Daily Digest - January 22: Which Schools Will Make the Grade on Economic Impact?

Jan 22, 2014Rachel Goldfarb

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Students to Analyze Yale’s Impact on New Haven (Yale Daily News)

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Students to Analyze Yale’s Impact on New Haven (Yale Daily News)

Nicole Ng reports on the launch of the Roosevelt Institute | Campus Network's Rethinking Communities initiative at Yale University. Students will examine how Yale influences local economic development in New Haven and be able to compare Yale to other institutions across the country.

  • Roosevelt Take: Roosevelt Institute Associate Director of Networked Initiatives Alan Smith explains the ideas behind the Rethinking Communities initiative.

Why the Rich Don't Think They're Rich. And Why It Matters (PolicyShop)

David Callahan looks at polls and surveys that show that wealthy Americans don't consider themselves to be wealthy. He suggests that most rich people compare themselves to even richer peers, but this perception is a problem when trying to implement policies that reduce inequality.

Janet Yellen Should Ignore the Unemployment Rate (Slate)

Matt Yglesias writes that the new Federal Reserve chair should recognize that the unemployment rate is not actually a useful measure of the health of the economy. The unemployment rate has been dropping recently, but that's because of the decline in labor force participation.

Want to Help the Middle Class? Don’t Kill Corporate Taxes (WaPo)

Juan Carlos Suárez Serrato and Owen Zidar write that cutting or eliminating a state's corporate income taxes won't bring in new business, and will help shareholders rather than average workers. They call for increased infrastructure spending as a better method of attracting businesses.

Four Years After ‘Citizens United,’ There Is Real Movement to Remove Big Money From Politics (The Nation)

John Nichols reports on the growing movement to support a constitutional amendment that would declare money to be property rather than speech and reverse the Citizens United decision. Sixteen states have already passed resolutions supporting the proposed amendment.

New on Next New Deal

Citizens United for Real Civic Engagement

Roosevelt Institute | Campus Network National Field Strategist Joelle Gamble uses the fourth anniversary of Citizens United v. FEC to call for more diverse forms of civic engagement. She argues that practices like participatory budgeting strengthen citizens' voices beyond the voting booth.

Rethinking Diplomacy: Why Iran Should Have a Seat at the Table on Syria

Roosevelt Institute | Campus Network Senior Fellow for Defense and Diplomacy Jacqueline Van de Velde writes that without bringing more of the major players, including Iran, to the Geneva II talks that are meant to solve the crisis in Syria, it's unclear if any resulting plan can be seen as legitimate.

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Daily Digest - January 21: Both Major Parties are a Work in Progress

Jan 21, 2014Rachel Goldfarb

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Independent Conservatives Growing (The Kudlow Report)

Roosevelt Institute Fellow Dorian Warren says the GOP must consider independents' views during the primary process. Otherwise, Tea Party primary challenges against moderate incumbents will result in general election candidates whom independents will never support.

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Independent Conservatives Growing (The Kudlow Report)

Roosevelt Institute Fellow Dorian Warren says the GOP must consider independents' views during the primary process. Otherwise, Tea Party primary challenges against moderate incumbents will result in general election candidates whom independents will never support.

Change in the Air (Harper's Magazine)

Roosevelt Institute Senior Fellow and Director of the Bernard L. Schwartz Rediscovering Government Initiative Jeff Madrick writes about the shift in Democratic politics that led to the election of progressives like New York City's new mayor, Bill de Blasio. He considers this proof that voters are paying attention to how long many elected officials have ignored rising inequality. This article is behind a paywall.

The Sunday Show with Philip Maldari (KPFA)

Jeff Madrick discusses the rise of inequality in the U.S., with a focus on the data. He touches on unemployment, individual and household wages, part-time work, increased productivity without increased wages, and more.

Back to the Digital Drawing Board (NYT)

Roosevelt Institute Fellow Susan Crawford argues that the circuit court ruling that eliminated the Federal Communications Commission's existing net neutrality rules offers an opportunity to declare the Internet a "common carrier," which would require equal service for all.

Class Divide on Campus: Adjunct Professors Fight for Better Pay, Benefits (NBC News)

Former Roosevelt Institute | Pipeline Fellow Nona Willis Aronowitz looks at the struggle of adjunct professors, who are paid poverty wages for jobs that require advanced degrees, and how their tenured peers have or have not been supportive of their push for changes.

Deficit Scolds Are Holding the Unemployed Hostage (NY Mag)

Jonathan Chait writes that by insisting that short-term stimulus, like extending unemployment insurance, absolutely must be offset by deficit reduction, the deficit scolds are doing far more to support gridlock than to create the political changes they want.

A Housing Relief Program with Policies That 'throw people into the grinder' (The Guardian)

David Dayen reports on the failure of one of the biggest housing relief programs in the country, Hardest-Hit, which was created in 2010 to provide foreclosure relief. The program's poor implementation has caused serious problems for homeowners seeking help.

Wall Street Group Aggressively Lobbied a Federal Agency to Thwart Eminent Domain Plans (The Nation)

Alexis Goldstein reports that Wall Street directly lobbied a key staffer at the Federal Housing Finance Agency, which has since threatened legal action against localities that attempt to use eminent domain to rescue underwater homeowners.

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Daily Digest - January 17: Less Aid Won't Lead to Less Inequality

Jan 17, 2014Rachel Goldfarb

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People Worried About Income Inequality (The Kudlow Report)

Roosevelt Institute Fellow Mike Konczal explains that while it's true that income inequality isn't quite as bad if you account for programs that provide low-wage income support, the GOP's plans to reduce that support and lower taxes will make the problem worse.

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People Worried About Income Inequality (The Kudlow Report)

Roosevelt Institute Fellow Mike Konczal explains that while it's true that income inequality isn't quite as bad if you account for programs that provide low-wage income support, the GOP's plans to reduce that support and lower taxes will make the problem worse.

Advocates for Workers Raise the Ire of Business (NYT)

Steven Greenhouse writes about how businesses are reacting to the rise of worker centers as an alternative model for labor organizing. He quotes Greg Asbed from the Coalition of Immokalee Workers, who decries businesses' attacks on these centers as "McCarthy-era tactics."

  • Roosevelt Take: Roosevelt Institute Senior Fellow Richard Kirsch interviewed Greg Asbed and two of his fellow organizers prior to the 2013 Franklin D. Roosevelt Four Freedoms Awards, where the Roosevelt Institute awarded the CIW the Freedom from Want Medal.

How Walmart Organizers Turned the Internet Into a Shop Floor (In These Times)

Sarah Jaffe looks at the innovative ways that OUR Walmart has used social media to organize discussions, build leaders, and support protests. She writes that these online spaces are valuable ways for organizers to reach workers and activists alike.

Mayor, Speaker Reach Deal on Paid Sick Leave (Capital New York)

Sally Goldenberg reports that New York City's top elected officials have reached an agreement to expand the city's paid sick leave law, which currently only applies to companies with at least 20 workers. Lowering that threshold will give more workers access to paid sick leave.

Obama Weighing Executive Action on Minimum Wage? (WaPo)

Greg Sargent writes that according to Senator Bernie Sanders, the White House is seriously considering raising the minimum wage for employees of federal contractors. Unlike raising the federal minimum wage, this could be accomplished with an executive order.

All the Jobs Growth Last Month Went to Women. (And That's Not Necessarily Good News for Them.) (TNR)

Emma Roller considers some of the problems with current job growth, which is primarily low-wage, going so heavily to women. She points to this "sinking floor" rather than the glass ceiling as the issue that is affecting most women in the workplace.

New on Next New Deal

Is Bridgegate Politics as Usual, or Beyond the Pale?

Roosevelt Institute Senior Fellow Bo Cutter considers the Christie administration's actions in light of his years of experience in government. He says that because the lane closures on the George Washington Bridge affected normal people, this case is particularly terrible.

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Daily Digest - January 16: We (Almost) Have a Budget. What's Next?

Jan 16, 2014Rachel Goldfarb

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Join Roosevelt Institute Associate Director of Networked Initiatives Alan Smith for a Twitter discussion this afternoon at 2pm EST to discuss the Roosevelt Institute | Campus Network's new project examining how anchor institutions can promote local economic development. Follow the discussion at #RethinkingCommunities.

House Passes Compromise $1.1 Trillion Budget for 2014 (CNN)

Deirdre Walsh and Lisa Desjardins report on the omnibus spending bill that will now move to the Senate. Earlier this week, the President signed a three-day extension on the current continuing resolution, which gives the Senate until Saturday to pass the new budget.

Reid Vows to Try UI Again (The Hill)

Ramsey Cox writes that despite the Republicans blocking the vote on extended unemployment insurance this week, Senator Reid wants to try again after the Senate passes the budget. It's been nearly three weeks since 1.3 million people lost their long-term unemployment benefits.

Seeking Ways to Help the Poor and Childless (NYT)

Eduardo Porter looks at an experiment in earned income tax credit-style support for workers without children. The test considers whether the labor market is doing enough to support the needs of all workers, and what government can do to make up the difference.

Workers At Food Court Owned By Federal Government Allege They’ve Been Cheated Out Of $3 Million (ThinkProgress)

Alan Pyke reports that Good Jobs Nation has filed a complaint with the Department of Labor, alleging that service workers in Washington, DC's Union Station have been subject to chronic wage theft. The complaint claims losses averaging $10,000 per worker per year.

Push Set to Wrest Minimum-Wage Control From Albany (Crain's New York)

Chris Bragg writes that liberal groups are launching a campaign to allow municipalities in New York to pass higher local minimum wages. New York City politicians are supporting this proposal, but it's unclear how the state legislature feels about giving up control of the minimum wage.

Why Banks Aren’t Lending to Homebuyers (Reuters)

Felix Salmon explains the drop in mortgage availability as a simple matter of profits. At current rates, a 30-year fixed rate mortgage won't make much money for a bank, and the possible solutions aren't very good for potential homeowners.

Regions Bank To Discontinue Payday Loan Program (NPR)

Robert Benincasa reports that the Alabama-based bank is discontinuing its payday loan offerings, likely in response to increased regulations that don't apply to this bank. This shows that sometimes, even the threat of regulation will eliminate the worst banking practices.

New on Next New Deal

Move Over, Shareholders: Let Workers Have a Say in Corporate Governance

Roosevelt Institute | Campus Network Senior Fellow for Economic Development Azi Hussain argues that we could change corporations so that they wouldn't have to put shareholder profits above all. A stakeholder corporate governance model would bring new priorities to the board room.

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Move Over, Shareholders: Let Workers Have a Say in Corporate Governance

Jan 15, 2014Azi Hussain

A model of corporate governance that brings in employees and other stakeholders alongside shareholders could ensure corporations make decisions based on more than stock prices.

A model of corporate governance that brings in employees and other stakeholders alongside shareholders could ensure corporations make decisions based on more than stock prices.

At this point, saying that inequality in the United States is a problem is almost cliché. There is plenty of data illustrating the extent of inequality. Proposed solutions range from education reform and minimum wage increases to tax and spending reform and public employment programs. Yet there is one area that has been largely neglected in policy discussions around inequality: corporate governance.

Corporate governance may at first seem like a marginal (and boring) issue, but it is in fact the opposite. Our corporate governance laws create the power structures of some of the most formidable economic forces on the planet. These laws are key to how economic and political power is distributed across society, and as such we should pay much more attention to them.

Currently, the U.S. has a shareholder corporate governance model. There are two major implications of such a model: practically, the shareholders are the ones who “own” the company and elect the board. Philosophically, the purpose of the corporation is to maximize value for shareholders. There are problems with this model. Because the corporation represents shareholders, there are incentives in place to externalize costs onto other groups. For example, in an effort to increase stock prices, corporations may dump waste into rivers, lay off workers, or engage in illegal accounting schemes.

However, there is an alternate model that could change how corporations function and what their purpose is: the stakeholder corporate governance model. In the stakeholder model, stakeholders are the “owners” of the corporation and elect the board of directors. The corporation’s purpose becomes maximizing value for stakeholders. Who exactly are these stakeholders? There are many, and definitions vary. But for our purposes, let’s focus on one particular stakeholder: employees.

In a stakeholder corporate governance model, employees would elect board members along with the shareholders, so the employees’ interests would be represented in business decisions. Employees would have much more bargaining power over their own wages and management’s wages, in a way that echoes unionized workplaces. However, this system would not be based on the antagonistic arrangement between unions and management, but rather on a cooperative, insider relationship between employees and shareholders. With symmetrical information between employees and shareholders, decisions could be made without misunderstandings and outrage.

When companies are doing well, employee representation in decision-making processes would ensure employees also benefit from the company’s success through increased wages. In companies that aren’t doing so well, employee representation can ensure cost-cutting measures don’t disproportionately affect employees while executives continue to get bonuses. Additionally, if a corporation is doing poorly and needs to lay off workers, there will be fewer tensions if workers understand they are properly represented in decision-making processes. For a real-life example of a successfully implemented stakeholder model, check out Germany. There’s also evidence that corporations that follow the stakeholder model outperform ones that follow the shareholder model.

This is just the tip of the iceberg for what stakeholder governance could achieve. There could be even greater impact if other stakeholders, such as communities and customers, could be represented. With this expanded definition, the interests of these various stakeholders would be strongly represented in the corporate decision-making process. Thus, corporations would not impose potentially damaging costs (such as dumping waste into rivers or producing poor quality goods) on to communities and customers. External costs would be effectively “internalized” into corporate decision-making. Under the stakeholder model, maybe, just maybe, corporations could save the world.

Azi Hussain is the Roosevelt Institute | Campus Network Senior Fellow for Economic DevelopmentHe is a junior in the School of Foreign Service at Georgetown University majoring in International Political Economy.

Image via ThinkStock.

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Daily Digest - January 15: Nobel Winners Unite to Push for Higher Wages

Jan 15, 2014Rachel Goldfarb

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Seven Nobel Laureates Endorse Higher U.S. Minimum Wage (Bloomberg)

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Seven Nobel Laureates Endorse Higher U.S. Minimum Wage (Bloomberg)

Lorraine Woellert reports that the laureates are part of a group of 75 economists pushing for a minimum wage of $10.10 an hour by 2016, and for indexing the minimum wage to inflation. Roosevelt Institute Chief Economist Joseph Stiglitz is among the signatories of this letter.

Net Neutrality is Dead. Bow to Comcast and Verizon, Your Overlords (LA Times)

Michael Hiltzik explains yesterday's federal court decision, which struck down the FCC's net neutrality rules. He quotes Roosevelt Institute Fellow Susan Crawford, who says big telecommunications companies aren't really competing, which makes regulation even more necessary.

Blue-Collar Wage-Grade Federal Workers Waiting on Pay Raise (WaPo)

Emily Wax-Thibodeaux writes about the federal employees who haven't gotten a 1 percent raise yet, despite President Obama's executive order ending a three-year pay freeze. Congress could finally enact that raise in the omnibus spending bill that's under consideration now.

Extension of Unemployment Benefits Dead in Senate For Now (CBS News)

Rebecca Kaplan explains how a fight over the rights of the minority party in the Senate subsumed the push to renew extended unemployment benefits. Senate Democrats are criticizing their Republican colleagues for putting politics ahead of the needs of the long-term unemployed.

Whose Side Are Progressives on: The Poor or the Upper Middle Class? (PolicyShop)

David Callahan points out that the coalition that elected President Obama twice and just elected Mayor de Blasio in New York City looks like a barbell: plenty of poor voters, and plenty of upper-middle class voters. But thus far, political priorities have greatly favored the wealthier part of this coalition.

Poverty Is Literally Making People Sick Because They Can't Afford Food (The Atlantic Cities)

Matthew O'Brien looks at a new study that determined that low-income patients who are living paycheck-to-paycheck experience an increase in health problems related to lack of food at the end of each month. The easiest solutions ensure that people have more money to buy food.

Democrats Concede to Curb Funds for Wall Street Regulators in Spending Bill (The Guardian)

Dan Roberts explains some of the bargains made for the sake of Congress's omnibus appropriations bill, expected to pass this week. Financial reform advocates are angered by the cuts to the Securities and Exchange Commission and the Commodity Futures Trading Commission budgets.

Regulators Ease Volcker Rule Provision on Smaller Banks (NYT)

Matthew Goldstein reports that regulators gave in to pressures from the banking industry and revised the Volcker Rule, supposedly to reduce its effects on smaller community banks. However, the revised rule will allow big banks to keep certain investments that could be seen as proprietary trading.

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Daily Digest - January 14: Big Money Isn't Beaten Yet

Jan 14, 2014Rachel Goldfarb

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How Big Money Keeps Populism at Bay (AlterNet)

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How Big Money Keeps Populism at Bay (AlterNet)

Roosevelt Institute Senior Fellow Thomas Ferguson writes with Paul Jorgensen and Jie Chen about how both parties' reliance on large donations from the wealthy to keep campaigns afloat limits the influence of populist movements on elections.

  • Roosevelt Take: Ferguson pulls from his working paper with Jorgensen and Chen to discuss political spending in the 2012 campaign.

'Mom did it, we can do it': Two-Generation Programs Help Lift Families Out of Poverty (NBC News)

Former Roosevelt Institute | Pipeline Fellow Nona Willis Aronowitz writes about a highly successful anti-poverty program in Amarillo, TX. The program works with single mothers and their children simultaneously to promote academic achievement.

How the Rise of Women in Labor Could Save the Movement (The Nation)

Bryce Covert draws on research from Roosevelt Institute Fellow Dorian Warren as she argues that encouraging the rise of female leadership in both traditional and alt-labor groups will help to reinvigorate the labor movement and lead it to success.

Two Roads Forward for Labor: The AFL-CIO’s New Agenda (Dissent)

Nelson Lichtenstein considers two paths for a revival of the labor movement, one based in singular events of mass upheaval, and the other in a slow drift to the left in American politics. These options aren't mutually exclusive, so he says labor should prepare for both.

Blaming Poverty on Single Parents Is Win-Win for Republicans, Evidence Be Damned (The Wire)

Philip Bump says that when Senator Marco Rubio tries to link marriage rates and poverty, progressives should remember that correlation is not causation. Sadly, the GOP would rather talk about marriage as a solution than fund real anti-poverty programs.

It Is Expensive to Be Poor (The Atlantic)

Barbara Ehrenreich discusses poverty as a shortage of money, as opposed to the moral failure that many politicians spin it to be. She argues that Americans need to stop blaming poverty on the poor and start fixing the economic and social institutions that perpetuate it.

Banks Seek to Limit Volcker With Challenge to Meaning of ‘Own’ (Bloomberg)

Yalman Onaran reports that bankers have filed a lawsuit arguing that the Volcker Rule's definition of ownership with regard to hedge funds and private-equity funds is too broad. The rule was written that way to keep banks from skirting the ban on proprietary trading.

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Daily Digest - January 13: Giving Welfare a Fair Shake

Jan 13, 2014Rachel Goldfarb

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No, We Don’t Spend $1 Trillion on Welfare Each Year (WaPo)

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No, We Don’t Spend $1 Trillion on Welfare Each Year (WaPo)

Roosevelt Institute Fellow Mike Konczal counters this common conservative talking point, along with the claim that welfare spending doesn't reduce poverty. Mike takes care to define which programs are really "welfare," and it turns out those programs are quite successful.

Internet In America: An On Again, Off Again Relationship (NPR)

Arun Roth speaks to Roosevelt Institute Fellow Susan Crawford about the problems with high-speed internet access in the United States. She says that the U.S. is falling behind, and calls for a public infrastructure project to bring fiber optic access to all.

The 2013 Employment Story: Yet Another Year of McJob Growth (The Atlantic)

Jordan Weissmann writes that 2013 follows the trend set in 2011 and 2012 with 182,000 new jobs per month in the U.S., but those numbers say nothing about the kind of jobs being created, and he argues we're becoming accustomed to growth in low-wage fields.

Number of Americans Looking for Work at Lowest Level Since 1970s (The Guardian)

Dominic Rushe looks at the December jobs report from the Department of Labor and points out that the unemployment rate dropped to 6.7 percent primarily because of people giving up their search for work and dropping out of the labor force.

Doctors Slam Proposed Food Stamp Cuts: ‘The Dumbest Thing You Can Do Is Cut Nutrition’ (ThinkProgress)

Sy Mukherjee reports that the medical community is calling out lawmakers for their failure to see the connection between hunger and health. Saving money on SNAP won't matter if health care costs go up, and research shows those costs would disproportionately hit Medicaid.

New on Next New Deal

Lesson from December's Jobs Report: Turn On the Fiscal Jets

Roosevelt Institute Senior Fellow and Bernard L. Schwartz Rediscovering Government Initiative Director Jeff Madrick argues that the Federal Reserve must maintain monetary stimulus to preserve the recovery, but what's really needed is increased government spending.

In 2013, the Fed Showed Why Fiscal Policy is Still Important

Roosevelt Institute Fellow Mike Konczal argues that expanded monetary policy wasn't enough to offset fiscal austerity in 2013, even according to the benchmarks set by those who predicted the opposite, and that fiscal policy is still needed to keep the economy going.

In Contraceptive Mandate Challenges, Women’s Health and Much More is on the Line

Roosevelt Institute Fellow Andrea Flynn writes that the challenges to the contraceptive mandate in the Affordable Care Act lay the groundwork for private employers to deny their employees access to birth control, and potentially to other health services.

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Lesson from December's Jobs Report: Turn On the Fiscal Jets

Jan 10, 2014Jeff Madrick

The economy is not yet strong enough to cope with tighter monetary policy, but fiscal policy is what's really missing from this recovery.

The weak employment report out today reinforces the view that the Federal Reserve should not ease up on monetary policy soon. The strength of this economic recovery is not yet clear, and the Fed is the only game in town due to sequestration of government funds.

The economy is not yet strong enough to cope with tighter monetary policy, but fiscal policy is what's really missing from this recovery.

The weak employment report out today reinforces the view that the Federal Reserve should not ease up on monetary policy soon. The strength of this economic recovery is not yet clear, and the Fed is the only game in town due to sequestration of government funds.

Waiting another three or four months to tighten policy and reduce quantitative easing will not change the course of America’s destiny. But moving now, as they have done ever so slightly, could easily pull the rug out from under this modest recovery.

The sharp fall in the unemployment rate to 6.7 percent was just about entirely accounted for by people dropping out of the work force. The employment-to-population rate is roughly at its lowest level in more than 30 years. Too many people are not working in America. For all the economic weakness in Europe, they have higher participation rates than the U.S. does.

The drum beat of optimism emanating from most economists recently will now be muted until the next set of data. The jobs numbers are the most telling indicator of economic strength. Economists turn on a dime when they are issued, but only because they can, given the computerized models that shift modestly with every piece of economic news. They should have a stronger analytical thesis than to depend on one month’s data.

The path forward is clear. We should keep in mind that the economy is not doing badly. On average, there has been moderate job growth over the last three months, just not nearly enough to justify an end to monetary stimulus now. We should wait at least a few months to make sure this recovery and expansion is truly solid.

The good news is that the disappointing employment data will reduce pressure on the Fed as Janet Yellen takes over the reins. The bad news is that it will unleash the anti-Obama forces who blame the slow economy on Dodd-Frank’s costs to the financial community, future fears of inflation, and of course the federal budget deficit. Tune in to Fox News after the employment data release and you'll find them saying "Obama did it."

Larry Summers offers the best advice: we have to turn on the fiscal jets. The first words out of anyone’s mouth about the economy should be that sequestration did it. Fiscal de-stimulus was huge in 2013. Government spending fell sharply. The deficit is no longer an issue, given unemployment around the current level.

Summers is being criticized by economists and commentators from across the political spectrum for claiming the nation may be in a period of secular stagnation. Summers noted that the economy was disappointing even before 2007. How could that be, ask some, if the unemployment rate got down to roughly 4.5 percent? 

John Taylor of Stanford is especially vociferous about how good the economy was under George W. Bush. Of course, he worked for Bush. But even apart from that, it is hard to take his claims seriously. 

Three points here. The labor participation rate under Bush never rose to the heights it reached in the second half of the 1990s. Had it done so, the unemployment rate would likely have been around 5.5 percent.

Second, wages rose very slowly. The low unemployment rate—to the extent that it fell—had a lot to do with slow-rising wages. And the wage share of GDP fell significantly, to levels well below what they were in the 1990s. The rise in consumption to support growth was based on borrowing, as we know, not strong incomes.

Third, capital investment was weak before 2007, never even close to returning to the levels of the second half of the 1990s. The right wing loves to blame lack of business confidence on low levels of capital investment today, but how do they explain the Bush era? 

So, to reiterate, Summers is right. We are wading in dangerous territory. On top of all this, there has been a confusing and disturbing downturn in productivity growth for several years—starting, again, before 2007.

We have a tool to deal with this: more government spending. But we get the opposite. Obsession with the budget has led to full-fledged austerity policies in America, as well as Europe.

There are some sweet spots in the economy. I am skeptical of fracking, but it is helping the economy now. Housing is picking up.

But any increase in interest rates without serious fiscal stimulus now is outright dangerous. The inflation fear-mongers are still out in force, of course. So let me repeat this: there is no appreciable inflation right now. And one last point: more growth in output could stimulate growth in productivity as well, a well-known economic relationship known as Verdoorn’s Law.

Will America do what’s necessary? Not enough of it. But at the least it should not reverse monetary policy yet. And there may be a little political room to push Washington toward spending in 2014. If so, the nation had better take advantage of it. 

Jeff Madrick is a Senior Fellow at the Roosevelt Institute and Director of the Bernard L. Schwartz Rediscovering Government Initiative.

Banner image via ThinkStock.

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In 2013, the Fed Showed Why Fiscal Policy is Still Important

Jan 10, 2014Mike Konczal

Last April I had a piece in Wonkblog saying we’d get to see whether or not the expansion of monetary policy in fall 2012 would offset 2013 fiscal austerity. I concluded that it wasn’t looking too good at the start, that QE3 was a smart idea anyway (and should go further), and, most importantly, that a fiscal multiplier would be in effect, and we should run a larger deficit and cancel out things like the payroll tax cut while the economy is still fragile. It received a lot of responses at the time (see the endnotes here for a list).

Recently, there’s been a wave of posts by Scott Sumner and David Beckworth calling me and others out, saying that the votes are in and it's a victory for the market monetarists, the team that said monetary policy would offset austerity in 2013 and fiscal policy wouldn't matter. (There have also been responses from Brad DeLong and Noah Smith.)

I don’t see it. I’m willing to be convinced, but the two clearest tests I saw the market monetarists put forward in early 2013 have resulted in failure. Let’s go through them:

1. “Paul Krugman Will Not Like These Figures,” David Beckworth, December 2, 2012, Macro and Other Market Musings

At the end of 2012, David Beckworth told the Keynesians they were wrong. In a provocative post, he argued “that nominal GDP (NGDP) growth has been remarkably stable since about mid-2010 despite a contraction in federal government expenditures" and that "the Fed has been doing a remarkable job keeping NGDP growth stable.” He posted a graph showing year-over-year NGDP growth at a steady clip.

My Wonkblog column was addressed to Beckworth specifically, and he reiterated the same exact data graphic in his response, arguing, “The U.S. series shows a stable NGDP growth rate.”

Even though the approach of examining year-over-year NGDP growth drew criticism, I like this test because it draws a line in the sand and it also fits with my understanding of how the market monetarists view the situation. The Federal Reserve picks the NGDP path it wants, as if it was off a menu, no matter what is going on with the rest of the economy.

So how did this line in the sand turn out? Here’s the data updated through 2013, with year-over-year (Beckworth’s line) and two quarters showing:

It was stable, until it wasn’t. You can see the year-over-year stable at 4-5 percent from 2011 through part of 2012, but when government spending starts to fall in late 2012 and through 2013, this falls as well. NGDP growth was lower in the first two quarters of 2013 than it was in 2012.

The third quarter did spike, but it was mostly the result of inventories, which, as Yglesias says, is probably bad news. Even more interesting, there wasn’t any additional government austerity in this quarter. Government spending actually increased slightly as state and local spending increased, which more than canceled out declining federal spending. (If continued, this would be an excellent trend, like the opposite of the downturn in which state and local austerity canceled out additional federal spending. I was hoping we'd have more data before we started this conversation.)

I’d note Beckworth didn’t mention this data or his old approach at all in his victory lap. Scott Sumner used this graph and data for his "Most Important Graphic of 2013," but didn’t include any of the 2013 data.

1.a Another related way of judging how the economy evolved in 2013 is to compare it to the Federal Reserve’s projections of it. As some market monetarists believe (e.g. Ryan Avent), these projections are an engine, not a camera -- they aren’t neutral projections of inflation and growth but also a communication of what the Fed thinks about what it can accomplish, which in turn will have an impact and determine what happens in the economy.

How did the Fed's projections for 2013 turn out? Did the economy end up how the Fed said it would when it announced expanded monetary policy?

It fell, both in real GDP and especially core inflation. Which leads me to the second test…

2: “The Federal Reserve's New Yield Curve,” Matt Yglesias, January 21, 2013, Slate

One way to read 2012’s monetary actions was that the Federal Reserve really wanted to hit a 2 percent inflation target. First they announced said target, then they announced open-ended purchases, then they announced that 2 percent wasn’t a ceiling and that they’d tolerate inflation above 2 percent.

Many people considered this an important part of the Fed’s ability to boost the economy (e.g. “the commitment to allow higher inflation in the future is one of the key methods through which the central bank can have a positive effect on an economy stuck at the zero lower bound”). I had written a lot about the Evans Rule, and why it would be a good idea for people to support, so I was watching this closely.

Yglesias, in the linked post, pointed to higher inflation projections in the short- and medium-term as of January as a success story. But, as you can see above, we then went on to have inflation rates collapse, leading to some of the lowest inflation rates in decades.

Regardless of what you think the Fed wanted in late 2012, they certainly weren't trying to generate lower inflation. If the Fed truly is omnipotent, we shouldn't see this. You can say that the bickering over the taper caused these problems, but this is precisely, as Michael Woodford has pointed out, one of advantages of fiscal stimulus in these situations (as I said in last year’s piece, “Using fiscal policy also avoids the expectations problems that plague monetary policy”).

To reiterate, I think the Federal Reserve should be doing more. I’d love to see Yellen enact a genuine regime change at the Fed. But we shouldn’t doubt that fiscal policy, at this moment, is making a difference in the giant slack that still smothers our economy and is collapsing our labor force.

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Last April I had a piece in Wonkblog saying we’d get to see whether or not the expansion of monetary policy in fall 2012 would offset 2013 fiscal austerity. I concluded that it wasn’t looking too good at the start, that QE3 was a smart idea anyway (and should go further), and, most importantly, that a fiscal multiplier would be in effect, and we should run a larger deficit and cancel out things like the payroll tax cut while the economy is still fragile. It received a lot of responses at the time (see the endnotes here for a list).

Recently, there’s been a wave of posts by Scott Sumner and David Beckworth calling me and others out, saying that the votes are in and it's a victory for the market monetarists, the team that said monetary policy would offset austerity in 2013 and fiscal policy wouldn't matter. (There have also been responses from Brad DeLong and Noah Smith.)

I don’t see it. I’m willing to be convinced, but the two clearest tests I saw the market monetarists put forward in early 2013 have resulted in failure. Let’s go through them:

1. “Paul Krugman Will Not Like These Figures,” David Beckworth, December 2, 2012, Macro and Other Market Musings

At the end of 2012, David Beckworth told the Keynesians they were wrong. In a provocative post, he argued “that nominal GDP (NGDP) growth has been remarkably stable since about mid-2010 despite a contraction in federal government expenditures" and that "the Fed has been doing a remarkable job keeping NGDP growth stable.” He posted a graph showing year-over-year NGDP growth at a steady clip.

My Wonkblog column was addressed to Beckworth specifically, and he reiterated the same exact data graphic in his response, arguing, “The U.S. series shows a stable NGDP growth rate.”

Even though the approach of examining year-over-year NGDP growth drew criticism, I like this test because it draws a line in the sand and it also fits with my understanding of how the market monetarists view the situation. The Federal Reserve picks the NGDP path it wants, as if it was off a menu, no matter what is going on with the rest of the economy.

So how did this line in the sand turn out? Here’s the data updated through 2013, with year-over-year (Beckworth’s line) and two quarters showing:

It was stable, until it wasn’t. You can see the year-over-year stable at 4-5 percent from 2011 through part of 2012, but when government spending starts to fall in late 2012 and through 2013, this falls as well. NGDP growth was lower in the first two quarters of 2013 than it was in 2012.

The third quarter did spike, but it was mostly the result of inventories, which, as Yglesias says, is probably bad news. Even more interesting, there wasn’t any additional government austerity in this quarter. Government spending actually increased slightly as state and local spending increased, which more than canceled out declining federal spending. (If continued, this would be an excellent trend, like the opposite of the downturn in which state and local austerity canceled out additional federal spending. I was hoping we'd have more data before we started this conversation.)

I’d note Beckworth didn’t mention this data or his old approach at all in his victory lap. Scott Sumner used this graph and data for his "Most Important Graphic of 2013," but didn’t include any of the 2013 data.

1.a Another related way of judging how the economy evolved in 2013 is to compare it to the Federal Reserve’s projections of it. As some market monetarists believe (e.g. Ryan Avent), these projections are an engine, not a camera -- they aren’t neutral projections of inflation and growth but also a communication of what the Fed thinks about what it can accomplish, which in turn will have an impact and determine what happens in the economy.

How did the Fed's projections for 2013 turn out? Did the economy end up how the Fed said it would when it announced expanded monetary policy?

It fell, both in real GDP and especially core inflation. Which leads me to the second test…

2: “The Federal Reserve's New Yield Curve,” Matt Yglesias, January 21, 2013, Slate

One way to read 2012’s monetary actions was that the Federal Reserve really wanted to hit a 2 percent inflation target. First they announced said target, then they announced open-ended purchases, then they announced that 2 percent wasn’t a ceiling and that they’d tolerate inflation above 2 percent.

Many people considered this an important part of the Fed’s ability to boost the economy (e.g. “the commitment to allow higher inflation in the future is one of the key methods through which the central bank can have a positive effect on an economy stuck at the zero lower bound”). I had written a lot about the Evans Rule, and why it would be a good idea for people to support, so I was watching this closely.

Yglesias, in the linked post, pointed to higher inflation projections in the short- and medium-term as of January as a success story. But, as you can see above, we then went on to have inflation rates collapse, leading to some of the lowest inflation rates in decades.

Regardless of what you think the Fed wanted in late 2012, they certainly weren't trying to generate lower inflation. If the Fed truly is omnipotent, we shouldn't see this. You can say that the bickering over the taper caused these problems, but this is precisely, as Michael Woodford has pointed out, one of advantages of fiscal stimulus in these situations (as I said in last year’s piece, “Using fiscal policy also avoids the expectations problems that plague monetary policy”).

To reiterate, I think the Federal Reserve should be doing more. I’d love to see Yellen enact a genuine regime change at the Fed. But we shouldn’t doubt that fiscal policy, at this moment, is making a difference in the giant slack that still smothers our economy and is collapsing our labor force.

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