provided a roadmap for the establishment of a provisional government. A provisional president will be elected by the National Assembly (a joint body of the Chamber of Deputies and the Senate) within five days of the signing of the accord, while executive power will be exercised in the interim by current Prime Minister Evans Paul and the Council of Ministers. Parliament has already established a bicameral committee to receive and vet applications for the post, and if all goes well, a provisional president will be sworn in on February 14. The mandate of the provisional president is limited to a maximum of 120 days, starting from the day they assume office.

The provisional president is tasked with “redynamizing” the currently “dysfunctional” CEP and finding a “consensus” Prime Minister. To do so, the political accord gives the provisional president the responsibility to establish a broad consultation process with Haitian society and the two Chambers of parliament mandate is find a consensus Prime Minister, who will then form a government and be confirmed by Parliament. Although not stated in the accord’s text, the New York Times reported that Martelly had made “an important concession” during the negotiations, agreeing to allow a member of an opposition party to be selected as interim president.

The provisional president is also called on to convoke the various social sectors to delegate new representatives (or confirm existing ones) to the CEP. At present, the CEP has only three of nine members, meaning it lacks the necessary two-third quorum for publishing electoral results. Just as important, the credibility of the current CEP has been badly eroded by corruption scandals and its complicity in Martelly’s efforts to ram through fraudulent elections despite strong opposition.

Once in place, the “redynamized” CEP will ensure the “continuation of the electoral process initiated during 2015,” according the agreement. The steps to be taken include the implementation of the “technical recommendations” of the Evaluation Commission and the finalization of municipal election results, followed by the organization of “second round of presidential elections, partial legislative elections, and local elections.” The accord fixes April 24 as the date for these elections, with final results proclaimed on May 6 and an elected president installed on May 14. Many commentators, including Senate President Privert, have pointed out that this calendar is only tentative, since only the CEP has the authority to officially set election dates.

Although the political accord’s signatories claimed to be “seeking a broad consensus of all vital forces of the nation,” support for the agreement was not unanimous. Almost immediately after it was signed, the deal was denounced in the streets by opposition protesters. The Group of Eight (G-8) characterized the agreement as “anti-popular and anti-democratic” and the Front du Refus et de la Résistance Patriotique, a grouping of political and civil society leaders, which called the deal “stillborn.” The G-30, another grouping of presidential candidates, announced that it will challenge the political accord’s legality. These critics charged that the deal did not taken into account a sufficiently wide range of perspectives. Senate President Jocelerme Privert admitted that some opposition lawmakers disagreed with the accord reached by Martelly and legislators, but Privert said they would have to accept the majority's decision. “This is the democratic way,” he said. Some pro-Martelly legislators have also expressed discontent with the deal.

Alexander MainThe New York Times, February 15, 2016

Robert Samuelson really, really wants to cut Social Security and Medicare and he is not going to let the data get in the way. His column today complains about the lack of straight talk on the budget. He calls for candor when discussing the budget. Unfortunately he resists this standard himself.

The argument is the usual, rising Social Security and Medicare spending are going to crowd out other areas of the budget. As he tells us:

“The basic conflict posed by the budget is not between rich and poor but between workers and retirees. Present policy favors retirees over workers — the past over the present and future — because, politically, tampering with benefits is off-limits. The rest of government absorbs the fiscal consequences of an aging population.”

Okay, let’s inject a little straight talk and candor into Samuelson’s discussion. First, he tells us that he wants to free up money for other programs by:

Ross Douthat used his NYT column to remind progressives of the 1990s and harangue them for not wanting them back. While he gets some of the points right, he misses a really big one: the 1990s prosperity was driven by a stock bubble, which would inevitably burst. Furthermore, Clinton’s policies lead to an over-valued dollar and a large trade deficit that persists to this day. This trade deficit has made it impossible to get to full employment without an asset bubble.

Just to briefly recount the good stuff, we saw the unemployment rate fall to 4.0 percent as a year round average in 2000. In the early and mid-1990s the consensus within the mainstream of the economics profession was that the unemployment rate could not get much below 6.0 percent without sparking inflation. 

The low unemployment rate disproportionately helped those at the bottom. This was the only period in the last forty years in which workers at the middle and bottom of the wage distribution saw sustained gains in real wages. African Americans were actually closing the earnings gap with whites and women were reducing the earning gap with men. 

Neil Irwin had an interesting NYT Upshot piece on the use of negative interest rates by central banks as a way of boosting demand. There are three points worth adding to this discussion.

First, the Fed has other tools to try to boost the economy. The obvious one is to explicitly target a long-term interest rate. For example, the Fed could say that it will push the 5-year Treasury note rate down to 1.0 percent. It would then buy enough 5-year notes to bring the rate down to this level.

Since longer term rates have much more impact on the economy than short-term rates, this would more directly affect the economy than trying to bring down long-term rates with lower short-term rates. If the Fed was really concerned about inadequate demand in the economy, it is difficult to see why it would not consider this sort of targeting. For some reason targeting long-term rates has not featured in discussions of potential Fed actions.

The figure above shows the percentage of unemployed Americans who quit their last job, by race. For all groups, the share of job quitters took a nosedive during the recession; this is to be expected, because a low rate of job quitting is actually a sign of a weak labor market. When workers feel that there are few job opportunities available to them, they are less likely to quit their jobs, because they know that they are unlikely to find a new one. By contrast, when the economy is strong and the job openings rate is high, we see more workers leaving their jobs: