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Posts from the ‘National Debt’ Category

Marketplace of Ideas


Money Talks Illustration by Oliver Munday, The New Yorker

GDP grew more than expected last quarter, jobless claims remain low, and one survey-based index says manufacturing activity hit a three-year high in July. Here are a few other stories from the week’s economic news:

  • The verdict on the July jobs report is that it was a “mild disappointment.” Non-farm payroll employment rose by 209,000 last month, below gains of 298,000 in June and 229,000 in May. Since the start of the year, the labor force has grown by an average of 126,000 people per month. Over the same period, job gains have averaged 230,000 per month. If sustained, that difference is enough to keep the unemployment rate falling by more than 0.1 point per month. The unemployment rate did nudge up a bit in July, to 6.2 percent from 6.1 percent, but that follows an outsized 0.6-point drop between March to June. While unemployment is down from a peak of 10.0 percent during the recession, Justin Wolfers, writing for the Upshot, says it is still way too high. Wolfers observes that if you were to line up all the unemployed people in the country, they would stretch from New York to San Francisco. That is a striking visual, but what does it mean for the economy? Following the recession, unemployment peaked at 15 million people. That number is down to 9.7 million now, but it is still higher than the low of 6.8 million prior to the recession. AIER’s Business-Cycle Conditions analysis suggests the economy will strengthen in the second half of the year, which should keep the employment picture improving.

Read more

An Unreliable Unemployment Rate?

An economics report from the Wall Street Journal suggests that the Fed might not take action on its bond-buying programs this October because of some unusual statistics tied to the country’s unemployment rate.

The piece explains that the Fed has often used the unemployment rate as a barometer of what to do with bond-buying programs and interest rates, but slow growth and a decline in people in the workforce are causing the organization to hold off on its bond decision.

From the Wall Street Journal:

“The unemployment rate is behaving in peculiar ways. It is coming down as people leave the labor force and exit the tallies of those seeking employment. In normal times, the labor force grows as the population grows, and employment must grow in excess of that labor force growth in order to reduce the unemployment rate. Now, because the labor force isn’t growing much, even small employment gains are bringing down the unemployment rate, even though millions of Americans remain parked on the sidelines.”

In other words, the unemployment numbers might not be as a strong an indicator of what the Fed should do about bonds as it has been in the past. This “disconnect makes it very hard to for them to send clear signals or make decisions with conviction.”

Read the full story here.

The Renewal of the Debt Ceiling Debate

With experts saying that the U.S. Treasury department could be unable to pay its bills by mid-October, the political fight over raising the debt ceiling is about to begin anew. If history is any guide, however, the debate won’t keep the debt ceiling from going up.

A new piece from looks at the basics of the debt ceiling issue and explains that it is inevitable lawmakers will raise the ceiling, both because they already have—nearly 80 times in the last 70 years—and because “they have no real choice if they want to avoid a U.S. default … which would hurt the economy and markets.”

From CNN:

“Despite some politicians’ incorrect assertions, raising the debt ceiling does not give the government a ‘license to spend more.’

It simply lets Treasury borrow the money it needs to pay all U.S. bills in full and on time. Those bills are for services already performed and entitlement benefits already approved by Congress. In other words, it’s a license to pay the bills the country incurs as a result of past decisions made by lawmakers from both parties over the years.”

Of course, not everyone agrees that the debt ceiling should be raised. A recent poll from NBC News suggests that close to half of the country (44 percent vs. 22 percent) would prefer Congress not raise the ceiling, and now, once again, the “stage is set for another round of conflict in Washington.”

From NBC News:

“House Republicans – fueled by Tea Party supporters – are demanding spending cuts to accompany any debt-ceiling hike. And President Obama has said he will not negotiate when asking Congress to raise the debt limit for money it has already spent. 

Raising the debt ceiling is a routine but also unpopular procedure that fires up the political opposition. Obama, when he served in the U.S. Senate, voted against it in 2006 and even called it  ‘a sign of leadership failure.'”

Time will tell if the U.S. will face another situation like it did in 2011, in which debate over the debt ceiling led to the country’s credit being downgraded.

The Marketplace of Ideas

Here’s what’s going on in the online world of economics.

  • babiesRichard V. Reeves and Kimberly Howard have written a paper on the “Parenting Gap“–the idea that the quality of a child’s parenting effects social mobility.  They found that, across the board, the children of stronger parents have more success, from pre-school through adulthood.  So what makes a strong parent?  Emotional support, quality time, and conversation are a few of the illusive qualities of strong parenting.  Read the full report here. [Brookings]
  • Emmanuel Saez has updated his paper “Striking it Richer: The Evolution of Top Incomes in the United States” with preliminary 2012 data.  [UC Berkley]
  • If you haven’t yet jumped on the smartphone bandwagon, you might be be smarter than your outdated phone: The Pew Research Center has found a 16% decline in the average cost of a smartphone over the past two years.  According to the report, much of this steady and marked decline comes from the increase of smartphones being sold and used in emerging markets.  So while “The devices tend to be quite prevalent at the upper end of the income distribution,” their prevalence amongst all age groups and income levels will likely start to become more ubiquitous.  [Pew]
  • Where do we stand with the nominations for a new Fed Chairman?  This week, a group of more than 300 economists, including such big names as Joseph E. Stiglitz and Alan S. Blinder, signed a letter to President Obama urging the appointment of Janet Yellen.  Read the Wall Street Journal’s reaction here.  [Institute for Women’s Policy Research]
  • There is a lot of talk about the correlation between majors and future earnings, and a lot of talk about women and their career choices.  Anthony Carnevale, an economist at Georgetown University, is studying the cross section: women in lucrative majors who go into non-lucrative fields [NPR]

The Marketplace of Ideas

Here’s what’s going on in the online world of economics.

  • This week, the SEC ruled that Wall Street hedge funds can advertise their services to regular investors. Previously, hedge funds were banned from soliciting investors through ads and direct-mail campaigns. Now, they can approach any investor with a net worth of over $1 million (not counting their homes). The Guardian’s Heidi N. Moore warns individuals not to be seduced by the glamor of hedge funds: “Giving money to a hedge fund does not mean investors will make a profit; it doesn’t even guarantee they’ll ever see the money again. Hedge funds are, by their nature, risky. Anyone who gets the investing itch after cashing in a 401(k) should picture an entire retirement without that money.” [The Guardian]
  • Oregon has a plan to make state colleges more affordable for in-state residents. Rather than take out student loans or pay tuition up-front, incoming students would sign an agreement to pay the state a small percentage of their future incomes. Details are still being worked out, but supporters estimate that students would commit to paying about 3 percent of their earnings over 20 years. In an unusual twist, the plan sprang from a class project by Portland State University students and their professor, Barbara Dudley: “The students and Ms. Dudley later made a presentation to state lawmakers, including state Representative Michael Dembrow, Democrat of Portland and chairman of the higher education committee. The Working Families Party of Oregon — of which Ms. Dudley was a co-founder — put the proposal at the top of its legislative agenda, and Mr. Dembrow and others ran with it.” [New York Times]
  • The Affordable Care Act will create fewer full-time workers and more part-time workers even without the employer mandate, according to calculations by University of Chicago economist Casey Mulligan. He writes: “By taking a part-time position, the employee can have comprehensive health insurance coverage and make almost the same money as he would in a full-time position. Thus the two traditional deterrents to part-time employment are disappearing.” [Economix]
  • Why progressives and conservatives need each other, from the mind of John Stuart Mill and via Miles Kimball: “…Only through diversity of opinion is there, in the existing state of human intellect, a chance of fair play to all sides of the truth.” [Confessions of a Supply-Side Liberal]
  • Higher capital requirements can help prevent bailouts in more ways than one, according to The Ticker’s Evan Soltas: “1. They make it less likely that a bank needs a bailout. Stronger bank balance sheets reduce the risk of insolvency. 2. They reduce the cost of letting banks go insolvent. More equity makes banks less domino-like. They can better absorb losses if counterparties fail. 3.They increase the government’s cost of breaking its no-bailouts commitment.” [The Ticker]

Understanding the End of Easing

This week, Federal Reserve Chairman Ben Bernanke indicated that the central bank is likely to start winding down its monetary easing program. Assuming U.S. economic growth continues apace, Bernanke anticipates pulling back later in 2013. A look at Dr. Polina Vlasenko’s recent article “Easy Money Talks” can help provide context for the Fed’s decision.

Vlasenko explains that while the Fed’s monthly bond buying may improve the economy in the short term, two issues make the strategy less than ideal in the long run. They are:

1. The Fed can increase the money supply, but it can’t control where the money goes.

Right now, banks are sitting on enormous stockpiles of extra cash. “Of the $530 billion the Fed has added to its balance sheet since September,” Vlasenko writes, “about $360 billion stayed in banks as excess reserves.” Money that’s not being lent can’t create additional economic activity–which is the goal of the easing program.

2. What borrowing and lending the policy does encourage may put the economy in a risky position.

“Easy money and record low interest rates create incentives for everybody to borrow,” Vlasenko writes, “possibly more than is prudent.”

Of course, borrowing is a necessary ingredient for a strong economy. But as the most recent global financial crisis showed, excessive debt can put people, businesses, and governments in danger. Moreover, Vlasenko argues that a government that becomes too dependent on borrowing may be tempted to sacrifice price stability for the sake of keeping interest rates low.

What do you think about the Fed’s announcement? Is it too soon to unwind easing, or is the timing right on schedule? Let us know in the comments.

For further reading:

Don’t Fear an Easing of the Fed’s Easy-Money Policy [Barron’s]

James Bullard: This is why I dissented at the Fed meeting this week [Washington Post]

Our Uneven Recovery

The recession hit a lot of Americans hard. But it didn’t affect all people equally. A new study from the Federal Reserve Bank of St. Louis reports that the worst-hit groups were families under 40, those without college degrees, and African-American or Hispanic households.

These groups are economically vulnerable in general. Two financial factors compounded their losses during the crisis. First, younger and less-educated families had large shares of their wealth tied up in housing. This put them on unsteady ground as the market tanked. Second, younger households and African-American or Hispanic families tended to have high debt-to-asset ratios. “Thus,” authors Ray Boshara and William Emmons write, “the very families most exposed to the economic fallout of a deep recession—fallout that came in the form of job loss or reduced income—possessed the weakest and riskiest balance-sheets.”

Not only was the recession particularly painful for these groups, the recovery has been more difficult. On average, younger, less educated, and African or Hispanic families are much worse off financially than they were before the crisis, according to a May Fed report by William Emmons and Bryan Noeth. Young, white or Asian families without high school diplomas have regained just 21 percent of the wealth they had before the economy crashed. Young, college-educated African-American families have recouped only 31 percent. By contrast, families headed by someone who is college-educated, white or Asian, and between the ages of 40 and 61 have recovered about 98 percent of their former net worth.

The Boshara-Emmons study also paints a bleak picture of wealth recovery for the majority of Americans. Earlier this year, the Fed estimated that households had regained about 91 percent of the wealth lost during the recession. But Boshara and Emmons say that number is misleading. Adjusting for inflation and population growth, the average household has recovered only 45 percent of its pre-crisis wealth. They also point out that two-thirds of the rebound in household wealth since 2009 comes from the stock market. That disproportionately benefits the wealthiest 10 percent of Americans, who own 80 percent of all stocks.

For further reading: If the Economy’s So Strong, Why Don’t We Feel Better?

What Would Variable Interest Rates Mean For Students?

student debtAh, summer: that time when we break out the boogie boards, slap on some sunglasses, and start debating student loan interest rates. Last summer, Congress agreed to extend the low 3.4 percent rates on federal student loans for another year. Those rates are set to double on July 1, rising to 6.8 percent–unless someone comes up with a better idea.

Policymakers now have several proposals on the table, including options from the Obama administration, House Republicans, and Democratic Senators Dick Durbin and Jack Reed. All three recommend a major change to our current student loan system: tie interest rates to market rates on Treasury notes. I sat down with AIER economist Polina Vlasenko to find out what that change would mean for students.

Right now, Congress sets the interest rates on student loans. Whatever the interest rate is when student borrowers take out a loan is the one they’ll keep until the loan is paid off. Vlasenko says these fixed-rate loans offer students one big advantage: certainty. Borrowers are protected from market fluctuations, and they’re able to make other financial decisions with a clear picture of what their loan payments will look like in the future.

But that certainty comes with a tradeoff. When the economy goes south and market interest rates plunge, students remain stuck with rates that are out of whack with the times. That’s why some graduates are paying 6.8 percent on federal loans right now while mortgage interest rates hover at near-record lows.

To help keep student loans in line with the overall health of the economy, policymakers are recommending variable interest rates tied to rates on Treasury bonds. That way, if you graduated in the midst of a recession, you wouldn’t have to pay much interest on your loans. But three years later, if the economy was booming, you’d start paying more. (That’s how the House Republican and Reed-Durbin proposals would work. Under the Obama plan, interest rates would vary with market rates, but would remain fixed for the life of the loan.) Read more

The Kids May Or May Not Be All Right

Ten years ago, over a third of people with student loan debt owned a house by the time they were 30. The educated millenials of today occupy a different economic landscape, according to a new study from the Federal Reserve Bank of New York. In fact, for the first time in at least a decade, young workers with student loans are less likely to purchase cars or houses than non-borrowers in the same age group.

This result might seem obvious: Of course people who have educational debt will delay taking on a mortgage or buying a new set of wheels. But in fact, it’s a reversal of the norm. Between 2003 and 2009, 30-year-olds with student loan debt were more likely to own homes than their non-borrower peers. That’s because student loan debt tended to mean that graduates had higher levels of education and income.

Homeownership rates tanked for both groups when the recession hit. Since then, for the first time in at least 10 years, people without student loans have become more likely to have a mortgage than people with educational debt. The same pattern is true when it comes to auto loans.

The study identifies two possible reasons for the shift. First, given today’s tough job market, recent graduates may have dimmer views of their future earning potential. That could make them proceed with caution when it comes to making big-ticket purchases. Second, student loan borrowers also have worse credit scores than non-borrowers, thanks to stricter debt-to-income ratio requirements and a rising student loan delinquency rate. That makes it harder for them to qualify for home and car loans. Read more

Why You Should Care About the Reinhart-Rogoff Firestorm

An academic debate among economists isn’t usually the kind of thing that gets people’s hearts racing. But the controversy over newly discovered problems with Carmen Reinhart and Kenneth Rogoff’s seminal study on public debt and economic growth is different. This is no tepid, ivory-tower, tea-and-catered-breakfast-pastries dispute. It’s sparked a heated conversation that has major implications for both future economic policy and for the way the field of macroeconomics changes–or doesn’t–with the times.

To recap what we know so far: In 2010, Harvard economists Reinhart and Rogoff released a paper called “Growth in a Time of Debt.” Among the paper’s key takeaways was that, on average, countries with debt-to-GDP ratios above 90 percent tend to see economic growth fall by about 0.1 percent annually. Proponents of austerity measures in both the U.S. and abroad used the study to help justify federal spending cuts in the wake of the global economic crisis.

But there’s just one problem. According to a new study by a University of Massachusetts-Amherst graduate student and two of his professors, Reinhart and Rogoff messed up. A coding error in their data spreadsheet excluded countries with high debt and average growth, throwing off the study’s results. The UM-Amherst crew also found bias in the way Reinhart and Rogoff weighted the countries in their study, as well as in their choice to exclude years that saw high debt and steady growth. When authors Thomas Herndon, Michael Ash, and Robert Pollin recalculated, they found that countries with a 90 percent debt-to-GDP ratio didn’t see growth decline. On average, their economies actually grew by 2.2 percent.

That’s a big difference. But perhaps even more important than the studies themselves are the potential ramifications of the debate that’s exploded over them. Here are just a few reasons why this controversy matters for everyone. Read more