Policy Shop

Policy as if people mattered

Reinhart and Rogoff's Theory of Government Debt is Dead

NBER
Carmen Reinhart and Kenneth Rogoff wrote a wildly influential book four years ago called This Time Is Different .* The thesis of the book is that when a government has a debt-to-GDP ratio above 90 percent, it is terrible for economic growth. The authors also followed up with a couple of papers arguing the same thing. Pro-austerity forces here and elsewhere in the world have seized upon the book to push their favored policies. From the beginning, the paper was met with extreme skepticism among the left. The theory could have gotten the causation backwards: perhaps low growth drives high debt, not the other way around. The theory also seemed hard to understand within any macroeconomic frame. It would follow from it that a government that holds assets instead of selling them to reduce debt somehow caused growth to decline, which is just a very confusing idea. The conceptual problems could iterate on and on. Beyond those problems, other researchers also had a hard time replicating their...

Wall Street's Grand Bargain

Flickr/ White House
Three developments in finance cropped up in the last days that must be read as a single story. First , Blankfein, Dimon, and the rest of the Wall Street bigwigs visited the White House to meet with the president and his team. That team consisted of Denis McDonough (Chief of Staff); Valerie Jarrett (Senior Adviser); Cecilia Munoz (Domestic Policy Adviser); Gene Sperling (National Economic Council Director); and Alan Krueger, (Chairman, Council of Economic Advisers). The meeting was secret, but we can deduce much from its attendance. The White House appears to want Wall Street support in the policy/politics battles to come. This is not far fetched, especially coming on the heels of steak dinners served to Republican Senators earlier this week and the Obama budget that grabbed the “third rail” issue of Social Security. But every conversation has two sides. What did the power brokers of Wall Street want in return? High on the list is a roll back of financial reform. Industry...

Cash Benefit Programs Are Not Really Government Spending

Wikimedia/Social Security Administration
For accounting purposes, it makes sense to count programs like Social Security, disability insurance, and Temporary Assistance for Needy Families as government spending. But these kinds of programs are not really government spending because the government does not actually direct how the money is spent. Unlike building a road, for instance, where the government decides that a road should be built and then pays to make it happen, cash benefit programs involve the government distributing money to people and allowing them to decide where to spend it. This is an important distinction because many of the problems people often raise about government spending simply do not apply to cash benefit programs. For example, one common criticism of government spending is that the government is incapable of figuring out what people actually want, and therefore wastes a bunch of money on projects and services that do not deliver much value. Another common criticism is that directly spending money...

The Horrible Youth Labor Market

Flickr
One of my pet peeves about the coverage surrounding the plight of young people in America is that it focuses heavily, and at times exclusively, on how well recent college graduates are doing. Why people focus on this is a mystery to me. I suspect it is because the chattering classes are almost all college graduates, as are their friends. To them, being a recent college graduate is simply what it means to be a young person in the labor market. The focus on college graduates is pernicious for a couple of reasons. First, most young people are not college graduates. So on a purely descriptive level, focusing on graduates fails to capture what the reality of being a young person looking for work actually looks like. Second, college graduates are considerably better off than their non-degreed peers. As bad as being a recent college graduate might be, being in the same position without a degree is so much worse. The primary focus on young college graduates skews our understanding of the...

Industry-Funded High-Frequency Trading Study Falls Short

I recently published an article in response to a study of high-frequency trading (“HFT”) by Professor Charles M. Jones of Columbia Business School and an opinion piece he published simultaneously in Politico . My article focused on the funding of the research by Citadel LLP, a major HFT user. It also pointed out broad concerns about the study, which asserts that computer-based algorithmic trading provides substantial net value to the economy. Keeping in mind the Professor Jones’ funding source, it is useful to look into the studies on which the professor relies (his independent work was limited to interpretation). These should be compared with other academic work that draws alternative conclusions. The studies that he cites as supportive are generally based on conventional views of the efficiency of markets. These studies identify lower trading costs that have been experienced during the years that HFT has emerged as a dominant force in the equities and commodities markets. He...

What New York’s (Partial) Victory on Paid Sick Days Means

New York Paid Leave Coalition
The news broke last night: a deal to bring paid sick days to a vote in the New York City Council has been reached. As I noted in my recent testimony on the bill , paid sick time is far from a pie-in-the-sky idea. It is the law in 145 countries around the world as well as the state of Connecticut, and the cities of San Francisco, Washington D.C., Seattle, and Portland, Oregon. Based on how this policy has operated in practice, the evidence strongly suggests that this is a successful policy and that it does not harm employment or the growth of small businesses as opponents have argued. The majority of New Yorkers —and indeed the majority of Americans —believe that one shouldn't lose a day's pay (or their job itself) just because they get sick. Every working person should be guaranteed at least a few paid days off a year for illness. My case was based on careful studies from McGill University, the Urban Institute, the Institute for Women’s Policy Research, the Community Service Society...

What Do Wealthy Super Citizens Want from Government?

Demos
It's no secret that wealthy people have a lot more clout when it comes to politics and civic life. They are more likely to vote, contact their representatives, belong to advocacy organizations, and—of course—contribute to politicians, parties, and PACs. Compared to ordinary folks, many of the wealthy are "super citizens." More controversial, though, is whether these disparaties pervert our democracy—or whether it's no big deal to have super citizens wielding what Demos has called " million dollar megaphones ." One way to examine whether disproportionate influence matters is to take a close look at what the wealthy actually want from government. Political inequality might not be such a big deal if there was no difference between the preferences of affluent Americans and the rest of the nation. It is a very big deal if the affluent have their own separate agenda, and the clout to pursue it. Several political scientists, including Larry Bartels and Martin Gilens, have recently examined...

Are Academics for Hire Influencing the High Frequency Trading Debate?

Last week, Professor Charles M. Jones, a noted economist at Columbia, published an opinion piece in POLITICO claiming to enlighten readers on the realities of high-frequency trading (or “HFT”), computer driven trading at millisecond speeds driven by complex algorithms based on complex trading strategies. This has surfaced as the subject of politically charged debate in the context of of a proposed financial transaction tax that would, among other things, curb the most excessive forms of HFT. The POLITICO piece and a longer, academic-style article were published simultaneously. These articles catalogue existing claims of the benefits of HFT and dismiss concerns of the potential harm of such activity. Perhaps the most important bit of information does not appear in the articles. It can be found at the very end of the press release by Columbia Business School announcing the article: “ The research was supported by a grant from Citadel LLC.” The interest of Citadel in the subject is clear...

Low-Wage Workers Say It's Not Getting Better

Flickr/ Walmart Corporate
It’s not getting better. That’s the key finding of a new survey of low-wage workers out yesterday from the Associated Press and NORC Center for Public Affairs Research at the University of Chicago. Eighty-one percent of low-wage employees surveyed said their family’s financial situation was the same or worse than it had been four years ago, while 64 percent reported that their wages have been stagnant or declined over the past five years. The survey queried 1,606 workers earning $35,000 or less annually. According to the survey: Less than half of lower-wage workers agree that their employer offers good benefits (48%) or that they are paid well for their job (32%). Only 30 percent of lower-wage workers report receiving any promotion to a higher position that pays more while working for their current employer. Although the proportion of workers who have received a promotion increases with the length of time the worker has been with their employer, only 41 percent of lower-wage workers...

The Right Way to Create Jobs

CPC
With over twenty million Americans still unable to find full-time work, Washington shouldn't take its eye off job creation for a minute. That's certainly the feeling of voters, who overwhelmingly told exit pollsters on Election Day last November that fixing the economy should be Congress's number one priority—far more than said reducing the deficit. Frankly, though, official Washington seems better at destroying jobs these days than creating them: Exhibit A are the sequestration cuts, which are eliminating jobs as I write this. Exhibit B is the rollback of the payroll tax holiday on January 1, which ensured that nearly every working American has been living with a pay cut for the past ten weeks. But there's an even deeper problem with how most politicians approach job creation, which is that many of their ideas depend on secondary stimulus effects—i.e., creating jobs by giving consumers more money to spend which presumably leads to more demand for goods and services and more jobs...

Jamie Dimon's Whale Fail

Flickr/ jurveston
Last night, the Senate Permanent Subcommittee on Investigations released a searing 300-page report on JP Morgan Chase’s London Whale episode. The bank lost at least $6.2 billion through trading credit derivatives in a business unit tasked with reducing firm-wide risk, the Chief Investment Office. (The trading activity is called the “Synthetic Credit Portfolio” or “SCP.”) There is much to digest in the report. Hearings are to commence today. But, even at this early date, the veil has been lifted on the complex and cavalier approach that banks take when they put the American public at risk every day in the quest for profits and personal gain. The bank’s CEO, Jamie Dimon, famously claimed that JP Morgan Chase featured the very best risk control systems in the industry. But the report makes it abundantly clear that these systems were manipulated to reduce the calculated risk of the CIO’s massive credit default swap positions. The SCP had grown from $4 billion to $51 billion in 2011, and...

All Wall Street Regulators Should be Self-Funded

Systemic RIsk Council.org
When a crew that calls themselves the "Systemic Risk Council" speaks, it's a good idea to pay attention. After all, the last time people pooh-poohed deep-seated problems within the financial system, trillions of dollars vanished into thin air and millions of people were thrown out of work. Since its creation last year by the Pew Charitable Trusts and CFA Institute, the Systemic Risk Council —which is chaired by former FDIC head Sheila Bair and advised by Paul Volcker—has sought to keep up the pressure for financial reform. That's important because a) many of the rules mandated by Dodd-Frank haven't actually been written yet; b) Wall Street is working every day to weaken that law; and c) additional reforms, beyond Dodd-Frank, are still needed. Yet unfortunately, as Thomas Hedges wrote recently here in Policyshop, sequestration cuts are going to set back the entire process of financial regulation. The SEC and CFTC were already struggling to find the staff capacity to write mandated...

Gone In 22 Seconds: How Frequent is High Frequency Trading?

Flickr/Ars Electronica
This is a story of journalists and economists, and the confusion that can ensue when they communicate. For me, the story starts with a book, Dark Pools , written by Wall Street Journal Reporter Scott Patterson. The book, published in the summer of 2012, is an account of the rise of high-frequency trading or “HFT.” That is automated trading of securities and derivatives using powerful computers driven by complex algorithms. It is widely accepted that trading activity in most markets is dominated by HFT. Firms that specialize in this practice trade in enormous volumes but start and end the day with few if any holdings. Their purpose is to profit from intra-day market moves, not from fundamental investment. They buy and sell in the blink of an eye, churning the markets constantly. Mr. Patterson’s book contains the following passage: At the end of World War II, the average holding period for a stock was four years. By 2000, it was eight months. By 2008, it was two months. And by 2011, it...

Young People and Debt: The New Normal

Flickr/401(k) 2013
With a weak job market and uncertain prospects, young people have to make careful choices about how to invest in their futures. They’ve put off marriage and having kids. They’re moving back home with mom and dad. But the one expense with which they are not compromising is the high and rising cost of college. According to a new study from the Pew Research Center, covered in the Wall Street Journal, young adults have changed their priorities in response to economic instability, but student debt is more common than ever. Pew looked at Federal Reserve data on the debt and assets of American households and found that while young people are avoiding big purchases that require long-term financial commitments—like buying homes and cars—they are increasingly investing in education, with 53 percent more people under 35 carrying student debt in 2010 than did in 2001. It makes sense. Unemployment rates have remained frustratingly high even as US businesses have recovered from the Great Recession...

Introducing Economic Stimulus Done Right

Flickr/Wisconsin Jobs Now
A new bill introduced today by Senator Tom Harkin and Rep. George Miller would raise the federal minimum wage to $10.10 per hour, and more importantly, peg it to inflation so that it would automatically adjust. The proposed wage hike is higher than the $9 per hour proposed by President Obama and is closer to what the minimum wage would be now if it had kept up with the rate of inflation. The bill also increases the tipped wage, which has not risen in twenty years. Increasing the minimum wage is as no-brainer of a policy as it can get. One, it is extremely popular with the public. A remarkable 73 percent of voters support increasing the minimum wage to $10 an hour and tying it to inflation. Two, it would impact millions of workers—more than 30 million workers would receive a raise if the minimum wage was increased. Three, it would create a significant economic boost. Recovery from the Great Recession has been sluggish because consumer activity makes up 70 percent of U.S. economic...

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