This is an interesting piece by Bremmer (Eurasia Group) and Roubini (NYU Stern). They are betting their money on the U.S. What do you think?

NOVEMBER 12, 2011

Whose Economy Has It Worst?

With Europe, China and the U.S. in crisis, the real question is which of them will stumble first


It’s no wonder that global markets are so jittery. The world’s three largest economies can’t continue along their current paths, and everybody knows it. Investors watch nervously for signs that China is headed toward a hard landing, that America will sink back into recession, and that the euro zone will simply implode.

[usecon2]Edel Rodriguez‘In all three cases, kicking the can down the road has staved off disaster so far — but the cans are getting bigger and heavier.’

In all three cases, kicking the can down the road has staved off disaster so far, but the cans are getting bigger and heavier. Which economy will be the first to stumble on its problems?

An improved political picture in Italy together with a new prime minister in Greece, is helping to patch up fragile investor sentiment, but some analyst say it could be short-lived. Stacy Meichtry joins Paul Vigna and Jonathan Shipman on Markets Hub.

In Europe, the tough decisions have been put off because the principal players don’t agree on how or why the trouble began. Germany and the other better-off countries blame the profligacy of Greece, Portugal and Italy and fear that an early bailout would relieve pressure on them to mend their ways. For their part, the debtor nations believe that the entire euro zone is out of balance and that more prosperous countries like Germany should export less and consume more to set things right.

Other Europeans say that a shared currency cannot survive indefinitely when monetary policy is centrally managed but each government decides how much to tax and spend. Still others warn that access to market capital requires a form of collective insurance, preferably in the form of a euro bond. Not surprisingly, Germany resists this solution because it implies a gradual transfer of wealth from the core economies to the periphery, a “transfer union” from rich to poorer states.

The market continues to pin its hope on massive intervention by the European Central Bank to restore market confidence once the new Greek and Italian governments are in place. But that may be wishful thinking. Simon Nixon joins The Markets Hub.

Yet another European view holds that the austerity plans now envisioned by Germany and the European Central Bank are worse than the disease. The Continent needs growth, not just reform and belt-tightening, they argue, and only a surge of stimulus across the entire euro area can achieve it.

The 17 countries and four European institutions now entangled in the euro zone crisis will continue trying to muddle through, but their dawdling can’t be sustained. Markets are already losing confidence in piecemeal reform. Doubts about Italy, an economy too big to bail, will only add to the volatility.

Europe will be the first to drop out of the game of kick the can: Expect a disorderly debt default in Greece, more trouble for European banks and a sharp recession across the continent.

Associated PressA salesperson talks to a woman visiting a housing fair in Nanjing in eastern China’s Jiangsu province on Oct. 13.

In China, the need for economic reform also has become obvious. It has been four years since Premier Wen Jiabao first warned that the country’s economic model is “unstable, unbalanced, uncoordinated and ultimately unsustainable” and three years since the financial crisis made clear that China’s growth remains dangerously dependent on exports to Europe, America and Japan.

To ensure long-term economic expansion (and political stability), Beijing must figure out a way to encourage Chinese consumers to buy more of the products that local manufacturers make. This will demand a massive transfer of wealth from the state and China’s state-owned companies to Chinese households.

European markets may have calmed down but with the future of the euro still unresolved, interest in the dollar should be on the rise. If not the dollar, then where should the hunt for a safe haven turn to next? Dow Jones’s Alen Mattich discusses.

But Beijing is moving in the opposite direction. The leadership responded to Western market turmoil not by boosting consumption but by increasing state and private spending on fixed investment, which now accounts for nearly half of China’s growth. The result has been an explosion in residential and commercial real estate, more state spending on infrastructure and more cheap loans from state-owned banks to state-owned enterprises.

In an interview with WSJ’s Rebecca Blumenstein, former U.S. Secretary of State Condoleezza Rice says she is very concerned about Europe’s future as it confronts a political crisis that threatens to destroy its unity.

Indeed, a key obstacle to reform is that China remains so heavily invested in its state-managed model of capitalism. Of the 42 Chinese companies listed in the 2010 edition of the Fortune 500, 39 were state-owned enterprises, and three quarters of China’s 100 largest publicly traded companies are government controlled. Party officials with a stake in the success of state-owned enterprises have amassed considerable power within the leadership, and they ferociously resist efforts to transfer away their wealth to private enterprises and ordinary citizens.

China has the cash and foreign reserves to postpone a crisis. But growth is slowing, financial stresses are rising, and there is good reason to fear that China’s days of can-kicking are numbered as well.


Which leaves the U.S. No one can restore confidence in America’s long-term fiscal health without a credible plan to cut spending on entitlements and defense while raising revenues, which are now at a 60-year low as a share of GDP. But don’t expect any immediate solutions from Washington. The campaign season will only exacerbate petty partisanship and political gridlock, which means that the structural problems of the U.S. economy are likely to persist.

But the longer-term future appears much brighter for the U.S. than for either Europe or China. America is still the leader in the kind of cutting-edge technology that expands a nation’s long-term economic potential, from renewable energy and medical devices to nanotechnology and cloud computing. Over time, these advantages will yield more robust economic growth.

The U.S. also has a demographic advantage. In Europe, declining birthrates and rising sentiment against immigration point toward a population that will shrink by as much as 100 million people by 2050. In China, thanks in part to its one-child policy, the working population has already begun to contract. By 2030, nearly 250 million Chinese will have passed the age of 65, and providing them with pensions and health care will be very costly.

Despite debate over illegal immigration, the U.S. population will likely rise from 310 million to about 420 million by midcentury. Between 2000 and 2050, according to Mark Schill of Praxis Strategy Group, the U.S. workforce is expected to grow by 37%. China’s will shrink by 10%. Europe’s will contract by 21%.

Finally, despite the rising exasperation of the American public, the U.S. is significantly more likely than Europe or China to quit kicking the can down the road. Nothing much will change during the election year, but 2013 offers a chance for real fiscal reform.

Next November, Republicans are likely to win both houses of Congress. If a Republican is elected president, the GOP will face enormous public pressure to deliver on its reform promises. Even if President Obama is re-elected, the outlook for a grand bargain is bright. He would be free of the most immediate demands of electoral politics, and like other second-term presidents, he could begin to consider his legacy.

Make no mistake: The challenges that the U.S. faces are formidable, and persistent political gridlock could delay badly needed fiscal and structural reforms. But everything is relative, and the best can to be kicking down the road just now is undoubtedly the one made in America.

—Mr. Bremmer is the president of Eurasia Group and the author of “The End of the Free Market.” Mr. Roubini is the chairman of Roubini Global Economics and a professor at New York University’s Stern School of Business.


Here’s the story in the Harvard Crimson:

Students Walk Out of Ec 10 in Solidarity with ‘Occupy’

Published: Wednesday, November 02, 2011
Economics 10 WalkoutHarvard students and community members gather in front of John Harvard statue in solidarity with the Occupy Movement and Occupy Oakland.

UPDATE: 4:04 a.m. November 3, 2011

Nearly 70 Harvard student protesters walked out of Economics 10 on Wednesday afternoon, expressing dissatisfaction with what they perceive to be an overly conservative bias in the course.

The walkout was meant to be a show of support for the “Occupy” movement’s principal criticism that conservative economic policies have increased income inequality in the United States.

“Today, we are walking out of your class, Economics 10, in order to express our discontent with the bias inherent in this introductory economics course. We are deeply concerned about the way that this bias affects students, the University, and our greater society,” read a statement issued by the organizers.

Economics 10—more commonly referred to as “Ec 10”—is taught by professor N. Gregory Mankiw, and has the highest enrollment of any course at the College, boasting over 700 enrollees.

“I was going to announce this at the end, but I have a feeling people might leave a little early,” he said.

At 12:15 p.m. students stood up en masse and walked out of Sanders Theatre, where Ec 10 lectures are held. Some students carried signs, but most left carrying just their backpacks. As the demonstrators marched out of Sanders Theatre, a small crowd booed them in support of Mankiw. Most students remained in their seats

After walking out, the group gathered in the hallway outside of the theater, standing in a circle and speaking out about the event.

“Harvard graduates have been complicit [and] have aided many of the worst injustices of recent years. Today we fight that history,” said Rachel J. Sandalow-Ash ’15, one of the students who organized the walkout. “Harvard students will not do that anymore. We will use our education for good, and not for personal gain at the expense of millions.”

Gabriel H. Bayard ’15, another organizer of the walk out, said that he believes the course is emblematic of the economic policies that have led the financial crisis.

“Ec 10 is a symbol of the larger economic ideology that created the 2008 collapse. Professor Mankiw worked in the Bush administration, and he clearly has a conservative ideology,” Bayard said. “His conservative views are the kind that created the collapse of 2008. This easy money focus on enriching the wealthiest Americans—he really operates with that ideology.”

Mankiw served as the chairman of the Council of Economic Advisers during the second Bush Administration and is currently an adviser to former Mass. Governor Mitt Romney’s presidential campaign. Mankiw declined to comment for this article.

Sandalow-Ash ’15 said that the course too heavily asserts conservative economic claims as fact.

“It’s a class that’s very indoctrinating, and does not encourage diversity of views. Economic questions are not always clear-cut. Multiple views should be presented in this course,” Sandalow-Ash said.

Many undergraduates remained skeptical of the demonstration’s mission.

Mark S. Krass ’14 said he believes the walkout’s intended goals were unclear, which detracted from the walkout’s message and comprises its integrity.

“Those of us who are supportive of Occupy Wall Street are trying very hard to combat the view that there is no set of objectives or ideology motivating that movement,” Krass said. “It was really distressing for people to advertise a walkout of Ec 10 on the basis of high textbook prices and bad teaching.”

Jeremy Patashnik ’12, an economics concentrator who authored a lengthy piece in defense of the course for the Harvard Political Review, rejected the notion that Ec 10 carries a conservative bias.

“I self-identify as a liberal on these issues, and I don’t see the conservative bias. I think this walkout misses the point of what Ec 10 is supposed to be,” Patashnik said. “This class is not attempting to give normative answers about how to address social issues. It’s meant to introduce students to economics as a social science.”

Krass noted that the topic of Wednesday’s lecture—income inequality—might have been particularly interesting to those who participated in the walkout.

“It’s incredible that in the name of advancing a more liberal view of economics they chose to walk out of a class on a social issue they care about,” Krass said.

According to those who walked out, part of the discontent with Economics 10 stems from what they say is the limited number of opportunities to express skepticism toward the material taught in the course.

“I’ve definitely written question marks in my textbook, but we never really get to question [what he says] in section,” said Alexandra E. Foote ’15, who is currently enrolled in the course. “I don’t know very much about economics, and it’s not really fair that I’m getting a skewed perspective.”

—Staff writer Jose A. DelReal can be reached at

The Open Letter the students sent to Mankiw:


A student defends the course:


The Harvard Crimson has an editorial on the protest:

NPR interviews Mankiw.

The EPI ( is celebrating its 25th anniversary. This is a recent report on the growing social inequality that underlies the ongoing protests in the country against Wall Street.

REPORTOccupy Wall Street

Occupy Wall Streeters are right about skewed economic rewards in the United States

By Josh Bivens and Lawrence Mishel | October 26, 2011

The Occupy Wall Street movement has captured much the nation’s attention with a clear message: A U.S. economy driven by the interests of business and the wealthy has generated increasingly unequal economic outcomes where the top 1 percent did exceptionally well but the vast majority did not do well at all.

According to the data, they’re fundamentally right. This paper presents 12 figures that demonstrate how skewed economic rewards (in income, wages, capital income, and wealth) have become in the United States. These figures, most of which cover 1979 through 2007 (prior to the recession) generally break out trends for the top 1 percent, the next richest 9 percent, and then the bottom 90 percent of households or earners. While income growth at the very top—the richest 1 percent and above—has been truly staggering, incomes at roughly the 90th percentile and above (the richest 10 percent) have generally at least matched the rate of economy-wide productivity. It is below the 90th percentile where one really sees the potential fruits of economic growth (as measured by economy-wide productivity) failing to reach American households. An economy that fails to cut in 90 percent of American households on a fair share of economic growth is one that needs serious reform. As the figures show:

  • The top 1 percent of households have secured a very large share of all of the gains in income—59.9 percent of the gains from 1979–2007, while the top 0.1 percent seized an even more disproportionate share—36 percent. In comparison, only 8.6 percent of income gains have gone to the bottom 90 percent. The patterns are similar for wages and capital income.
  • As they have accrued a large share of income gains, the incomes of the top 1 percent of households have pulled far away from the incomes of typical Americans. In 2007, average annual incomes of the top 1 percent of households were 42 times greater than incomes of the bottom 90 percent (up from 14 times greater in 1979) and incomes of the top 0.1 percent were 220 times greater (up from 47 times greater in 1979).
  • The financial sector’s share of the overall economy has roughly doubled in recent decades, and now stands at 7.6 percent of total national income. Relative to this sector’s share in 1979, this translates into an extra $547 billion in compensation and profits claimed by the sector—a trend with questionable social payoff.
  • Growth in wealth, not just incomes, has also become greatly skewed in recent decades. Most of the wealth gains of the last generation went to those who already had the most wealth, a group increasingly distant from the vast American middle-class. The wealth of the median household actually declined over this time period. As a result, in 2009, wealth held by the wealthiest 1 percent of households was 225 times greater than that held by the median household.

The effect of policy on income and wealth inequality

No one who has looked at trends in economic inequality in the United States in recent decades could dispute the dramatic increase in the share of all income claimed by the richest subgroups—especially the highest-earning 1 percent referred to by Occupy Wall Street activists when they say they represent the 99 percent of Americans left behind. Mishel, Bernstein, and Shierholz (2009) present a comprehensive review of these trends and Piketty and Saez (2010, updating earlier reports) explore in more depth the gains enjoyed by the top 1 percent.

There is some disagreement around the edges of the debate concerning just how dramatic this income-share increase was or when exactly it happened—was it steady and continuous, or the result of a couple of discrete “jumps”? And there are those who discount the seriousness of the divide, saying that middle-class incomes are managing to grow despite the huge increase in the top earners’ share. But no serious analyst denies that the top 1 percent (of households or tax-units or families) has seen a very large increase in incomes and in share of total income since the late 1970s.

Public policy, either through commission or omission, has played a central role in the increasing concentration of income. For example, Baker (2006), Bivens (2010), and Hacker and Pierson (2010) have all documented the role of various policies in generating greater inequality. The decade-long surge in income inequality occurred in pre-tax incomes, driven by developments in both major kinds of market-based incomes, namely the wage and salary incomes from work, and capital incomes (realized capital gains, interest, dividends) from wealth. And we know that the most obvious way policy can affect incomes—through taxes—has clearly aided the widening of the income gap. The Congressional Budget Office (CBO) shows that even as their share of total incomes more than doubled between 1979 and 2007, the richest 1 percent of household’s effective federal tax rate fell from 37 percent to 29.5 percent.

The clear policy tilt in favor of the highest-income households in the completely visible realm of taxes suggests that this group receives preferential treatment in the much more opaque policy decisions that get made in Washington every day. For example, Bartels (2007) shows how policymakers give much larger weight to the preferences of richer constituents.

What the Occupy Wall Street movement has done with its “We are the 99 percent” campaign is to remind Americans that economic outcomes are not just like the weather, something that must simply be endured and adapted to rather than forced to change. Instead, economic outcomes are shaped by political decisions. This insight is valuable because it confers the power to challenge the status quo, which is often preserved by claims that economic rewards are doled out through simple meritocracy and that any interference with market outcomes will wreck the economy. It’s not so. Markets are always shaped by policy, and policies in the United States have been shaped to benefit the already well-off. Changing the rules to ensure that rewards are more broadly shared can lead to an economy that is both more efficient and more fair.

The widening income gap

Figures A–C display trends in growth of overall market incomes, including wages and salaries as well as interest, dividend, and capital income generated by holding wealth. In the long period before the current recession, from 1979 to 2007, inflation-adjusted average annual incomes of the highest-income 1 percent of households grew by 224 percent, as shown in Figure A. Those even better off, the top 0.1 percent (the highest-income one one-thousandth of households), saw their incomes grow by 390 percent. In contrast, incomes of the bottom 90 percent grew just 5 percent between 1979 and 2007—and all of that growth occurred in the unusually strong income growth that occurred from 1997 to 2000, a period followed by declining income from 2000 to 2007.1 These data include all sources of market-based incomes such as wages and salaries, dividend and interest income, and realized capital gains, but do not include government transfer income (such as Social Security income or unemployment benefits).


Figure A

Because of their vastly greater income growth, the highest-earning 1 percent of households have rapidly distanced themselves from the vast majority (the bottom 90 percent). As Figure Bshows, average annual incomes of the top 1 percent of households in 1979 were 14 times greater than incomes of the bottom 90 percent; by 2007 incomes of the top 1 percent were 42 times greater. The income gap between the upper 0.1 percent of households and the bottom 90 percent grew even more, from a top-to-bottom ratio of 47-to-1 in 1979 to 220-to-1 in 2007.


Figure B

The vastly greater income growth of the top highest-income 1 percent of households also obtained a much larger share of income growth than the vast majority (the bottom 90 percent). As shown in Figure C, the top 1 percent gained 59.9 percent of all the income growth generated between 1979 and 2007. In contrast, the bottom 90 percent received just 8.6 percent of all the income generated over the same period. It’s illuminating to note that the bottom 90 percent were able to claim just one-fourth of what the top one one-thousandth of households claimed from the growth of that period (36 percent).


Figure C

Rising inequality in income from work

Figures D–F examine the rising inequality of wage and salary income—in other words, income from work. Labor earnings are by far the most evenly distributed sources of overall income because, after all, the vast majority of non-retired households have members that work. Yet labor earnings have become much more unequally distributed in recent decades. Figure D shows that the top 1 percent of wage and salary earners increased their inflation-adjusted average annual salaries by 144% from 1979 to 2006. The top one one-thousandth (0.1 percent) of earners enjoyed annual wages growth of 324 percent over that same period.


Figure D

In contrast, the bottom 90 percent of wage earners increased their annual salaries by about 15 percent from 1979 to 2006. Most of this growth occurred during the relatively brief period of tight labor markets that accompanied the late 1990s boom. Between 1979 and 1995, average annual wages for the lowest-earning 90 percent grew just 2.8 percent. And from 2000 and 2006, wages did not improve at all. Thus, nearly all of the wage and salary growth of the bottom 90 percent from 1979 to 2006 occurred from 1995 to 2000 when unemployment was falling and then remained low.2

As with overall incomes, the disparity in wage growth has significantly widened the gap in salary levels between the top earners and everyone else, as shown in Figure E. In 1979 average annual salaries of the top 1 percent of wage earners were 9.4 times that of those in the bottom 90 percent, but by 2000 the gap had more than doubled to 20-to-1, a level that was maintained until 2006.


Figure E

The very highest-wage earners—those in the upper 0.1 percent (the top one one-thousandth)—increased their distance from the earners in the bottom 90 percent even more rapidly; the ratio of their earnings to those in the bottom 90 percent rose from 21-to-1 in 1979 to 80-to-1 in 2000. This gap shrank after the stock market bubble burst in the late 1990s (wage data include the “realized stock options” that top corporate officers receive) but had nearly recovered its former size by 2006.

Figure F looks directly at the ratio of average compensation earned by the chief executive officers of large firms relative to the compensation of typical workers. In 1978, CEO compensation was 35 times greater than that of the typical worker, up from 24 times as great in 1965. After 1979 the pay of CEOs skyrocketed; by 2000 their pay was 299 times that the pay of a typical worker.


Figure F

That level of CEO pay was admittedly somewhat inflated by the stock market boom in the late 1990s, and retreated significantly after the tech bubble burst. However, by 2007, CEO pay had nearly restored itself, attaining a ratio of 277-to-1 relative to pay of a typical worker. CEO pay fell again relative to typical workers in the Great Recession but is again reestablishing itself in the recovery. In 2010, the ratio of 243-to-1 was the fifth highest of any year since 1965. At this rate, it will likely not take long for the gap to reach its prior peak.3

Increasing concentration of income from wealth-holding

Figures G–H show that the trend of rapidly growing concentration in overall income and labor earnings is also apparent in the growth of income earned from wealth-holding, often labeled either “unearned” or “capital” income. Essentially, capital incomes are always and everywhere less equally distributed than wage income. As shown in Figure G, in 1979 the top 1 percent of households on the income scale already claimed 38 percent of all capital income generated in the economy. By 2007 this share had ballooned to 57 percent. The next richest 9 percent saw their share of capital incomes shrink from 29 percent in 1979 to 23 percent in 2007. And the bottom 90 percent, which collected 33 percent of capital incomes in 1979, claimed only 20 percent by 2007. This startling concentration of already unequally distributed capital incomes defies the logic of claims that there is a natural limit to how much of the fruits of economic growth can go to any one group.


Figure G

The very large rise in the share of all capital incomes collected by the highest-income 1 percent since 1979 means that this group has also collected a disproportionate share of the growth in these incomes over the same period. Basically, if the top 1 percent’s share of all capital incomes had remained constant between 1979 and 2007, they would have claimed 37 percent of capital income growth in the economy in those years. Instead, as Figure H shows, the top 1 percent alone collected a whopping 86.5 percent of growth in capital incomes during this period.4 The next highest-income 4 percent claimed 10.7 percent of all capital income growth while the bottom 95 percent claimed just 2.8 percent of the growth in these incomes. This figure departs from the convention of the other charts in not isolating the bottom 90 percent because their average capital incomes fell between 1979 and 2007, registering as negative capital income growth, which is hard to depict in a pie chart.


Figure H

The financial sector’s increasing claim on growth

Much of the rising share of total income claimed by the top-earning 1 percent is associated with the rise of the financial sector, which is a dominant employer at the top.Figure I shows the share of total gross domestic product, or national income, attributable to compensation and profits in the corporate financial sector. Between 1929—just before the Great Depression ended the first Gilded Age—and 1973, this share fell from 3.7 percent to 3.2 percent. But between 1973 and 2007, this share more than doubled, to nearly 7 percent.


Figure I

And financial sector compensation and profits’ share of GDP rebounded quickly from the dip of the Great Recession and actually passed its pre-recession peak. By 2010, in fact, the rising share of finance translates into an extra $547 billion claimed by this sector relative to the case where its share had remained at its 1979 level (3.8 percent). This is serious money. The payoff to these larger claims made by the financial sector are dubious. For example, business investment in plant and equipment (i.e., the productivity-generating investment that financial firms are supposed to make cheaper and safer) did not rise between 1973 and 2007. Residential investment, outside of the bubble-inflated mid-2000s, has also failed to show any persistent upward climb during the time that the financial sector has claimed an ever-larger piece of the pie. It is, in short, not off-base to wonder whether there is any return to forking over a much larger share of economic activity to the financial sector.

The concentration of wealth

The concentration of wealth has mirrored trends in the concentration of income. Wealth is a measure of a household’s assets (such as real estate, stocks, bonds, and cash) minus their liabilities (such as home mortgages and other personal debt). The only available data covering recent decades dates back to 1983 and shows that the wealth held by the wealthiest 1% of households grew far more than the wealth of the median household, whose wealth was actually lower in 2009 than in 1983. Figure J shows that the wealth of the top 1 percent grew over the 1980s and ‘90s and by 2007 was 103 percent greater than in 1983. The financial crisis in 2008 reduced the wealth of those at the top but by 2009 their wealth remained 48 percent greater than in 1983. The median household’s wealth fared far worse. After falling in the early 1990s the median household’s wealth rose and was 48 percent greater in 2007 than in 1983. But the fall of wealth in the financial crisis was sharper for those in the middle than at the top because those in the middle have much of their wealth in housing, values of which fell dramatically after the housing bubble burst. By 2009 the median household’s wealth had fallen so much that their wealth was 13.5 percent less than what it was in 1983.5


Figure J

Not surprisingly, the gap between the wealth of those at the top and those in the middle substantially grew over the last few decades, as Figure K shows. In 1983 the wealthiest 1 percent of households had wealth that was 131 times greater than wealth of the median household. This gap grew until the early 1990s and again in the 2000s, and by 2009 the top 1 percent had 225 times as much wealth as the median household.6


Figure K

Perhaps more startlingly, more than 94 percent of the gains in wealth from 1983 to 2009 accrued to the top fifth of wealthiest households, with 40.2 percent of the gains going to the wealthiest 1 percent and 41.5 percent going to the next wealthiest 4 percent of households (Figure L). This translated to gains among the wealthiest 1 percent of $4.5 million per household and gains among the next wealthiest 4 percent of roughly $1.2 million per household.7


Figure L

In other words, the richest 5 percent of households obtained roughly 82 percent of all the nation’s gains in wealth between 1983 and 2009. The bottom 60 percent of households actually had less wealth in 2009 than in 1983, meaning they did not participate at all in the growth of wealth over this period.

Basing policy in the true picture of income and wealth

The insights offered by the data on income, wealth, and inequality should shape the economic policy debate going forward. Most immediately, they should inform budget deficit debates about what the United States can “afford.” The nation can easily afford more federal government support aimed at reducing today’s historically high and persistent rates of joblessness. In fact it is the cheapest option in all major economic respects (Mishel 2011).

Once the current crisis of joblessness has passed and smaller imbalances between federal investment and revenues are appropriately targeted, attention should turn to supporting the same level of economic security and dignity that we have provided for generations. This would mean ending the unnecessary calls to close budget deficits by cutting the benefits provided by Social Security, Medicare, and Medicaid.

Thirty years of economic data show that the U.S. economy has generated significant levels of income and should continue to do so into the future; in other words, there is no economicconstraint that mandates that we scale back expectations for living standards growth in coming years (Mishel 2011). But this vast income that has been generated has been distributed in an extremely skewed fashion; typical American families have not benefitted from it nearly as much as they could have. This is a political problem that, if solved, has the potential to make our country more fair and the vast majority of its citizens more prosperous.

The politics of economic policymaking may be broken, but the U.S. economy is not broke, the data show. The country does have the economic wherewithal to provide a decent standard of living for all.


1. Economic Policy Institute analysis of “Table A6: Top fractiles income levels (including capital gains) in the United States” from “Income Inequality in the United States, 1913-1998” with Thomas Piketty, Quarterly Journal of Economics, 118(1), 2003, 1-39 (Longer updated version published in A.B. Atkinson and T. Piketty eds., Oxford University Press, 2007) (Tables and Figures updated to 2008 in Excel format, July 2010).

2. Based on Table 3.10 in Mishel, Bernstein, and Shierholz (2009), which uses data from Kopczuk, Saez and Song (2007), Table A-3. Data in Table 3.10 for 2006 was extrapolated from 2004 data using growth rates from Social Security Administration wage statistics ( SSA provides data on share of total wages and employment in annual wage brackets such as for those earning between $95,000.00 and $99,999.99. We employ the midpoint of the bracket to compute total wage income in each bracket and sum all brackets. Our estimate of total wage income was 99.1 percent of the actual. We used interpolation to derive cutoffs building from the bottom up to obtain the 0–90 percent bracket and then estimating the remaining categories. This allowed us to estimate the wage shares for upper wage groups. To obtain absolute wage trends we used the SSA data on the total wage pool and employment and computed the real wage per worker (based on their share of wages and employment) in the different groups.

3. The CEO pay data are described in the table note for table 3.41 in Mishel, Bernstein, and Shierholz (2009).The compensation data for typical workers comes from the Bureau of Labor Statistics’ series on average hourly earnings of production, non-supervisory workers inflated to compensation using the ratio of compensation to wages in the Bureau of Economic Analysis National Income and Product Accounts.

4. The data in Figure G comes directly from the Congressional Budget Office, which calculates the share of all capital income going to various income groupings. Figure H is calculated by EPI with slightly different data, specifically the CBO estimates of average incomes’ sources of incomes by income groupings. What are being labeled as growth in capital incomes between 1979 and 2007 in Figure H are dividends, interest payments, capital gains, and “other business income,” which includes partnership income, income from S corporations, and rental income.

5. The data on wealth are based on Wolff’s analysis of the Federal Reserve Board’s Survey of Consumer Finances presented in Table 3 of Allegretto (2010)

6. Ibid.

7. Ibid.


Allegretto, Sylvia. 2009. The State of Working America’s Wealth, 2011: Through Volatility and Turmoil the Gap Widens. Economic Policy Institute Briefing Paper #292. Washington, D.C.: EPI.

Bartels, Larry M. 2008. Unequal Democracy: The Political Economy of the New Gilded Age. Princeton, N.J.: Princeton University Press.

Bivens, Josh. 2011. Failure by Design: The Story behind America’s Broken Economy. An Economic Policy Institute Book. Ithaca, N.Y.: ILR Press, an imprint of Cornell University Press.

Congressional Budget Office (CBO). June 2010. “Average Federal Tax Rates for All Households, by Comprehensive Household Income Quintile.” Washington, D.C.: CBO.

Hacker, Jacob S. and Paul Pierson. 2010. Winner-Take-All Politics: How Washington Made the Rich Richer – And Turned Its Back on the Middle Class. New York: Simon & Schuster.

Mishel, Lawrence. 2011. We’re not broke nor will we be: Policy choices will determine whether rising national income leads to a prosperous middle class. Economic Policy Institute Briefing Paper #310. Washington, D.C.: EPI.

Mishel, Lawrence, Jared Bernstein, and Heidi Shierholz. 2009. The State of Working America 2008/2009. An Economic Policy Institute Book. Ithaca, N.Y.: ILR Press, an imprint of Cornell University Press.

Piketty, Thomas and Emmanuel Saez. 2010. Excel tables and figures with 2008 data updating “Income Inequality in the United States, 1913–1998,” Quarterly Journal of Economics, 118(1), 2003, 1–39 (longer updated version published in A.B. Atkinson and T. Piketty eds., Oxford University Press, 2007).

The ECB’s Battle against Central Banking


The ECB’s Battle against Central Banking

BERKELEY – When the European Central Bank announced its program of government-bond purchases, it let financial markets know that it thoroughly disliked the idea, was not fully committed to it, and would reverse the policy as soon as it could. Indeed, the ECB proclaimed its belief that the stabilization of government-bond prices brought about by such purchases would be only temporary.

It is difficult to think of a more self-defeating way to implement a bond-purchase program. By making it clear from the outset that it did not trust its own policy, the ECB practically guaranteed its failure. If it so evidently lacked confidence in the very bonds that it was buying, why should investors feel any differently?

The ECB continues to believe that financial stability is not part of its core business. As its outgoing president, Jean-Claude Trichet, put it, the ECB has “only one needle on [its] compass, and that is inflation.” The ECB’s refusal to be a lender of last resort forced the creation of a surrogate institution, the European Financial Stability Mechanism. But everyone in the financial markets knows that the EFSF has insufficient firepower to undertake that task – and that it has an unworkable governance structure to boot.

Perhaps the most astonishing thing about the ECB’s monochromatic price-stability mission and utter disregard for financial stability – much less for the welfare of the workers and businesses that make up the economy – is its radical departure from the central-banking tradition. Modern central banking got its start in the collapse of the British canal boom of the early 1820’s. During the financial crisis and recession of 1825-1826, a central bank – the Bank of England – intervened in the interest of financial stability as the irrational exuberance of the boom turned into the remorseful pessimism of the bust.

In his book Lombard Street, Walter Bagehot quoted Jeremiah Harman, the governor of the Bank of England in the 1825-1826 crisis:

“We lent…by every possible means and in modes we had never adopted before; we took in stock on security, we purchased exchequer bills, we made advances on exchequer bills, we not only discounted outright, but we made advances on the deposit of bills of exchange to an immense amount, in short, by every possible means consistent with the safety of the Bank, and we were not on some cases over-nice. Seeing the dreadful state in which the public were, we rendered every assistance in our power…”

The Bank of England’s charter did not give it the legal authority to undertake such lender-of-last-resort financial-stability operations. But the Bank undertook them anyway.

Half a generation later, Britain’s Parliament debated whether the modifications of the Bank’s charter should give it explicit power to conduct lender-of-last-resort operations. The answer was no: granting explicit power would undermine confidence in price stability, for already there was “difficulty restrain[ing] over-issue, depreciation, and fraud.” Indeed, granting explicit lender-of-last-resort powers to the Bank of England would mean that the “millennium of the paper-mongers would be at hand.”

But the leaders of Parliament also believed that the absence of a codified authority to act as lender of last resort would not keep the Bank of England from doing so when necessity commanded. As First Lord of the Treasury Sir Robert Peel wrote: “If it be necessary to assume a grave responsibility, I dare say men will be willing to assume such a responsibility.”

Our current political and economic institutions rest upon the wager that a decentralized market provides a better social-planning, coordination, and capital-allocation mechanism than any other that we have yet been able to devise. But, since the dawn of the Industrial Revolution, part of that system has been a central financial authority that preserves trust that contracts will be fulfilled and promises kept. Time and again, the lender-of-last-resort role has been an indispensable part of that function.

That is what the ECB is now throwing away.

J. Bradford DeLong, a former assistant secretary of the US Treasury, is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau for Economic Research.

Copyright: Project Syndicate, 2011.


1 from The Truth on Vimeo.

Extra credit opportunity!

For extra credit, email me an one-paragraph answer to each of these questions:

1. What was the most relevant factual economic information given in the documentary?

2. Did the presenter offer a model or theory to organize or explain those facts? If the answer is yes, describe it shortly.

3. What were the conclusions drawn by the documentary from the facts presented?

4. State your own opinion and/or comments regarding the content of the documentary?

Please do not create a Word document or attach anything. Just write the answers in a plain email to me.

Just three recent cases that make the point.

Case 1:
The Costliest Mistake In All Of Economics
Joe Weisenthal | Oct. 16, 2011, 1:37 PM | 6,484

This week saw something stunning: The world’s most famous bond manager, Bill Gross, was forced to send out an apology to investors over his dismal performance this year.

It’s obvious why he had to do it. With equity markets incredibly volatile, people think of their bond investments as their anchor of stability, smoothing out volatility and canceling out losses in any climate. The PIMCO Total Return Fund (PTTAX) has failed to do that, and is actually down over the last year. As such, his fundraising numbers have shriveled.

PTTAX 1-Year Performance


What made his year so bad? Well, as he puts it, he expected a “new normal” (2% growth, 2% inflation) but things have gotten much worse, causing a rush into long-term fixed income instruments which he was betting against.

But going back over his writings over the past year, you can see that his error actually went much deeper.

A key reason he’s shied away from U.S. debt (up until now) is his fear of massive U.S. deficits, and the belief that these deficits would turn investors away from our debt.

His August 2011 letter — which was basically written right at the peak of the chart above — lead off with three bullet points that got right to his thinking at the time

  • ​Nothing in the Congressional compromise reached over the weekend makes a significant dent in our $1.5 trillion deficit.
  • In addition to an existing nearly $10 trillion of outstanding Treasury debt, the U.S. has a near unfathomable $66 trillion of future liabilities at “net present cost.”
  • Aside from outright default, there are numerous ways a government can reduce its future liabilities. They include balancing the budget, unexpected inflation, currency depreciation and financial repression.

Because he expected “unexpected inflation,” “currency depreciation,” and “financial repression” he was not going to be exposed to U.S. Treasuries. Instead, he wrote:

Based on historical example at Moody’s and Standard & Poors, it just might take 50 years for them to downgrade U.S. credit, but be that as it may, you and PIMCO as savers and savings intermediaries can take precautionary or even retaliatory measures to preserve purchasing power. Favor countries with cleaner “dirty shirts” and higher real interest rates: Canada, Mexico, Brazil and Germany come to mind. Shade equity and fixed income investments away from dollar based indexes towards those of developing nations with stronger growth prospects. Purchase commodity based real assets before reserve surplus nations do.

This was an extremely costly conclusion to make. Fear of deficits, and the belief that higher deficits would be bad for fixed income, clearly cost PIMCO a lot of money.

Other economists saw the blunder in real time.

In June of this year, right before the Total Return Fund started going off the rails, Paul Krugman wrote a brutal post called The Decline Of PIMCO Macro:

For the past year or so, however, Pimco seems to me to have been making less and less sense. Gross bet big on the idea that rates would spike when quantitative easing ends; I guess he has three weeks to be vindicated, but it sure doesn’t look like it. And the economic logic was all wrong. Now Mohamed El-Erian is claiming that inflation in China and Brazil is Bernanke’s fault; again, the economic logic is all wrong.

What’s strange about this is that nobody was better at laying out the logic of deleveraging and its consequences than Pimco’s Paul McCulley. But maybe that’s the explanation: McCulley has moved on.

In fairness to Bill Gross, this fear of deficits extends all the way to the top, and by that we mean the decision makers in Washington DC.

While the economy clearly could use more government stimulus, the dominant talk in Washington is all about where to cut back and how to “get our fiscal house in order.” And because Washington is obsessed with this, we had to go through the wrenching debt ceiling fight, which seems to have clearly dealt a confidence blow at the worst possible time.

In fact, you can go back even further, to Obama’s first days in office, and the original stimulus, and see that fear of deficits and bond vigilantes was one factor in making the original stimulus too small.

So literally every American (not just those in the Total Return Fund) who depends on a robust recovery is hurt by this misplaced fear of deficits.

It’s because the misplaced fear of higher deficits is so costly that Richard Koo of Nomura recently wrote that we should not even be uttering anything about them, even when talking about the long term!

Arguing need for longer-term fiscal consolidation is irresponsible

The insistence that fiscal consolidation is necessary in the longer term is like the doctor who, faced with a patient who has just been admitted to the intensive care ward, repeatedly questions the patient about his ability to afford the treatment. This is both lacking in decency and irresponsible.

If the patient loses heart after learning the cost of the treatment, he may end up spending even longer in the hospital, leading to a larger final bill. Completely ignoring the policy duration effect of fiscal policy and constantly insisting on longer-term fiscal consolidation was what prolonged Japan’s recession.

And really, the costliness of deficit fears is all over the place. Kyle Bass has been betting against the Japanese Yen for awhile now due to Japan’s deficit issues, only to watch the yen race to mult-decade highs.

Unfortunately, no matter how badly the theory (that higher deficits will cause interest rates to shoot up) fails to jibe with reality, the misconception persists. Just two weeks ago, a well-known newspaper’s op-ed page was railing on Bernanke for keeping the bond vigilantes at bay via quantitative easing, wailing that if only the Fed weren’t involved, the market would be forcing some real discpline on Congress via higher rates.

The fact of the matter is that this connection between deficits and rates is patently false.

This is true over the long term, as seen here comparing the US debt to the 10-year rates:


And it’s true over the short term. Here’s a look at deficits and 10-year rates just during the Bush administration.


Until this misconception goes away, we’re almost certainly going to see plenty more policy mistakes, as well as big investors losing their shirts by betting the wrong way.

Read more:

This is from Paul Krugman’s own blog:

October 16, 2011, 5:50 PM

Gross Miscalculation

Somehow I missed this: Joe Weisenthal informs us that Bill Gross has publicly apologized for getting the bond market so wrong, predicting a spike in interest rates when QE2 ended. As Weisenthal points out, however, Gross’s exaggerated fear of deficits was very widespread; it was, indeed, what all the Very Serious People were obsessing about, even as the real economy was falling apart.

Weisenthal also points out that I called this in real time. If you want to have some fun, read the vituperative comments on that post.

The thing is, all it took to get this right was understanding IS-LM, and taking it seriously.

Case 2:

Flashback: Paul Krugman

  • Jonathan Cohn

  • October 14, 2011 | 9:42 am

The political constraints on the Obama Administration in January, 2009, were very real. Even if the president had pushed for a much bigger stimulus, it’s unlikely Congress would have passed one, at least as long as the filibuster remained in place.

Still, this excerpt from a Paul Krugman column is downright eerie:

This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan’s perceived failure, if it’s spun that way, will be placed on Democrats.

I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”

Yup. The only thing Krugman got wrong was the unemployment rate. It peaked even higher, topping 10 percent. (See above.)

This is from Paul Krugman’s blog again:

October 13, 2011, 8:43 AM

Legends Of The Fall (Of 2009)

Mike Konczal has some thoughts on the Obama administration’s economic missteps, and mentions that there were reports in Fall 2009 that the administration was afraid of the invisible bond vigilantes:

Noam Schieber at the New Republic was getting word from Treasury as early as late 2009 that they thought that they needed “some signal to U.S. bondholders that it takes the deficit seriously” and “spending more money now [on stimulus] could actually raise long-term rates, thereby offsetting its stimulative effect.” This naturally lead to wanting to strike “grand bargains” with the other side, a path that lead the administration down some bad roads in terms of the agenda.

I was hearing the same thing, with more specifics; as I wrote at the time,

Well, what I hear is that officials don’t trust the demand for long-term government debt, because they see it as driven by a “carry trade”: financial players borrowing cheap money short-term, and using it to buy long-term bonds. They fear that the whole thing could evaporate if long-term rates start to rise, imposing capital losses on the people doing the carry trade; this could, they believe, drive rates way up, even though this possibility doesn’t seem to be priced in by the market.

Even then, this seemed awesomely wrong-headed: policy makers were being scared off dealing with a real economic disaster by threats that existed only in their imagination. Now, of course, it looks even worse.

Case 3:

October 11, 2011, 6:39 PM

Who You Gonna Bet On, October 2011

Sorry, but if I am not for myself, who will be for me? For readers new to this, back in 2010 Business Week ran a story contrasting my pessimistic views with the bullish outlook of hedgie John Paulson, and making it clear that only a fool would believe the views of some bearded professor.

Today in the FT: Paulson’s costly bet on US rebound unravels.

It’s also worth noting not just that things have in fact gone badly, but the way they’ve gone badly: not via surging interest rates and inflation, but via weak demand associated with low rates, and with markets now expecting very low inflation looking forward.

The point isn’t that I’m infallible, which (as my wife can tell you) is very far from true. It is that Keynesian analysis has worked in this crisis, and those who refused to believe it have lost money as well as credibility.

Click on the link almost at the end of this piece to see what, according to the Business Insider, the demonstrators at Occupy Wall Street (#OWS) are protesting against:

CHARTS: Here’s What The Wall Street Protesters Are So Angry About…

Henry Blodget | Oct. 11, 2011, 1:03 PM | 2,117,336 | 352

The “Occupy Wall Street” protests are gaining momentum, having spread from a small park in New York to marches to other cities across the country.

So far, the protests seem fueled by a collective sense that things in our economy are not fair or right.  But the protesters have not done a good job of focusing their complaints—and thus have been skewered as malcontents who don’t know what they stand for or want.

(An early list of “grievances” included some legitimate beefs, but was otherwise just a vague attack on “corporations.” Given that these are the same corporations that employ more than 100 million Americans and make the products we all use every day, this broadside did not resonate with most Americans).

So, what are the protesters so upset about, really?

Do they have legitimate gripes?

To answer the latter question first, yes, they have very legitimate gripes.

And if America cannot figure out a way to address these gripes, the country will likely become increasingly “de-stabilized,” as sociologists might say. And in that scenario, the current protests will likely be only the beginning.

The problem in a nutshell is this: Inequality in this country has hit a level that has been seen only once in the nation’s history, and unemployment has reached a level that has been seen only once since the Great Depression. And, at the same time, corporate profits are at a record high.

In other words, in the never-ending tug-of-war between “labor” and “capital,” there has rarely—if ever—been a time when “capital” was so clearly winning.

Click here to see what the protesters are so upset about >