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The last month has seen a virtual earthquake in the framework for economic policy following the 2008 collapse. The conclusions of Reinhart-Rogoff paper, which has been widely cited as the basis for austerity, were shown to be driven by spreadsheet errors. The corrected calculations provide no evidence for the dreaded debt cliff. Furthermore, subsequent analysis has shown that whatever link exists between debt and slow growth is almost exclusively the result of causation running from slow growth to high debt.

This new evidence should be sufficient to prompt a serious rethinking of the austerity agenda, especially in the euro zone countries where it has caused the most damage. Unfortunately, no change of course seems likely with top officials in the European Central Bank and the European Union remaining determined to pursue their austerity agenda regardless of what the evidence shows.

This agenda implies enormous pain for the crisis countries. The most hard hit countries, like Greece, Spain, and Portugal, would almost certainly be better off leaving the euro at this point. However, their leaders lack the political will to take this step, which means that they can look forward to a prolonged period of recession or stagnation and double digit unemployment.

The goal of this policy is to force down wages to the point where the crisis countries are again competitive with Germany and northern Europe. This may be doable, but the process could well require a decade or more. It should be clear to everyone by now that wages do not fall easily. If Germany refuses to allow more rapid inflation in the northern countries then the process of falling wages and prices in southern Europe will be a long slow grind.

No one should ever accept such viciously misguided policy as an unavoidable fact, but as long as the policy is in place the crisis countries must try their best to adjust to it. In this respect, they are missing an opportunity to place downward pressure on the other major immobile factor of production: land.

Much of the story of the boom and the resulting imbalances created in the last cycle was an unprecedented run-up in house prices. While prices have fallen considerably from their bubble peaks, they still have a long way to go to get to their pre-bubble levels.

Governments can help this adjustment process through the mechanism of a vacant property tax. The logic is simple, property that is vacant for a substantial period of time (e.g. 3-6 months) will face an additional tax (e.g. 1.0 percent of assessed value) in addition to whatever normal tax the property would face. The tax would give owners of vacant land, houses, and businesses a strong incentive to lower prices in order to have the property used.

The administration of the tax should be straightforward. In almost all cases property will already have an assessed value on public records, so this will require no new work from the tax authorities. In the case of commercial or rental property, property owners will have to show an income from the property or pay the tax. If they choose to lie about a vacancy, they will end up paying tax on income they are not receiving.

In the case of purely residential property, for example a homeowner who has moved or a developer who is holding out for a high price, property owners may lie about the status, but the risk of detection should cause many to pay the tax. (Part-year vacancies may have the delicious result that German property owners will have to pay a substantial tax on summer homes in Greece or Spain.) An almost inescapable outcome is that the government will collect additional revenue and reduce vacancies, putting downward pressure on property prices and rents.

This will have a hugely positive economic effect. Rent typically accounts for 30-40 percent of the consumption basket of ordinary workers and often more than 50 percent for low-income workers. If this tax could lower average rents by 10 percent it would effectively raise real wages by 3-4 percent. This would make the process of internal devaluation far more palatable to workers. Falling rents on commercial properties should also be a boon to business.

While many of the people who will be hit by falling land prices are not wealthy, property owners as a whole are certainly much better off than those without property. And the people who will pay the most tax will be holders of highly valued vacant properties.

It is also important to realize that the tax would primarily be accelerating a process of market adjustment that would take place in any case. If the leadership of the European Union persists in its policy of internal devaluation, then prices and wages in the crisis countries will have to decline to restore trade balances. The only question is the pace of the adjustment.

By hastening the adjustment this tax will bring forward the date when these countries can resume normal growth. Furthermore, by pushing down land prices sooner rather than later, the tax will be redistributing wealth from current property owners to future property owners. This is a reasonable policy goal in a context where young people have felt the brunt of mass unemployment.

A vacant property tax is hardly a panacea and it would be much better if the ECB would reverse its policy and seek to promote growth and inflation in the core countries. However, given the range of choices available to the governments in the crisis countries, a vacant property tax should rank high on the list.

Cutting Social Security and Not Taxing Wall Street

Wed, 15 May 2013 14:15:30 GMT

Dean Baker
Truthout, May 15, 2013

See article on original website

As we move toward the fifth anniversary of the great financial crisis of 2008, people should be outraged that cutting Social Security is now on the national agenda, while taxing Wall Street is not. After all, if we take at face value the claims made back in 2008 by Fed Chairman Ben Bernanke and former Treasury Secretaries Henry Paulson and Timothy Geithner, Wall Street excesses brought the economy to the brink of collapse.

But now the Wall Street behemoths are bigger than ever and President Obama is looking to cut the Social Security benefits of retirees. That will teach the Wall Street boys to be more responsible in the future.

Most people are now familiar with President’s Obama’s proposal to cut Social Security by reducing the annual cost-of-living adjustment (COLA). While the final formula is somewhat convoluted, the net effect is to reduce benefits by an average of roughly 3.0 percent.

Since Social Security benefits account for more than 70 percent of the income of a typical retiree, this cut is more than a 2.0 percent reduction in income. By comparison, a wealthy couple earning $500,000 a year would see a hit to their after-tax income of just 0.6 percent from the tax increase that President Obama put in place last year.

While President Obama is willing to make seniors pay a price for the economic crisis, his administration is unwilling to impose any burdens on Wall Street. Specifically, it has consistently opposed a Wall Street speculation tax: effectively a sales tax on trades of stock and derivatives. The Obama administration has even used its power to try to block efforts by European countries to impose their own taxes on financial speculation.

If the idea of taxing stock trades sounds strange, it shouldn’t. The United States used to impose a tax of 0.04 percent until Wall Street lobbied to eliminate it in the mid-1960s. Many countries, including the United Kingdom, Switzerland, China, and India already impose taxes on stock trades.

The tax in the UK is 0.5 percent on stock trades (0.25 percent for both the buyer and the seller). It dates back more than three centuries. The country raises more than 0.2 percent of GDP ($32 billion in the United States) from the tax each year. The tax has not prevented the London stock exchange from being one of the largest in the world.

There are currently two bills in Congress for a similar tax in the United States. A bill by Minnesota Representative Keith Ellison would impose the same tax as the UK on stock trades and would apply a scaled rate to options, futures, credit default swaps and other derivative instruments. It could raise more than $150 billion annually or more than $2 trillion over the ten year budget window.

A second bill has been put forward by Iowa Senator Tom Harkin and Oregon Representative Peter DeFazio. This bill would apply a 0.03 percent tax to trades of stock and a wide range of other financial assets. According to the Joint Tax Committee, the bill would raise close to $40 billion a year or over $400 billion over a ten-year budget window once it is implemented.

Unfortunately the administration has consistently opposed both bills. It claims that it is concerned about the incidence of these taxes – that ordinary investors would see large burdens from the tax. It also claims to be worried that the taxes will disrupt financial markets by making trading more costly.

Neither of these stories passes the laugh test. Ordinary investors don’t trade much, and therefore are not going to feel much impact from the tax. If someone with $100,000 in a 401(k) (this is much larger than the typical 401(k)) turns it over at the rate of 50 percent annually, they would pay $15.00 each year as a result of the Harkin-DeFazio tax.

Furthermore research shows that investors reduce their trading as costs increase. This means that if the tax increases trading costs by 20 percent, then investors will reduce their trading by roughly the same amount (in this example, turnover would fall to 40 percent annually). That means that the net cost of turnover in a 401(k) will barely change for a typical investor as a result of the tax. Wall Street would just see much less business.

So the Obama administration wants us to believe that it is willing to cut the Social Security benefits of retiree living on $15,000 a year in Social Security by $450 but it opposes a Wall Street speculation tax because it is concerned that investors with $100,000 in a 401(k) may pay a few dollars a year in additional trading costs. Only a reporter with the Washington Post would believe a story like that.

The other part of the Obama administration’s story is equally laughable. The cost of financial transactions has plummeted in the last four decades because of computers. Even the Ellison tax rate would just raise costs back to their mid-80s level. The Harkin-DeFazio tax rate would probably still leave costs lower than they were in 2000.

The country certainly had a vibrant capital market and stock exchange in the 1980s, taking costs part of the way back to this level will not prevent Wall Street from serving its proper role of transferring capital from savers to borrowers. It will just clamp down on speculation.

The basic story is very simple. Wall Street bankers have a lot more political power than old and disabled people who depend on Social Security. That is why President Obama is working to protect the former and cut benefits for the latter.

McKinsey on Young College Graduates

Tue, 14 May 2013 19:45:00 GMT

McKinsey and Company released a report this week that found 42 percent of recent college graduates are currently in jobs that do not require four-year degrees. This finding was comparable to those estimates of previous studies that I mentioned in this blog post. McKinsey surveyed more than 4,900 recent graduates (2009-2012) using the learning platform, Chegg. Almost 45 percent of graduates of public universities reported that their current job requires less than a four-year degree compared with only 34 percent of those from private universities.

Almost half of recent college graduates did not get jobs in their field of choice. The majority of these underemployed appear to work in the retail or restaurant industries. Among those working in the retail industry, 78 percent had desired to enter a different industry prior to graduating. Similarly, 81 percent of those graduates working in the restaurant industry had wanted to enter a different industry. This study once again showed that many of our recent graduates are currently underutilized.

EVENT: A Bold Approach to the Jobs Emergency: Setting the Political Agenda for 2014 and 2016

Tue, 14 May 2013 15:30:00 GMT

June 4, 2013

A Bold Approach to the Jobs Emergency: Setting the Political Agenda for 2014 and 2016

8:30 a.m. - 4:00 p.m.
20 F Street Conference Center
20 F Street, NW
Washington, D.C. 20001

There is a jobs emergency in the United States. The American people need new thinking on jobs and immediate and comprehensive action toward a better, fairer system of work, achieved through the collective efforts of diverse thinkers with strong progressive ideas. The Roosevelt Institute's Rediscovering Government Initiative will be hosting a daylong conference exploring the roles of government, policy, and activism in addressing historic levels of unemployment and economic misery. CEPR Co-Director Dean Baker will take part in a 9:30 a.m. panel on "Getting to Full Employment," and CEPR Senior Economist John Schmitt will take part in a 1:45 p.m. session titled "Is Education the Answer?" You can RSVP for the panels here.

"Free Trade" Agreements Won’t Create Jobs But a More Competitive Dollar Would

Mon, 13 May 2013 18:28:00 GMT

Mark Weisbrot
Fresno Bee (CA), May 9, 2013
McClatchy Tribune Information Services, May 9, 2013
Lexington Herald-Leader (KY), May 9, 2013
Hanover Evening Sun (PA), May 9, 2013
Merced Sun-Star (CA), May 9, 2013
Bradenton Herald (FL), May 9, 2013
Beaufort Gazette (SC), May 9, 2013
Bellingham Herald (WA), May 9, 2013
Kansas City Star (KS), May 9, 2013
Anchorage Daily News (AK), May 9, 2013
Modesto Bee (CA), May 9, 2013
Wapakoneta Daily News (OH), May 11, 2013
Salinas Californian (CA), May 11, 2013
Marysville Appeal-Democrat (CA), May 12, 2013
Gainesville Times (GA), May 12, 2013
Schenectady Gazette (NY), May 12, 2013
The Times of India, May 12, 2013
Youngstown Vindicator (OH), May 13, 2013
Arizona Daily Star (AZ), May 13, 2013
En Español

The Trans-Pacific Partnership (TPP) is a very special trade agreement. It is so special that our government officials who are negotiating it want to keep it completely secret from us. It’s like a special Christmas present so they want it to be a surprise! And to make sure it’s a surprise, they won’t even let a single member of Congress see what they are negotiating. However, hundreds of corporations have been given access to the draft text.

This should give you some idea of our government’s trade agenda. President Obama says that he wants to create jobs through trade, but this agreement is more likely to cost jobs here than to create them. Leaked drafts of parts of the agreement indicate that our negotiators are trying to increase patent protection for pharmaceutical companies, for example. This will not create jobs, although it may make our big drug companies and their shareholders richer.

When our government tells us such an agreement will create jobs in the U.S., they are saying that the agreement will increase our exports faster than imports. So, for the TPP, they are saying that we will increase our exports to Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam, and now possibly Japan faster than our imports from these countries. That is unlikely. We were promised the same thing with NAFTA two decades ago, but it didn’t work out that way at all.

Of course the most important thing our government needs to do to create jobs here is to stimulate the economy by spending more money. Private demand for goods and services has not recovered sufficiently from the Great Recession, and so we still have more than 21 million people who are unemployed, working part time involuntarily, or have given up looking for work. Unfortunately, because of the power of both ideology and special interests, our government is going in the wrong direction, weakening the economy by reducing spending.

There is one way in which we can increase exports more than imports, and that is by lowering the value of the U.S. dollar against the currencies of our trading partners. A lower dollar would mean that our exports are more competitive and imports more expensive. This would reduce our trade deficit, and that would definitely create jobs here, including manufacturing jobs. Our trade deficit has come down lately – it has fallen from 5.7 percent of GDP at its peak in 2006 to about 3.6 percent today. But this is overwhelmingly because of the Great Recession and the weak recovery since the recession officially ended nearly four years ago. When the economy returns to normal growth, imports will shoot up, because the dollar is overvalued.

Of course our most powerful corporations are fine with an overvalued dollar. Wall Street likes it because it keeps inflation lower. Other big corporations, and Wall Street too, like it because it means they can buy things (and labor) cheaper around the globe. As with our trade agreements, the big corporations that dominate our government don’t care so much about jobs or whether we have a manufacturing sector. So you do not hear much debate about what an overvalued dollar has done – or continues to do -- to our economy and employment.

Our rulers have a vision of the United States extracting more monopoly rents from other countries, increasingly developing nations, through greater patent and “intellectual property” protection. Their big banks want to grab more financial services markets overseas too. There is lots of money to be made for the “1 percent,” even if our domestic economy remains sluggish, our infrastructure and educational system deteriorate, and jobs – even more, good jobs – remain scarce at home. That is their so-called “free trade” agenda.