Growth Without Jobs

From yesterday’s NYT editorial:

In a statement last Wednesday — just hours after the government reported headline-grabbing economic growth of 4 percent in the second quarter —the Federal Reserve said it would continue to stimulate the economy because, despite overall growth, the labor market remained weak. In a speech the same day in Kansas City, Mo., President Obama echoed the Fed. “I’m glad that G.D.P. is growing, and I’m glad that corporate profits are high, and I’m glad that the stock market is booming,” he said, (which it was before profit-taking at week’s end dented its performance). “But what I really want to see is a guy working 9 to 5, and then working some overtime.”

Those cautionary views were validated on Friday, when the employment report for July showed slower job growth, flat earnings, stagnant hours and stubbornly high long-term unemployment. The challenge now, as always, is to translate official concern over the job market into change for the better.

The economy added 209,000 jobs last month, a decent enough figure in and of itself, but a slow start to the third quarter compared with the average monthly gain of 277,000 last quarter. Worse, July’s relatively slow pace of growth may not be sustainable. Many of last month’s job gains were in automobile manufacturing, which could reflect a statistical blip from shorter-than-usual factory shutdowns in July rather than new positions added.

Moreover, the upswing in the auto industry is tied to a surge in high-cost auto loans to uncreditworthy borrowers, an unstable foundation for future growth. In addition, the sectors that generally add the most jobs each month all slowed in July from their pace in June, including bars and restaurants, retail, health care and temporary services. As for the president’s vision of a 40-hour week plus overtime — well, if only. For the fifth straight month, the average workweek for most of the labor force was stuck at 33.7 hours. Factory overtime, once a mainstay in the lives of working-class Americans, dropped in July for the second straight month. Average hourly wages have, at best, kept pace with inflation over the past year. Pay is languishing, but working longer hours is not an option.

In its statement, the Fed said it was basically a tossup whether the economy would speed up or slow down. Faster growth, however, generally requires a healthy real estate market and that requires a healthy job market, especially for younger workers.

But in July, the jobless rate for workers ages 25 to 34 was 6.6 percent, compared with 6.2 percent over all. Among young people who are working, many are in low-wage or part-time jobs, or jobs that otherwise do not make use of their education or experience. So it is not surprising that the sale of new homes plummeted recently at the fastest pace in nearly a year. Sales of existing homes have risen, a positive sign but a questionable trend given the still-ailing job market.

The most likely scenario is for the economy to continue to muddle along at an overall annual pace of 2 percent to 2.5 percent. The Fed has affirmed its commitment to keep interest rates low until the labor market recovers, but the real test of its resolve will come if and when inflation meets or exceeds its preferred annual rate of 2 percent. In a sluggish economy with significant employment slack, continued stimulus policy would be called for even if inflation exceeded the target, but whether the Fed will oblige is unknown.

As for Mr. Obama, he seems to understand that with a Republican-dominated House and Republican senators keen on winning a majority in the Senate, he is on his own to push for change. He can and should continue to issue executive orders to improve pay and working conditionsfor the federal contract work force. He should work with the Labor Department on upcoming rules to re-establish a broad right to time-and-a-half for overtime. And he should continue to rally public support for Democratic legislation to raise the minimum wage and to combat the growing use of unpredictable part-time scheduling.

None of that is enough to counter significantly the forces responsible for job growth that is too weak, wages that are too low and workweeks that are too short. For that, a functional political climate is needed, one in which leaders find compromise solutions to the nation’s problems. Without that, the Fed’s modest prediction that the economy has an even chance of getting better may in fact be too optimistic.

Obama Plans New Scrutiny for Contractors on Labor Practices

From today’s NYT “Politics” section by Michael Shear and Steven Greenhouse:

President Obama is expected to sign an executive order on Thursday that could make it harder for companies that violate wage, labor and anti-discrimination laws to win federal contracts, administration officials said on Wednesday.

Under the order, Mr. Obama will require federal contractors to disclose any labor violations that their companies committed over the previous three years, with government procurement officials then being advised to steer clear of those with repeated and egregious violations.

“The president’s view is that taxpayer dollars should not reward corporations that break the law,” said an administration official, who insisted on anonymity because the executive order had not yet been issued. The order would affect about $500 billion a year in contracts like those awarded to make Navy uniforms and run federal cafeterias.

Read the entire article here.

The Clear Benefits of a Higher Wage

From the New York Times Editorial Board:

Republicans sputtered with outrage when the Congressional Budget Office said that immigration reform would lower the deficit, strengthen Social Security and speed up economic growth. They called for the office to be abolished when it dared to point out that tax cuts raise the deficit or when it highlighted the benefits of health care reform. But now that the budget office has predicted (and exaggerated) the possibility that an increase in the minimum wage might result in a loss of jobs, Republicans think it’s gospel.

“This report confirms what we’ve long known,” said a spokesman for the House speaker, John Boehner. “While helping some, mandating higher wages has real costs, including fewer people working.”

What Republicans fail to mention is that Tuesday’s report from the budget office, a federal nonpartisan agency, was almost entirely positive about the benefits of raising the minimum wage to $10.10 by 2016, as President Obama and Congressional Democrats have proposed.

But the report said there could be a cost to the wage increase, and most of the headlines have focused on the possible loss of 500,000 jobs, or about 0.3 percent of total employment. That bears further scrutiny, because, unlike the benefits, the employment estimates have been disputed by a wide variety of nonpartisan economic studies.

What the report actually says is that there is a two-thirds chance that a $10.10 wage would produce job losses in a range from just above zero to one million. The number 500,000 was simply picked as a midpoint. (There is a one-third chance the wage increase would lead to more than a million job losses or actually increase employment.) A range that big is essentially the budget office’s way of saying it doesn’t really know what would happen to employment if the wage goes up, because, as the report says, there is vast uncertainty about how much wages will go up on their own over the next three years, and uncertainty about how employers would react to a higher minimum.

The budget office didn’t do its own research on those variables. It surveyed the economic literature on the subject, and chose a figure more conservative than the most recent and rigorous studies have found. That means the job-loss figure needs to regarded skeptically, as a careful reading of the report shows, while the benefits are undisputed.

Those benefits to millions of low-wage workers overwhelmingly outweigh the questionable possibility of job losses. Lawmakers who focus only on the potential downside of an enormously beneficial policy change are the same ones who never wanted to do it in the first place.

Brookings study finds income inequality in America’s largest cities

From the Brookings Institute “Metropolitan Opportunity Series” Papers:

In December 2013, President Obama gave a speech on economic mobility, in which he called income inequality and lack of upward mobility “the defining challenge of our time.”

That challenge is front and center in America’s big cities today. Obama’s speech followed a series of municipal elections in November 2013 in which inequality figured prominently as a campaign issue. Foremost among these was in New York City, where Bill de Blasio won a landslide election after campaigning to address what he called a “Tale of Two Cities.” Similar themes were sounded in the successful campaigns and first days in office of Marty Walsh in BostonEd Murray in Seattle, and Betsy Hodges in Minneapolis. The “Google Bus” in San Francisco’s Mission District has shone a spotlight on growing economic divisions within that city. And income inequality will no doubt be a central issue in mayoral elections during the next couple of years in cities like Chicago and Washington, D.C.

Inequality may be the result of global economic forces, but it matters in a local sense. A city where the rich are very rich, and the poor very poor, is likely to face many difficulties. It may struggle to maintain mixed-income school environments that produce better outcomes for low-income kids. It may have too narrow a tax base from which to sustainably raise the revenues necessary for essential city services. And it may fail to produce housing and neighborhoods accessible to middle-class workers and families, so that those who move up or down the income ladder ultimately have no choice but to move out.

There are many ways of looking at inequality statistically; one useful way to measure it across places is by using the “95/20 ratio.” This figure represents the income at which a household earns more than 95 percent of all other households, divided by the income at which a household earns more than only 20 percent of all other households. In other words, it represents the distance between a household that just cracks the top 5 percent by income, and one that just falls into the bottom 20 percent. Over the past 35 years, members of the former group have generally experienced rising incomes, while those in the latter group have seen their incomes stagnate.

The latest U.S. Census Bureau data confirm that, overall, big cities remain more unequal places by income than the rest of the country. Across the 50 largest U.S. cities in 2012, the 95/20 ratio was 10.8, compared to 9.1 for the country as a whole. The higher level of inequality in big cities reflects that, compared to national averages, big-city rich households are somewhat richer ($196,000 versus $192,000), and big-city poor households are somewhat poorer ($18,100 versus $21,000).

Read the entire study here.

Minimum Wage Increase Would Have Mixed Effects, CBO Report Says

From the New York Times by Annie Lowrey:

A popular Democratic proposal to raise the minimum wage to $10.10 an hour, championed by President Obama, could reduce total employment by 500,000 workers by the second half of 2016. But it would also lift 900,000 families out of poverty and increase the incomes of 16.5 million low-wage workers in an average week.

That is the mixed conclusion of an assessment on how raising the minimum wage would affect incomes, employment and the federal budget. The report was released on Tuesday by the nonpartisan Congressional Budget Office, whose views often have a powerful influence on the fate of legislation.

The nuanced analysis provided instant fuel for both supporters and critics of raising the federal minimum wage, a policy heavily favored by Democrats but viewed skeptically by Republicans in Congress.

Republicans contended the policy would be a job-killer, while Democrats asserted it would help alleviate poverty. Economists said both might be right.

And the White House, in an unusual twist, openly disputed the budget office’s math.

Jason Furman, the chairman of the White House’s Council of Economic Advisers, said that the office’s estimate of the potential lost jobs might be too high. In a call with reporters, Mr. Furman said that finding no jobs effect at all would be a “perfectly reasonable estimate.”

The analysis does not reflect “the consensus view of economists,” he said. “Sometimes, you have to have respectful disagreement.”

But the report was embraced by leading Republicans, who have opposed the legislation despite its widespread popularity in public opinion polls. “Raising the minimum wage could destroy as many as one million jobs, a devastating blow to the very people that need help most in this economy,” said Senator Mitch McConnell of Kentucky, the minority leader. “If and when Democrats try to push this irresponsible proposal, they should be prepared to explain why up to a million Americans should be kept from having a job.”

Democratic lawmakers and liberal groups joined the White House in challenging that view. “I haven’t seen Republicans this excited about something that bucked the trend in their favor since the last poll showing Mitt Romney was about to be elected president,” said Brad Woodhouse, the president of Americans United for Change, a liberal advocacy group. “But sorry to rain on their parade — one report does not a trend make.”

The budget office found that lifting the federal minimum wage, currently $7.25 an hour, would have a complicated effect on the labor market, acting as a boon and a burden for businesses and workers.

Over all, the budget office estimated that lifting the minimum wage to $10.10 and indexing it to inflation would reduce total employment by about 0.3 percent, or 500,000 workers. But it cautioned that the estimate was imprecise, with the job losses likely to fall in a range from practically nothing to one million.

The proposal would result in winners and losers among the low-wage workers it would target, the report found. Some businesses, squeezed between increased costs and the inability to raise prices or sell more goods, would hire fewer low-wage workers because of a higher minimum wage, the report said.

But increasing the minimum wage would bolster the earnings of about 16.5 million workers: providing $5 billion a year more for families living in poverty, $12 billion a year more for families earning from one to three times the poverty threshold.

Several top labor economists said on Tuesday that the budget office was overstating the proposal’s effect on the job market. Lawrence Katz of Harvard, for instance, said that the budget office had used “a lot of off-the-shelf estimates” of the jobs effect, and that if it had emphasized findings from higher-quality studies, it would have found a smaller or negligible impact on total employment.

More conservative economists said that the profession had long viewed raising the minimum wage, like any increase in price, as having an effect on the demand for jobs.

“The Congressional Budget Office confirms the president proposes an unprecedented increase in the minimum wage that will cost hundreds of thousands of jobs,” said James Sherk, who analyzes the labor markets for the Heritage Foundation, a right-of-center research group.

Liberal economists said that quibbling over the jobs numbers neglected a central finding in the report: that many workers would benefit from an increase in income.

“The C.B.O. chose a higher number than I think reflects the best work, but they’re not way off the reservation,” said Jared Bernstein, a former Obama administration economist now at the Center on Budget and Policy Priorities. “Even if they’re right, the beneficiaries far, far outweigh the people who are hurt by this.”

The budget office analyzed two proposals in its report. The first would increase the minimum wage to $10.10 by mid-2016 and would tie it to the Consumer Price Index, so that it would increase with inflation over time. It would also increase the minimum wage for workers who receive tips for services.

The second proposal would increase the minimum wage to $9, without any indexing for inflation. That would have much smaller effects, the budget office found. It would reduce employment by 100,000 workers by the second half of 2016, and push about 300,000 people above the poverty line.

The higher minimum wage would reduce employment in two main ways, the budget office report said. Businesses facing higher labor costs would raise prices, passing those higher costs on to their customers. That would lead their customers to cut back on their purchases, meaning that businesses would need fewer workers.

Raising the minimum wage would also make hiring low-wage workers more expensive relative to other investments, like new machinery. Businesses might then reduce their use of low-wage workers and shift their spending toward other things, like automated systems.

But a higher minimum wage would offset at least part, if not all, of that effect by helping increase spending by lower income workers throughout the economy.

Read the entire article here.

SOTU 2014 focuses on jobs, fairness

President Obama’s State of the Union Address last week highlighted a number of themes that focused on creating more opportunities for working Americans by streamlining the tax code, providing financial support for small business innovation, and making older industries like auto manufacturing and newer industries like vaccine manufacturing more competitive in the global economy.

Underlying all this was a promise to get the country back on track after it went off the rails in 2008 from a financial collapse that was precipitated by poor financial oversight, risky investment, and gross mismanagement of the nation’s financial and banking sectors. Obama claimed that the recession was making several trends worse, including growing income inequality between the wealthy and the rest of Americans. Although the President called on Congress to end its politics of obstruction and act to reform a sluggish economic recovery, he indicated that he didn’t expect much from the Republican Party, and he would move ahead without them wherever executive orders could be made on these issues in place of substantial legislation.

Here is an excerpt of Obama’s SOTU 2014 that focuses on the theme of economic recovery and fairness:

And in the coming months — (applause) — in the coming months, let’s see where else we can make progress together. Let’s make this a year of action. That’s what most Americans want, for all of us in this chamber to focus on their lives, their hopes, their aspirations. And what I believe unites the people of this nation, regardless of race or region or party, young or old, rich or poor, is the simple, profound belief in opportunity for all, the notion that if you work hard and take responsibility, you can get ahead in America. (Applause.)

Now, let’s face it: That belief has suffered some serious blows. Over more than three decades, even before the Great Recession hit, massive shifts in technology and global competition had eliminated a lot of good, middle-class jobs, and weakened the economic foundations that families depend on.

Today, after four years of economic growth, corporate profits and stock prices have rarely been higher, and those at the top have never done better. But average wages have barely budged. Inequality has deepened. Upward mobility has stalled. The cold, hard fact is that even in the midst of recovery, too many Americans are working more than ever just to get by; let alone to get ahead. And too many still aren’t working at all.

So our job is to reverse these trends.

Read the full text and watch the video of President Obama’s SOTU speech here.

Five regulatory agencies approve Volcker Rule, curbing risky banking

Five federal regulatory agencies approved the so-called “Volcker Rule” today, restricting commercial banks from trading stocks and derivatives for their own gain and limits their ability to invest in hedge funds. The five agencies include the Federal Reserve, the Federal Deposit Insurance Corporation, Securities and Exchange Commission, the Commodity Futures Trading Commission and the Comptroller of the Currency:  all five agencies approved the Volcker rule, named after former Fed Chair Paul Volcker who championed restrictions on proprietary trading by banks, which puts into effect the centerpiece of the Dodd-Frank Act’s attempt to reign in financial corruption on Wall Street.

Congress passed and regulators approved the legislation despite the lobbying efforts of Wall Street banks, and the rule itself includes new wording aimed at curbing the risky practices responsible for the $6 billion trading loss, known as the so-called “London Whale,” at JPMorgan Chase last year. The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by Congress and signed into law by President Obama in July 2010, but the complex nature of financial regulation and the lobbying efforts of Wall Street slowed down the process of enacting the law.

The outgoing Fed Chair Ben S. Bernanke stated that “getting to this vote has taken longer than we would have liked, but five agencies have had to work together to grapple with a large number of difficult issues and respond to extensive public comments.”

Consumer advocacy groups praised the spirit of the rule as much needed reform of the greed and corruption that have become synonymous with Wall Street’s practices in the last decade, which led to the catastrophic consequences of the Great Recession including trillions of dollars and millions of jobs lost.

Dennis Kelleher, the head of Better Markets, said:  “The rule recognizes that compliance must be robust, that C.E.O.’s are responsible for ensuring a compliance program that works, that compensation must be limited, and that banned proprietary trading cannot legally be disguised, as market making, risk mitigating hedging or otherwise…Those requirements will not end all gambling activities on Wall Street, but should limit them and reduce the risk to Main Street.”

For a good summary of the Volcker Rule watch this video.

 

House GOP shuts down government, harming workers and economy alike

The federal government remains in partial shut down today after the House GOP, spurred on by a fringe element of Tea Party extremists, refused to pass legislation authorizing a budget until and unless funding for the Affordable Care Act is eliminated or the implementation of some of its important features are delayed.

The problem is that the ACA is already law and has been delayed once so that insurance exchanges could be set up. The GOP demands for rolling back so-called “Obamacare” therefore amount to blackmail and coercion by a minority of politicians who lost the legislative fight to defeat it. Now like children who can’t get their way, Republicans are using the budget battle and looming debt-ceiling crisis to try and gain concessions to which they have no right.

The GOP says it is the party of responsible economics and ordinary Americans, but when one looks at their track record, all that can be seen is a list of failures and lies:

1. The GOP’s economic ideology and subsequent policies under President Bush deregulated the economy, particularly the financial sector, to risky levels never before seen. As a result banks and financial institutions engaged in increasingly irrational behavior in order to make short but huge profits that led to the Great Recession in 2008. The idea that markets work better without government interference is a facile talking point, but in reality it means leaving capitalists to do whatever they want no matter how the risky the outcomes. Government oversight of the financial industry is not the same thing as “interference” unless one thinks it is better to let wealthy and powerful banks and hedge funds to loot the financial sector and outsource the cost to the taxpayers, which is exactly what happened. The rich got richer, but Americans had to foot the bill for it in the form of government bailouts of banks, the auto industry, and housing market.

2. The GOP’s opposition to the Affordable Care Act is also an irrational piece of fantasy motivated by the false economic ideology it continues to promote in the face of overwhelming facts that “free” markets basically amount to permitting market failures. The problem of uninsured Americans is the single largest example of a market failure in recent history. Over 50 million Americans lack health insurance because the costs have exceeded the demand—individuals and businesses alike simply cannot afford insurance because of sky-rocketing medical care costs and declining marginal profits of insurance companies. The Affordable Care Act uses markets to incentivize competition and create better access for the uninsured. Why does the GOP resist using market exchanges for providing health care? The answer is that Republicans irrationally assume (along with a public blitz of misinformation) that the federal government is making a grab for health care, and that “socialist” Obama is undermining democracy, but this is red herring and racism rolled into one. The truth is that the Affordable Care Act will help millions of ordinary Americans get access to health insurance they could not otherwise afford, which means that the GOP’s opposition to it reveals that it really doesn’t care about ordinary Americans at all.

The sad fact is American politics is increasingly partisan and divisive because it is increasingly driven by personalities, and they are increasingly uneducated, ill-mannered, and downright spiteful personalities. Just listen to Rep. Steve King (R-IA) who claims that Republicans are “right” that the Affordable Care Act will destroy America. Since the law went into effect yesterday, the sky hasn’t fallen but Republicans like King keep on believing they are right, and this dangerous mentality of extremism is at the root of the problem. It must be rooted out methodically before this fringe minority destroys America and the global economy along with it.

With Summers out, Yellen is now favored to lead the Federal Reserve

In the last month, a groundswell of opposition from economists and the public alike has led to positive development. After a major announcement last week by 3 key Democratic Senators who said they would oppose the nomination of Larry Summers, it looks like Janet Yellen, currently the second in command at the Fed, is now favored to be President Obama’s pick to lead the Federal Reserve.

Watch this video on the nomination of Janet Yellen, the first woman nominated to the Chair of the Fed.

Nobel laureate criticizes Summers for deregulation leading to recession

Nobel laureate economist Joseph Stiglitz makes a case for Janet Yellen to head the Federal Reserve, and criticizes Larry Summers, who is President Obama’s alleged first choice, for his support of economic deregulation of the financial sector, which precipitated the 2008 recession.

Read the full article in Stiglitz’s weekly NYT blog, “The Great Divide.”