Center for Economic and Policy Research (CEPR)

Established by Dean Baker and Mark Weisbrot in 1999 to promote democratic debate on the most important economic and social issues that affect people's lives.

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The Trans-Pacific Partnership and Team Pfizer

Last month the Peterson Institute for International Economics released a new study that projected the impact of the Trans-Pacific Partnership (TPP) on the U.S. economy. The study projected that when its effects are fully felt by 2030, the economy will be 0.5 percentage points larger than if we did not have the TPP. It also showed that annual exports would be $387 billion higher as a result of the deal.

These projections were widely reported in major media outlets and seen as evidence that the TPP would be a good deal for the United States and American workers. Unfortunately, a closer analysis of the Peterson Institute study indicates considerably less grounds for celebration.

First of all, some of the key questions that people have raised about the TPP are not answered by the Peterson Institute study because of the design of the model it used. First and foremost, people are worried that the TPP could open the door to another wave of imports, causing more workers to lose their jobs and putting downward pressure on the wages of the workers who keep their job.

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The Federal Reserve Board and the Elections

Next month the Federal Reserve Board’s Open Market Committee (FOMC) will meet in Washington to decide how many people in the United States should have jobs. If that comment sounds overblown, then you need to do some more reading about the Federal Reserve Board. The basic story is that the FOMC sets the short-term interest rates for banks. This short-term interest rate in turn affects the interest rate on longer term loans, like car loans, home mortgages, and corporate and government bonds. When the FOMC raises interest rates, as it did back in December, it generally leads to higher interest rates on other forms of debt. This means that people will pay more money on a car loan or mortgage, which in turn discourages them from buying cars or houses.

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Millionaires Get Their Valentine from Social Security: Those Making $1,000,000 a Year Stopped Paying Into Social Security on February 14th

Social Security, the program that provides retirement, disability, and survivor benefits to millions of Americans just gave a valentine to those making $1,000,000 a year.

Many people do not realize that the taxes that fund Social Security only apply to the first $118,500 of wage income in 2016. Income above the cap is not subject to the tax and workers do not pay into Social Security on that income. That means that the vast majority of the population (those making under $118,500 a year) pay the 6.2 percent Social Security payroll tax for the entire year, but the wealthy don’t. It also means that the wealthy have a lower effective tax rate.

For example, someone making $1,000,000 paid into Social Security on every day in 2016, up until and including February 13th. On the 14th — Valentine’s Day — their income was no longer subject to the payroll tax, and their paychecks for the rest of the year became heftier.

Read the rest, and try the calculator here: http://cepr.net/blogs/cepr-blog/millionaires-get-their-valentine-from-social-security-those-making-1-000-000-a-year-stopped-paying-into-social-security-on-february-14th

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Bernie Sanders, Hillary Clinton, and the Money

Bernie Sanders has made the corrupting role of money in politics a centerpiece of his campaign. He has argued that because campaign contributions by the rich pay for political campaigns, they are able to control the political process. This gives us a political system that is very effective at serving Wall Street and the insurance and pharmaceutical industries. It is much less effective at serving the needs of ordinary people.

This has created an interesting dynamic in the race for the Democratic nomination. Secretary Clinton has flipped Sanders’ claim around and challenged him to show where she has reversed a position to serve the moneyed interests. This might be a useful campaign tactic, but it misrepresents the way in which money affects campaigns.

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The Congressional Budget Office and the Reemergence of the Deficit Hawks

It is often said that in Washington, no bad idea stays dead for long. This is certainly true for the crazy paranoia we see around the budget deficit and idea that it is going to bankrupt the country and leave our children impoverished. The moral of this story is usually that we need to cut and/or privatize Social Security and Medicare.

The deficit hawks had been relatively quiet the last few years. They had a big victory with the 2011 budget deal between President Obama and the Republicans in the House. This led to substantial reductions in spending for 2012 and subsequent years. These cuts slowed the economy and kept millions of people from getting jobs, but the small positive from the deal was that it temporarily silenced the deficit hawks. After all, the deficit had fallen rapidly and the debt-to-GDP ratio was going down, what did they have to complain about?

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Congress Needs to Press Yellen on Mistaken Rate Hike

Today, Federal Reserve Board Chair Janet Yellen will go before Congress to report on the economy and monetary policy. A key topic of discussion will be the Fed's decision in December to raise the federal funds interest rate by one-quarter of a percentage point. This was the first time that the Fed had raised interest rates since the beginning of the recession in December 2007.

The Fed appears to have acted prematurely. Since the Fed announced its rate hike, we've received nothing but sobering economic news. Last week, the Commerce Department reported that the economy grew at just a 0.7 percent annual rate during the fourth quarter of 2015, down from a 2.5 percent rate for the previous two years. Similarly, the labor market added just 150,000 jobs in January, down over a third from the monthly average of 230,000 jobs for 2015.

The Fed has a dual mandate to constrain inflation and maximize employment. The Fed has interpreted the inflation side of this mandate as meaning that it should try to have an average annual inflation rate of 2 percent. In balancing these goals, the Fed raises rates when it wants to push down inflation at the cost of lowering employment; when the Fed wants to raise employment at the cost of higher inflation, it lowers rates.

Read the rest.

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Financial Reform: It’s About Improving the Financial System, Not 2008

As the Democratic presidential race heats up, the debate on financial reform has taken a bizarre twist. Somehow the measure of a good reform is its ability to prevent another 2008-type financial crisis.

While it is reasonable to subject a reform agenda to the 2008 test, this should be at most a side issue. After all, it is virtually certain that our next crisis will not look our last crisis. Financial reform first and foremost is not about preventing the last crisis, but rather about designing a financial system that more effectively serves the rest of the economy.

Finance is an intermediate good like trucking. It does not directly provide value like food or health care, the value in the financial sector depends exclusively on its ability to make the rest of the economy function better. This means effectively getting money to businesses and households who need to borrow. And it means providing safe investment vehicles for people to save for retirement or other purposes.

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FedWatch: Low Interest Rates in the Late 1990s Led to 4.2 Million More Workers Employed

In 1996, the Congressional Budget Office (CBO) projected that unemployment would rise from 5.8 to 6.0 percent the next year and stay at that rate into the 2000s. The consensus among most economists and policy experts was that 6.0 percent unemployment was the lowest the unemployment rate could fall to before it caused inflation (this rate is known as the non-accelerating inflation rate of unemployment, or NAIRU), even though inflation was already very low.

In their minds, this meant the Federal Reserve (Fed), which has an obligation to pursue low unemployment, should keep interest rates as high as necessary to prevent the unemployment rate from falling much below 6.0 percent. While it might be possible to lower interest rates to reduce unemployment, as some economists and activists advocated for, the mainstream view was that this would not be worth the cost of higher inflation.

Alan Greenspan, then chair of the Fed, and Janet Yellen, the chair today, seemed to go along with that consensus. Yellen even called low interest rates to promote growth and employment “a very confused set of arguments.”

But over the next four years, Greenspan broke with orthodoxy and used his influence to keep rates relatively low, unlike during the expansion in the 1980s. In 1997, when unemployment had dipped below 6.0 percent without an uptick in inflation, Paul Krugman doubled down on his belief that this would lead to accelerating inflation. He, like many other commentators, was wrong. Read the rest of the post.

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If Bill Gates Turned to Philanthropy: Publicly Funded Clinical Drug Trials

High drug prices have been big news lately. Some of this has been due to straight out price gouging by the likes of Martin Shkreli, everyone’s favorite young punk hedge fund tycoon and potential convict. However the more common problem stems from the exorbitant price charged for important new drugs like the Hepatitis C drug Solvaldi. Gilead Sciences, the patent holder for Solavldi, has a list price for this drug in the United States of $84,000 for a 3-month course of treatment. The company argues the drug is worth the price since it can cure people of a debilitating and potentially deadly disease.

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Market Turmoil, the Fed, and the Presidential Election

The business press has been obsessed in recent weeks over the volatility in financial markets around the world. Most of the world’s major stock markets have dropped by more than 10 percent from their peaks of 2015. China’s market is down by more than 40 percent from its peak last spring. Interest rates on high risk bonds have soared and the price of oil has fallen by more than 70 percent from its levels of two years ago. While these movements are dramatic, it is important to remember the financial markets are not the economy. Markets often take sharp turns in ways that have no obvious connection to the real economy. The best example of this is the 1987 stock market crash in which the U.S. markets lost more than 20 percent of their value in a single day. There was no obvious cause for this plunge nor did it have a noticeable effect on the economy. The U.S. economy continued to grow at a healthy pace for the next two and a half years.

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Do the Uber-Rich Pay Their Share?

According to their acolytes, the rich are great innovators and job creators. But they haven't lived up to that billing in this century, as both job growth and overall economic growth have been extraordinarily weak since 2000. If their benefit to the economy is in doubt, no one can dispute that the wealthy are world-class tax avoiders. The New York Times recently reported that the country's 400 wealthiest families paid an average of just 17 percent of their income in taxes. This is a smaller share of their income than many middle-income families pay, especially if we add in Social Security and Medicare taxes.

Read the rest.

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Bernie Sanders, Hillary Clinton, and Wall Street

As the Democratic presidential primary heats up, one of the major issues has been which candidate has the better approach towards regulating Wall Street. While financial regulation can get into many complex areas, there are some basic points that people should know. First, financial regulation always leaves enormous room for discretion. Some regulatory agencies, like the Office of the Comptroller of the Currency, are notoriously lax, not because they lack the authority to control the banks and other financial institutions, but because their leadership is content to let the banks do what they want. Sometimes an agency’s character changes with its leader. The Commodity Futures Trading Commission became a serious regulatory agency under Gary Gensler, who headed it in the first six years of the Obama administration. (Gensler is now the chief financial officer of Secretary Clinton’s campaign.) 

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Mission Possible: Breaking Up the Big Banks and Universal Medicare

Senator Bernie Sanders is getting a lot of heat from political establishment types for proposals they view as outlandish. The top of the list is breaking up the big banks and universal Medicare. The complaint is that these proposals are so far off the political agenda, Sanders is wasting everyone’s time by raising them. It is understandable that the interest groups who profit from the current situation do not want to see it altered. But that doesn’t mean we are condemned to have incredibly wasteful financial and health care systems forever. Starting with finance, we actually have already seen some breakups of large financial institutions in the wake of the Dodd-Frank financial reform bill. GE is seeking to offload its financial services division. Citigroup has also downsized by selling off some divisions. The Financial Stability Oversight Council established by Dodd-Frank currently has the authority to breakup too big to fail banks.

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Wall Street Rocks!

For those who closely follow financial markets the first two weeks of 2016 have been the most fun since the financial crisis triggered by the collapse of the housing bubble. The market has lost more than 10 percent of its value since its late December peak, destroying more than $2 trillion of stock wealth. Markets elsewhere in the world have experienced comparable declines. Slowing economic growth has sent oil prices plummeting to less than $30 a barrel, pushing many oil companies to the edge of bankruptcy and devastating the economies of countries that are heavily dependent on oil exports. All this may sound very grim, but unless you were borrowing to buy large amounts of stock or oil futures, there is no reason to look for a ledge from which to jump.   

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"The Big Short": A Tale of Stupidity, Greed, and Corruption

I saw the movie last night. It's a great flick. If anyone doubted that it was possible to make a humorous entertaining film about credit default swaps and collaterized debt obligations, The Big Short is the definitive answer to the question. But now let's get to the substance.

Not surprisingly, the movie is prompting another round of revisionist accounts of the housing bubble. If you had not already guessed, the movie's account is one in which the Wall Street boys ran wild and ended up drowning the country and themselves in their own greed. Fortunately for the bankers, they could turn to the government for help. The rest of the country wasn't quite as lucky.

Read the rest here.

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Obama Helped Avert Economic Collapse, but Full Recovery Is Distant

When President Obama took office seven years ago the economy was in a full-scale tailspin. It was losing 700,000 jobs a month, the auto industry was facing bankruptcy and the major banks were on life-support. These were undoubtedly bad economic times, but this crisis also opened the door to real change. Just as the Great Depression created the political space for Social Security, the federal minimum wage and the Wagner Act institutionalizing unions, the economic crisis that President Obama was handed could have created an opening to allow for a very different economy. Unfortunately, major transformations were not forthcoming. Obama took the steps necessary to get us out of the immediate crisis. He pushed through a stimulus package that quickly reversed the tailspin and had the economy growing at a healthy pace by the end of the year. He also bailed out the industry, keeping GM, Chrysler and hundreds of supplier firms in business. These were hard fought battles even for a Congress run by Democrats, but they were important for the health of the economy.

Read the rest.

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A Progressive Way to End Corporate Taxes

Washington — JUST about every American chief executive has the same dream: to get out from under the corporate income tax. For many, that means lobbying Congress to change the tax code. But for a growing number, it also involves increasingly creative — and successful — tricks to avoid their liability.

The latest fad is inversion. Over the last few years, some of the country’s largest companies have arranged to be taken over by smaller companies, conveniently headquartered in the Bahamas or some other tax haven. A company then has to pay tax only in the tax haven; it escapes American corporate income taxes altogether. For example, Pfizer, the pharmaceutical company, is being taken over by a much smaller company with headquarters in low-tax Ireland. Read the rest.